Back to school this fall? Be sure to get full credit! 

It's fall and the kids are back in school. We have two teenagers, one in college right now and the other in high school. We will have at least one child in college for the next six years, and for two of those years we'll have both children in college at the same time. How can we take the best advantage of the college credits available to us? K.J., Indianapolis  

There are two college credits available to you right now: the Hope Scholarship Credit, and the Lifetime Learning Credit.  

Before you proceed, you should know that there are certain taxpayers who cannot claim these credits. If your tax filing status is Married Filing Separately, neither the Hope credit nor the Lifetime Learning Credit is available to you. If you are married filing jointly, your adjusted gross income must be lower than $100,000 for you to qualify for these credits. If you are single, the income cut off is $50,000.  

Both the Hope credit and the Lifetime Learning credit relate to expenditures for tuition, lab fees, and other expenses directly related to the cost of higher education. Room and board costs while away at school do not qualify for these credits. The cost of books qualifies for the credit only if the book fees are paid directly to the school as opposed to buying the books at a book store.  

The credits apply to college costs paid during the calendar year for courses that begin during the same year. The exception to this rule is that you can prepay college costs as many as three months in advance and claim the credit for the year in which the costs were paid. In other words, you can pay for 2001 college costs in October 2000 and use those costs toward your credit for year 2000.  

You must claim the student as your dependent in order to take the credit. If the student is not being claimed as a dependent, the student may be eligible to take the college credit himself. This is a great tip for parents whose income is too high to claim credit. If you can't claim your child as a dependent, the family can still benefit from the college credit by claiming it on the student's tax return.

The Hope Scholarship Credit  

The Hope credit is available only for costs relating to freshman and sophomore college students, the student must be carrying at least a 1/2 time course load, and the student must be enrolled in a degree program.  

The amount of the credit is a maximum of $1,500 per student per year. Calculate the credit by taking 100% of the first $1,000 of college costs and 50% of the second $1,000 of college costs paid for the student during the calendar year.

The Lifetime Learning Credit  

The Lifetime Learning Credit is available for all students in the family, whether they are enrolled in a degree program or not, whether they are full- or half-time students, or simply enrolled in a single course, whether the courses run the length of a semester or are single day courses, whether the student is an undergraduate, a graduate student, or taking courses to improve skill in the workplace.  

The credit is a maximum of $1,000 per family per year and is calculated by taking 20% of up to $5,000 spent on course costs paid during the year for all students in the family.  

There is no limit on the number of years during which you may claim the Lifetime Learning Credit.

Choosing a Credit  

You may not claim the Hope Scholarship Credit and the Lifetime Learning Credit on the same tax return. It makes sense, therefore, to calculate both credits and figure out which one will benefit you the most in a given tax year. You can choose whichever credit will benefit you the most in any year.  

Generally speaking, I would imagine that if you have one child who will be attending college for two years, then you will have two children in school simultaneously for two years, then the second child will be in school for another two years, the best use of the credits will probably be to take the Hope credit for the older student for two years, and then switch to the Lifetime Learning Credit for the remaining years.

Stay Tuned  

Be sure to follow the law changes on these credits during the years your children will be in college. The Lifetime credit is due to increase to 20% of up to $10,000 of college costs or a maximum of $2,000 credit per year in 2002. The Hope credit is scheduled to be indexed for inflation after 2001, so expect the amount of that credit to increase in a couple of years. The instructions that accompany your tax return will provide updated information about the maximum amount of credits available each year.