Hope Credit
Posted on September 10, 2008
Filed Under Credits, Federal Income Tax
Single taxpayers and joint filers can claim a nonrefundable Hope scholarship credit for certain higher education expenses. The Hope credit is available to the taxpayer, taxpayer’s spouse, or individuals the taxpayer can claim as dependents. Married individuals filing separate returns are not eligible for the Hope credit. However, there is an exception: A married person who (1) lives apart from his or her spouse for the last six months of the year, (2) pays over one-half of the cost of keeping up a home, (3) provides housing for one or more dependents, and (4) files a separate return is considered an unmarried head-of-household filer and therefore eligible for the Hope credit.
In terms of actual dollar amounts, a taxpayer in 2007 can claim a maximum credit of $1,650 per student per year for qualified tuition paid in each of the first two years of postsecondary study at a suitable educational institution. A close reading of the phrase “each of the first two years…” indicates the Hope credit can be claimed for the freshman and sophomore years of college or equivalent at a technical-vocational institute; that is, the Hope credit expires after two uses by the same undergraduate student and doesn’t count toward graduate study. The maximum credit of $1,650 is equal to a 100% credit for the first $1,100 and a 50% credit for the second $1,100 of qualified postsecondary tuition paid to a technical-vocational institute, college, or university. In 2008, the maximum credit will increase to $1,800 or 100% of the first $1,200 and 50% of the next $1,200 of qualified tuition expenses.
The Hope credit has an income limitation, that is, it is not available in 2007 to single individuals with modified adjusted gross income (AGI) over $57,000 or joint filers with modified AGI over $114,000 (the 2008 limits are $58,000 for single and $116,000 for joint filers). (Note: For the most part, modified AGI is AGI plus any exclusion or deduction for foreign earned income and foreign housing costs.) In addition, the credit is subject to phase out at lower levels of modified AGI: for single taxpayers, the phaseout range is $47,000 to $57,000 modified AGI (in 2008, the range is $48,000 to $58,000); for joint filers, the phaseout range is $94,000 to $114,000 modified AGI (the range in 2008 is $96,000 to $116,000).
For purposes of the Hope credit, a qualified educational institution is any postsecondary educational institution able to participate in student aid programs administered or supervised by the U.S. Department of Education, namely, any accredited college, university, or technical-vocational institute.
Qualified tuition expenses qualify for the Hope credit in the year paid even if made with borrowed funds. Tuition payments are considered a current-year expense if traceable to an academic period that starts in the first three months of the succeeding tax year (e.g., qualified tuition paid for spring semester 2009 would be a qualifying 2008 expense). Fees other than tuition are not acceptable for purposes of the credit unless required as a condition of enrollment or attendance. Tuition for “hobby” courses (i.e., courses involving games, sports, side interests, etc.) or noncredit courses do not count toward the Hope credit unless part of a student’s degree program. Other fees such as room and board, student health fees, and transportation are not eligible for the credit; bundled fees must be disaggregated and allocated to appropriate categories by the educational institution. Perhaps contrary to expectation, amounts paid for books, supplies, and equipment are not acceptable expenses unless required for enrollment or attendance. Click on Hope learning credit (pdf file) to see the form taxpayers use to claim the Hope credit.
A student meeting the following requirements is eligible for the Hope credit:
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The student hasn’t used the Hope credit more than once.
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The student hasn’t completed the first two years of postsecondary education.
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The student is enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational diploma or credential.
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The student hasn’t been convicted of state or federal felony drug possession or distribution.
It is important to note that only the parent with the right to a dependency exemption can claim the Hope credit. However, because the Hope and lifetime learning education credits are exceptions to the general rule that the eligibility to claim, not the actual use of, a dependency exemption determines tax benefits, a parent can elect not to claim the exemption and thereby shift the tax advantage of the Hope credit to the student-dependent. But if a third-party (that is, someone other than the taxpayer, taxpayer’s spouse, or taxpayer’s dependent) pays tuition directly to an institution, then it is possible for the taxpayer with rights to the student’s dependency exemption to treat the payments as his or her own and use this fact as a reason to claim the Hope credit. Or a third-party making tuition payments on the student’s behalf may claim the Hope credit. For example, a grandparent who pays more than 50% of the student’s total support for the year acquires the right to not only a dependency exemption for the student but also the Hope credit by reason of meeting the support test for a qualifying relative.
Payments of qualified tuition expenses with tax-free funds or investments such as Pell grants, scholarships, educational savings accounts, qualified tuition plans, and tax-exempt bonds reduce the available Hope credit dollar-for-dollar. By the same token, a credit and deduction cannot be claimed for the same expense. Nontaxable reimbursements reduce the Hope credit but not taxable reimbursements. Finally, a student cannot claim both the Hope tax credit and the other major education credit, the lifetime learning credit, in the same year.
Supplementary relevant articles on the Hope credit are listed below:
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Hope credit education (pdf file)
Many happy returns, Roger
[...] Other rules and regulations for the Hope and lifetime learning credits are the same; click on Hope credit, an earlier post to this web log, and Hope credit lifetime learning for a full [...]