Education Credits/Deductions

By: Perry Fales and Robert Anderson (12/06/01)

Click here to print this page using Acrobat Reader

In the past few years, both Congress and the Minnesota State Legislature have adopted new credits and deductions for educational expenses. In addition, Congress has authorized a new IRA for education expenses as well.

Federal Credits

These credits are available for parents of college students, if they claim the student as a dependant, or for the student, if the student claims himself. They apply to adults as well, if they are college students. To qualify for either of these credits your adjusted gross income must be under $100,000 per year for taxpayers whose filing status is married filing jointly, and under $50,000 for taxpayers filing single. The credit begins to phase out at $80,000 for married filing jointly and $40,000 for single. Both of these credits are non-refundable, which means you only get credit up to your federal income tax. For example, if you are eligible for a $1000 credit, but your federal income tax is only $800, you get only an $800 credit. These credits are for tuition only, not books, board and room, or personal expenses. Only the tuition you or your offspring pay with cash or loans is eligible. Tuition paid by grant or scholarship is not. It makes no difference whether the parent or child writes the check or receives the loan; the credit goes with the taxpayer claiming the dependant.

The “Hope Credit” is for freshman and sophomores only and is for 100% of the first $1000 of tuition, and 50% of the second $1000, for a $1500 maximum. The student must be enrolled at least ½ time to qualify. The credit can be claimed only twice per student, even though he may be a freshman or sophomore in more than two calendar years.

The “Lifetime Learning Credit” is for anyone going to a qualified educational institution, even if less than ½ time. The credit is for 20% of the first $5000 of qualified expenses through the year 2002. The credit increases to 20% of the first $10,000 of expenses for years after 2002. You can’t claim the Lifetime Learning Credit for a student if you are claiming the Hope Credit.

Educational IRA

An educational IRA can be started or contributed to by the student, parents, grandparents, or friends of the child. The student must be under 18 years of age for a contribution to be made. A maximum of $500 per year per student can be deposited. This means if one person contributes the maximum amount, no one else can contribute to that child’s IRA. The amounts grow tax free until withdrawn. If the withdrawal is used for qualified expenses, the withdrawal will remain tax-free. Qualified expenses include tuition, fees, books, supplies, equipment, and room and board. Deposits are not deductible by the person making the deposit. If the Educational IRA is not used before the child reaches the age of 30, he must pay tax on the earnings. However, the IRA may be rolled over to another, younger sibling, or to a child of the IRA owner. Tax-free withdrawals cannot be made in a year that the Hope or Lifetime Learning Credit is claimed.

Minnesota Credits/Deductions

The state program is for children in K-12.

It is divided into credits and deductions. Credits, of course, directly reduce your tax; deductions decrease your taxable income. If you qualify for a credit it is refundable, which means that you can get a refund if you don’t owe state tax.

Household incomes of $37,500 or less qualify for the credit; otherwise, the expense is used as a deduction. Maximum credit per child is $1,000, and $2000 per family. For 2002, the credit is reduced to 75% of expenditures, but the limits remain the same. Maximum deduction is $1625 per child K-6, and $2500 per child 7-12. Use the grade the child is in at the end of the year to calculate the deduction. There is no family maximum deduction, only a per-child maximum. Expenses that exceed the-per-child or per-family credit maximum can be claimed as a deduction, up to the deduction limits. You must have cash register receipts to claim a credit or deduction.

Private school tuition and tuition for college courses that are for high school graduation requirements are always deductions.

Expenses that qualify for both credits and deductions are:

Tutoring
Fees for after school and summer enrichment programs.
Music lessons.
Non-religious academic books for public, private or home school
Home computer hardware, educational software, internet access (Can use $200 for the credit and an additional $200 for the deduction)
Driver’s Education
Musical instrument rental
Purchase of long-lived equipment such as calculators or musical instruments
Normal supplies used in the school day such as paper and pencils
Special supplies for school classes such as shop or home economics
Special clothing required for classes such as phy-ed
Transportation cost paid to someone else for normal school day

Qualified music instructors must be licensed or have a baccalaureate degree, even if the degree is not in music, or be a member of the Minnesota Music Teachers Association. Extracurricular instruction provided by a sibling or lineal ancestor of the child (parent or grandparent) is disallowed.

Expenses that don’t qualify for credit or deduction are:

Non-educational software
Religious programs
Sports camps or lessons
Purchase of books or materials used for tutoring, enrichment programs or academic camps
Travel expenses, lodging, and meals for overnight class trips
Monthly internet fees
Costs to transport your child to and from tutoring, enrichment programs, or camps that are not part of the school day

Questions regarding these deductions and credits may be directed to the Minnesota Department of Children, Families and Learning at 1-800-657-3990 or cfl.state.mn.us.

Return to the Farm Management Page
Return to the SWROC Home Page

This page was created on 9/17/01 by Bob Anderson with assistance from M. Werner.