From William Perez,
Your Guide to Tax Planning: U.S..
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There are three tax benefits for college education expenses:

• the tuition and fees tax deduction,
• the Hope Credit, and
• the Lifetime Learning Credit.

The Tuition and Fees deduction reduces taxable income. The Hope Credit and Lifetime Learning Credit, however, provides a tax credit based on a percentage of your qualified college expenses. Generally, taking a tax credit will provide a greater benefit than a deduction. The education tax credits are calculated on IRS Form 8863 (PDF).

Hope Credit

The Hope Credit is a tax credit for college students in their first two years of college. It provides a tax credit of up to $1,650 on the first $2,200 of college tuition and fees. You can claim the Hope Credit on your tax return if you, your spouse, or your dependent are a first-year or second-year college student, is enrolled at least half-time at an eligible education institution, and you were responsible for paying college expenses.

Lifetime Learning Credit

The Lifetime Learning Credit is a tax credit for any person who takes college classes. It provides a tax credit of up to $2,000 on the first $10,000 of college tuition and fees. You can claim the Lifetime Learning Credit on your tax return if you, your spouse, or your dependents are enrolled at an eligible educational institution and you were responsible for paying college expenses. Unlike the Hope Credit, you need not be enrolled at least half-time. Even if you took only one class, you may take advantage of the Lifetime Learning Credit.

Eligible Educational Institutions

All accredited colleges and universities are eligible educational institutions. Additionally, vocational schools and other postsecondary institutions are also eligible. Basically, if the institution is eligible to participate in federal student aid programs through the US Department of Education, then you may use tuition and fees paid to the school for claiming the Hope or Lifetime Learning Credits.

Qualifying Expenses

Qualifying expenses include amounts paid for tuition and any required fees (such as registration and student body fees). Qualifying expenses do not include any of the following: books, supplies, equipment, room and board, insurance, student health fees, transportation, or living expenses.

You must be responsible for paying the college tuition and fees. You must reduce your qualifying expenses when figuring your tax credit by the amount of financial assistance received from grants, scholarships, or reimbursements from your employer. You do not need to reduce your qualifying expenses, however, if you paid for college tuition using borrowed funds, including student loans, or by using gifts from family members.

Who Can Claim the Education Credits?

If your son or daughter is going to college, and you claim him or her as a dependent, then you can claim the education credits on your tax return. If your son or daughter is no longer a dependent, then he or she should claim any education credits on his or her own tax return. If you pay the college expenses for someone who is not your dependent, you cannot claim any education credits.

Income Limitations on Education Tax Benefits

The amount of the Hope Credit or Lifetime Learning Credit is limited over a phase-out range. If your adjusted gross income is below the phase-out, your credits are not reduced. If your income is in the middle of the phase-out range, your credits will be reduced. If your income exceeds the phase-out range, you are not eligible to claim any education tax credits.

• $45,000 to $55,000 : Single, Head of Household, or Qualifying Widow
• $90,000 to $110,000 : Married Filing Jointly

Compare this with the income limitations on the tuition and fees tax deduction. The full $4,000 deduction is allowed if you earn less than $65,000 (single, head of household, qualifying widow) or less than $130,000 (married filing jointly). The deduction is limited to $2,000 if your income is between $65,000 and $80,000 (unmarried taxpayers) or is between $130,000 and $160,000 (married filing jointly).

No education tax break of any type is allowed for taxpayers who are married but filing separately. Married filing separately taxpayers are not eligible for the Hope Credit, Lifetime Learning Credit, or the tuition and fees deduction.

Education Credits Tax Forms and Instructions

IRS Form 8863
Publication 970, Tax Benefits for Education