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Qualified students or their parents can use the Hope Credit to offset more than a thousand dollars in education expenses.

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Tax Relief Act of 1997: Hope Scholarship Information

The following information was prepared to inform students about the benefits and requirements contained in the Tax Relief Act of 1997. It is based upon our understanding of the provisions contained in the law and should not be considered an official document. Students should rely upon the advice of their tax accountant or the Internal Revenue Services as appropriate.

The Tax Relief Act of 1997, signed by the President on August 5th, includes benefits for students, taxpayers who claim and support students and former students who are repaying education loans. These benefits include the Hope Credit, the Lifetime Learning Credit, Student Loan Interest Deduction, State Pre-paid Plans, a new Education IRA and penalty free use of pre-existing IRAs.

TAX PAYER BENEFITS FOR HIGHER EDUCATION

HOPE CREDIT - is a non-refundable tax credit (i.e., low income taxpayers with no tax liability receive no benefit) available beginning with the 1998 tax year. The benefit amount is 100% of the first $1,000 of "qualified tuition and related expenses" (discussed below) and 50% of the second $1,000 paid within a tax year to an eligible institution of higher education for the first two years of postsecondary at-least-half-time enrollment in a course of study leading to a degree or a recognized certificate. The Hope Credit is available to an independent student or, in the case of a dependent student, to the taxpayer entitled to claim that student as an income tax exemption. The Hope Credit may be claimed for each qualifying student reported on a tax return. No student (or taxpayer claiming on behalf of that student) may claim a Hope Credit for more than two tax years, although one year does not appear to have to follow immediately on the other.

LIFETIME LEARNING CREDIT - is a non-refundable credit equivalent to 20 percent of the first $5,000 ($10,000 in 2003) of "qualified tuition and related expenses" paid within a tax year, beginning July 1, 1998, to an eligible institution of higher education for a course of study leading to a degree, certificate, or improved job skills. The Lifetime Learning Credit is potentially available to an independent students or, in the case of a dependent student, to the taxpayer entitled to claim that students as an income tax exemption. The Lifetime Learning Credit is available each year to each qualifying tax filer (eligible taxpayers who are married must file jointly,) up to a maximum of $1,000, irrespective of how many eligible students are in the taxpayerÕs family (i.e., a maximum $1,000 per tax return).

Taxpayers cannot claim both a HOPE and a LIFETIME LEARNING CREDIT for a single student in the same tax year. However, the two credits can be claimed simultaneously for different qualifying students. Qualifying students may not have been convicted of felony drug possession or distribution. The reference to "out-of-pocket expenses" means the fee/tuition paid ONLY for academically-related activities (e.g., not books, insurance, or student activity fees) less any "untaxed educational benefit" (e.g., grants, scholarships, or fee waiver). Eligibility for both credits is ratably reduced fro single filers (taxpayers) with modified adjusted gross incomes between $40K and $50K and for joint filers with modified adjusted gross incomes between $80K and $100K.

STUDENT LOAN INTEREST DEDUCTION - is actually an offset to modified adjusted gross income (does NOT require the taxpayer to "itemize deductions") equivalent to up to $,1000 (increasing $500 per year until it reaches $2,500 per year in 2001) per year, beginning January 1, 1998, for the first 60 months during which interest is due (months of deferral or forbearance do not count against the 60-month clock) on loans made to pay for "qualified expenses" such as tuition, fees, books, room and board. The qualified expenses must be incurred on behalf of the taxpayer, his or her spouse or dependent. Eligibility is ratably reduced for single filer taxpayers with modified adjusted gross incomes between $40K - $55K and for joint filer taxpayers with modified adjusted gross incomes between $60K - $75K.

STATE SPONSORED TUITION PREPAYMENT PLANS - is extended to include payments from those funds for room and board charges as well as tuition. In addition, tuition and fees paid for with funds from such state programs qualify for the Hope or Lifetime Learning Credit.

IRA ACCOUNTS - will have the 10 percent early withdrawal penalty for distributions that are used to pay tuition, fees, books, supplies and equipment for undergraduate or graduate study for the taxpayer, the taxpayerÕs spouse, child or grandchild waived.

EDUCATION IRA ACCOUNTS - New tax sheltered Education IRA accounts are established. Annual contributions are limited to $500 per year for children under age 18. Account earnings and withdrawals for education expenses, including tuition, fees, books, supplies and, for students attending at least half-time, room and board, are tax sheltered.

OTHER STUDENT RELATED PROVISIONS - affect employer paid tuition (Section 127), tuition waivers (Section 117d) and loan forgiveness for community service.

"Qualified Tuition and Related Expenses"

For purposes of determining tax credit eligibility, the new law defines "qualified tuition and related expenses" as tuition and fees required for enrollment or attendance at an eligible institution. However, those expenses are reduced by most, but not all, gift aid. Specifically, "qualified tuition and related expenses" are reduced by non-taxable education grant aid.

Explanation: Under current tax law, scholarship and fellowship aid up to the amount of tuition and "course related" expenses is non-taxable (Section 117). Grant aid in excess of those expenses is taxable as ordinary income. Consequently, for purposes of the new tax benefits, "qualified tuition and related expenses" are reduced by non-taxable grant aid.

Examples:

 
In addition, the law requires that various benefits provided to members of the military also are subtracted from the amount of qualified tuition and fees. Qualified expenses would not be reduced by payments made with loan proceeds.