FinAid | Education Tax Benefits | Hope Scholarship Tax Credit

9/10/11 9:18 AM

Hope Scholarship Tax Credit

The Hope Scholarship provides a federal income tax credit based on the first $4,000 in postsecondary education expenses paid by the taxpayer during the tax year. Changes for 2009 and 2010
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The American Recovery and Reinvestment Act of 2009 (P.L. 111-5) included the American Opportunity Tax Credit, which expands the Hope Scholarship. This expansion is temporary, limited to the 2009 and 2010 tax years. However, President Obama's FY2010 budget proposes making these changes permanent. The changes are as follows: Increases the amount from $1,800 to $2,500. The amount of the credit is 100% of the first $2,000 in qualified expenses and 25% of the second $2,000. (Previously it was 100% of the first $1,200 and 50% of the second $1,200.) The number of years allowed was Advertisement increased from 2 to 4. The income phaseouts were increased to $80,000/$90,000 (single filers) and $160,000/$180,000 (joint filers). Course materials added as a qualified expense in addition to tuition and fees. 40% refundable (max $1,000) to allow even low income students who have no tax liability to obtain a partial benefit. May offset the AMT. Students who qualify for higher Gulf Opportunity Zone amounts may choose that amount. Amount of Credit The Hope Scholarship provides a tax credit of up to $2,500 per student per year for qualified higher education expenses during the first four years of post-secondary education. (The amount of the Hope Scholarship is $3,600 for Gulf Opportunity Zone Students.) The amount of the credit is 100% of the first $2,000 of qualified tuition and related expenses per student and 25% of the second $2,000 of qualified tuition and related expenses.

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FinAid | Education Tax Benefits | Hope Scholarship Tax Credit

9/10/11 9:18 AM

If the family has multiple students that meet the requirements, then multiple Hope Scholarship Credits may be claimed. The tax credit is partially refundable. If the taxpayer does not have sufficient tax liability to fully offset the tax credit, up to 40% of the amount of the tax credit may be refunded to the taxpayer. For example, if the taxpayer has $4,000 in education expenses (enough for a $2,500 tax credit) but only $1,500 in tax liability, the taxpayer may obtain the remaining $1,000 tax credit as a refund. This means that low income families who have no tax liability may file an income tax return to obtain a refund of up to $1,000 from the Hope Scholarship tax credit. The Hope Scholarship tax credit is no longer subject to the Alternative Minimum Tax (AMT) starting in 2009. (The amount of the maximum Hope Scholarship was originally $1,500. It was increased to $1,650 in 2006, to $1,800 in 2008 and to $2,500 for 2009 and 2010. The Tax Relief Act of 2010 extended the American Opportunity Tax Credit's improvements to the Hope Scholarship through 2012. If not made permanent by Congress, the maximum Hope Scholarship will revert to $1,800 in 2013, possibly increasing to $1,900 because of inflation. Except for the 2009 and 2010 changes, the amount of expenses eligible for the tax credit is adjusted annually for inflation and rounded to the nearest $100.) Qualified Higher Education Expenses Qualified higher education expenses include tuition, fees and course materials (e.g., textbooks). Nonacademic fees such as student activity fees, athletic fees and insurance are excluded. The expenses must be related to the student's academic course of instruction. Expenses related to sports, games or hobbies are excluded unless they are part of the student's degree program. The expenses must have been paid by the taxpayer or by the student, and the taxpayer must list the student as an exemption on their income tax return. (Any qualified tuition and related expenses paid by the dependent are treated as though they were paid by the taxpayer, per 26 CFR 25A(g)(3).) While a taxpayer may opt to not claim the student as an exemption to allow the student to claim the tax credit, students who could be claimed on another's income tax return are not eligible for the partial refundability. Scholarships and financial aid do not count as qualified tuition and related expenses paid by the taxpayer. Only out-of-pocket expenses count. Gifts, bequests and inheritances do count as though paid by the taxpayer. The credit applies to expenses paid after December 31, 1997. Limitations and Eligibility Restrictions
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FinAid | Education Tax Benefits | Hope Scholarship Tax Credit

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The credit is allowed only for the first four tax years of higher education expenses per student. Typically the first tax year will correspond to the fall of the student's freshman year in college, and the second tax year will correspond to the spring of the freshman year and the fall of the sophomore year. The student must be enrolled at least half time for at least one academic period that begins during the taxable year. The credit is also allowed only for the first four academic years of postsecondary education. It cannot be used if the student already has four years of post-secondary education. The credit will be denied for a student convicted of a felony drug offense. Coordination Restrictions The Hope Scholarship can be used in conjunction with other tax benefits, provided that different education expenses form the basis for each benefit. You cannot use the Hope Scholarship with the Lifetime Learning tax credit for the same student in the same year, but you can use them for different students' educational expenses in the same year. In most cases the Hope Scholarship will yield a greater financial benefit than the Lifetime Learning tax credit. The Hope Scholarship is limited per student, while the Lifetime Learning tax credit is limited per taxpayer. The Lifetime Learning tax credit also offers a lower percentage of qualified expenses than the Hope Scholarship. The Lifetime Learning tax credit will mostly be useful for graduate and professional students who are ineligible for the Hope Scholarship of the restriction to the first few years of postsecondary education. You cannot use the Hope Scholarship and the Tuition & Fees Deduction for the same student in the same year. Income Phaseouts If not for the American Opportunity Tax Credit changes, the 2009 income phaseout would have been for incomes from $50,000 to $60,000 (single filers) and $100,000 to $120,000 (married filing joint). (The phaseouts are indexed for inflation.) The American Opportunity Tax Credit increased the phaseouts to $80,000 to $90,000 (single filers) and $160,000 to $180,000 (married filing joint). These higher phaseouts are temporary and are not indexed for inflation. Taxpayers who are married cannot claim the tax credit if they are filing separate returns.

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