FastFacts: The New Education Tax Credits

HOPE scholarship credit. Starting in 1998, you can claim a HOPE credit of up to $1500 a year per student, for each of the first two years of college tuition and fees. If you have more than one student in your family you can claim a credit for each. The credit applies to expenses you paid after December 31, 1997 for an academic period beginning after that date.

Specifically, you’re allowed a 100% credit per eligible student for the first $1000 of tuition expenses, and a 50% credit for the second $1000 of tuition paid. The credit is available for the qualified tuition expenses of a taxpayer, a taxpayer’s spouse, or a taxpayer’s dependent. To qualify, a student must be attending an eligible educational institution at least half time, for at least one academic period. Qualified expenses include tuition and fees required for attendance at an eligible educational institution, but not room and board, books, student activity fees, or other expenses unrelated to the a student’s course of instruction.

The allowable amount of credit is reduced for married taxpayers who file jointly with incomes over $80,000, and is completely phased out for those with incomes above $100,000. For single taxpayers, these limits are $40,000 and $50,000 respectively.

Lifetime learning credit. You can apply the lifetime learning credit for qualified tuition and academic fees you pay after June 30, 1998 for an academic period beginning after that date. In contrast to the HOPE credit, you can take this credit for both college undergraduate and graduate expenses, as well as for some vocational training or courses that help you acquire or improve job skills. Furthermore, the minimum half-time requirement of the HOPE credit doesn’t apply. Also in contrast to the HOPE credit, you can claim the credit for an unlimited number of tax years.

The maximum annual credit is $1000 per taxpayer, increasing to $2000 in the year 2003. Specifically, the credit is allowed for 20% of qualified tuition expenses you pay, up to $5000 per year, increasing up to $10,000 per year starting in 2003.

If you’re a married taxpayer who files jointly, with a modified adjusted gross income under $80,000, you qualify for the full credit. After that, the credit gradually phases out until your income reaches $100,000. These thresholds are $40,000 and $50,000 respectively if you’re a single taxpayer. These limits will be indexed for inflation after the year 2000.

The credit is available for qualified tuition expenses of a taxpayer, a taxpayer’s spouse, or a taxpayer’s dependent. The credit maximum is calculated per taxpayer. Therefore, you can only claim up to the maximum credit once on your annual tax return, no matter how many students you have in your family.

To be eligible to claim the credit, a parent must pay the tuition, and a student must be eligible to be claimed as a dependent on that parent’s tax return. Consequently, in the case of divorced parents, if one parent claims a child as a dependent, and the other parent pays the college tuition, neither will get the credit.

Important note: For any one tax year, you can elect only one of the following for the same student: 1) HOPE scholarship credit, or 2) lifetime learning credit, or 3) tax-free withdrawals for college expenses from an education IRA. However, since the election is separate for each student, you can take for example, the HOPE credit for one child, and the lifetime learning credit for another child in the same tax year. Another note: If you claim either the HOPE or lifetime learning credit, you can’t claim the federal tax break on a Series EE bond’s interest earnings if you cash in bonds to pay those same education expenses.