Hope Credit

The Hope Scholarship Tax Credit is an education tax benefit that allows taxpayers a credit of up to $2,500 (per student, per year) if they paid qualified tuition and related expenses for the first four years of postsecondary education.

For tax years 2009 and 2010, the Hope Credit has been expanded and modified by the American Opportunity Tax Credit (as part of the American Recovery and Reinvestment Act of 2009). The modifications to this education tax credit are as follows:

‘ The maximum amount of the Hope Credit increased to $2,500 (from $1,800)

‘ The credit can now be claimed for the first 4 years of postsecondary education (rather than just the first 2 years)

‘ The income phaseouts increased to $80,000/$90,000 for single filers and $160,000/$180,000 for joint filers

‘ ‘Qualified expenses’ were expanded to include course materials

‘ Up to 40% (or $1,000) of the Hope Credit is refundable

‘ The credit may offset the Alternative Minimum Tax (AMT)

‘ Gulf Opportunity Zone students may qualify for higher credit amounts

Credits lower your taxes. Tax credits provide a dollar-for-dollar reduction of your income tax liability. For instance, a $1,000 tax credit actually saves you $1,000 in taxes. On the other hand, deductions lower your taxable income and they are worth the percentage equal to your marginal tax bracket. For instance, if you are in the 25% tax bracket, a $1,000 deduction saves you $250 in tax (0.25 x $1,000 = $250).

A tax credit is always worth more than a dollar-equivalent tax deduction, because deductions are calculated using percentages. Referring to the numbers above, you can see that a $1,000 credit offers a savings of $750 more than a $1,000 deduction.

You may claim the Hope Scholarship Tax Credit if you meet all of the following requirements:

‘ You pay qualified tuition and related expenses for the first 4 years

‘ You pay the tuition and related expenses for an eligible student

‘ The eligible student is you, your spouse, or a dependent for whom you claim an exemption on your tax return

You cannot claim the Hope Scholarship Tax Credit if any of the following applies:

‘ Your tax filing status is ‘married filing separately’

‘ You are listed as a dependent in the Exemptions section of another person’s tax return (e.g., your parents’)

‘ Your modified adjusted gross income (MAGI) exceeds the dollar limitation

‘ You (or your spouse) were a nonresident alien for any part of the tax year, and did not elect to be treated as a resident alien for tax purposes.

‘ You claim the Lifetime Learning Tax Credit for the same student in the same year

With the Hope Scholarship Tax Credit, the maximum amount you can claim is $2,500 for each eligible student. The amount of this education tax credit is equal to 100% of the first $2,000 paid in qualified educational expenses, and 25% of the second $2,000 paid. However, keep in mind that the credit amount may be reduced depending on your income level and the amount of your tax.

Qualified educational expenses include the following:
‘ Tuition and fees required for enrollment (at an eligible educational institution)
‘ Course-related books, supplies, and equipment

Expenses that do not qualify for the Hope Scholarship Tax Credit include the following:
‘ Insurance
‘ Medical expenses (including student health fees)
‘ Room and board
‘ Transportation
‘ Similar personal, living, or family expenses

To claim the Hope Scholarship Tax Credit, you must complete Part II and Part V of IRS Tax Form 8863 (Education Credits) and submit that with your Form 1040 or Form 1040A.

Rules for Combining Education Tax Benefits

Note that there are specific rules regarding which education tax benefits may be used in the same tax year. Federal education tax credits include the American Opportunity Tax Credit, the Lifetime Learning Tax Credit, and the Hope Scholarship Tax Credit.

If you are eligible to claim the Hope Scholarship Tax Credit as well as the Lifetime Learning Tax Credit for the same student in the same year, you may claim one credit (but not both).

If you pay the educational expenses for more than one student in the same year, you may choose to claim the Hope Tax Credit for one student and the Lifetime Learning Credit for another student.

However, you cannot simultaneously claim the Hope Scholarship Tax Credit and the American Opportunity Tax Credit for different students in the same year. In that case, you can only use one type of education tax credit or the other (the Hope or the American Opportunity) for all eligible students.

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