Education Credit Rules

What are prepaid expenses?

Prepaid expenses are expenses for an academic period (semester, trimester, quarter) that begins in the first three months of the year following the year of payment. Education credits for a particular tax year, 2007 for example, are based on expenses paid in that tax year for academic period beginning after December 31, 2006 and the first three months of 2008.

You can claim the education credit using expenses you paid with gifts, inheritances or the proceeds of a loan

You take the credit when you pay the expenses not when you repay the loan. You cannot, however, claim a credit for education expenses you paid with:

• a tax free scholarship,
• a grant,
• employer provided educational assistance or
• use the same expenses claimed elsewhere on your tax return (as a business expense or a tuition and fees deduction on line 35 of the tax form 1040).

When can I not claimed the education credits?

You cannot claim an education credit based on the same expenses used to figure the taxable portion of a Coverdell education savings account (ESA) or qualified tuition program or QTP distribution.

You cannot claim either credit if your tax filing status is married filing separately.

You cannot take the education credits if you can be claimed as a dependent on someone else's tax return. You can claim the education tax credit for qualified expenses paid by a dependent you claim on your tax return.

Education credit amount reduction rules

The amount of the education tax credit is reduced or eliminated depending on your modified adjusted gross income and your tax filing status.

Your education credits are reduced if your modified adjusted gross income AGI is over $45,000 ($90,000 if you are married filing jointly) and eliminated if your modified AGI is $55,000 or more ($110,000 if married filing jointly). For purposes of figuring out the education credits, your modified AGI is usually the same as your AGI on line 37 of the form 1040.