LOISELLE, GOODWIN & HINDS
CERTIFIED PUBLIC ACCOUNTANTS

NOTE: IRS has issued comprehensive rules on education credits. Click here and Here

HOPE Scholarship Credit and Lifetime Learning Credit

The HOPE credit and Lifetime Learning credit may allow you to turn part of the higher education expenses you incur for yourself, your spouse, or your dependents into tax savings.

The maximum HOPE credit is $1,500 per year per student, for the first two years of undergraduate education at an eligible education institution. The maximum Lifetime Learning credit is $1,000 per year ($2,000 per year after 2002) per eligible taxpayer, for any post-high school education (including graduate-level courses and courses to acquire or improve job skills) at an eligible education institution. Generally, eligible education institutions are accredited schools offering credit toward a bachelor's or associate's degree or other recognized post-high school credential, and certain vocational schools.

The HOPE credit is available only for the qualified tuition and related expenses of a student who is enrolled in a degree or certificate program on at least a half-time basis at an eligible education institution, and who has never been convicted of a federal or state felony drug offense. The Lifetime Learning credit is not subject to these restrictions.

The HOPE credit and the Lifetime Learning credit aren't allowed for an expense that's otherwise deductible, and may not be claimed in a year when the student receives any tax-exempt distribution from an education IRA.

The HOPE/Lifetime Learning credits may not be claimed in the same tax year for expenses of the same student, but each may be claimed for expenses of different students. For example, in the same tax year, a taxpayer may claim the HOPE credit for a dependent child's higher education expenses and may claim the Lifetime Learning credit for the qualified tuition and related expenses incurred for himself.

To be eligible for the HOPE credit or the Lifetime Learning credit for a tax year, qualified tuition and related expenses must be paid during that tax year for education furnished during an academic period (e.g., semester) that starts within that tax year or within the first three months of the following year. Under this rule, taxpayers have a timing option. For example, for a semester beginning in Jan. of Year 2, a taxpayer may pay the expenses in Year 1 or Year 2. The credit will be available in whichever year the payment is made.

The HOPE credit is available for expenses paid after 1997, for education furnished in academic periods starting on or after Jan. 1, 1998. The Lifetime Learning credit is available for expenses paid after June 30, 1998, for education furnished in academic periods starting after that date.

The HOPE/Lifetime Learning credits are nonrefundable - i.e., they can reduce regular income taxes to zero but cannot result in the receipt of a refund. Also, they cannot be used to reduce alternative minimum tax liability. If the expenses on which the HOPE/Lifetime Learning credits are based are later refunded, the credits may have to be recaptured, i.e., they may have to be repaid.

As noted above, the HOPE/Lifetime Learning credits are based on the payment of qualified tuition and related expenses. These are the expenses for tuition and academic fees at an eligible education institution. Qualified tuition and related expenses do not include the cost of books, student activity fees, athletic fees, insurance expenses, room and board, transportation costs and other personal living expenses. They also don't include the cost of any course or education involving sports, games, or hobbies unless the course or education is part of the student's degree program.

The amount of qualified tuition and related expenses taken into account in computing the HOPE/Lifetime Learning credits must be reduced by tax-exempt scholarships and fellowships, certain military benefits, and any other tax-exempt payments of those expenses other than gifts or bequests.

Both the HOPE credit and the Lifetime Learning credit are phased out ratably for married taxpayers filing jointly with adjusted gross income (AGI), with certain modifications, between $80,000 and $100,000. Married taxpayers must file jointly to claim the credits. For other taxpayers the phase-out range is $40,000 to $50,000.

Neither the HOPE credit nor the Lifetime Learning credit is allowed to an individual who can be claimed as a dependent on another's return. In this situation, the credits are allowed instead to the taxpayer claiming that individual as a dependent, and the credits are based on the total qualified tuition and related expenses paid both by the taxpayer and the student.

Eligibility for the HOPE and Lifetime Learning credits are subject to a number of technical requirements not discussed above. Please contact us if you would like to discuss your eligibility for these credits and how to claim them.

(04/16/98)

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Last modified: August 19, 1999