IRS guidance on education tax incentives (Notice 97-60, IRB 1997-46, 8; 97FED ¶46,560; CFTS §§A:20.80; A:20.42[1])

HOPE scholarship credit

A.   Applies to qualified tuition and related expenses for the taxpayer, the taxpayer's spouse, and/or an eligible dependent (i.e., credit applies on a per student basis)

B.   In some cases, it will be important to decide whether the parent or the child should claim the credit

(1) Child under 24 who is a full-time student may qualify as the parent's dependent even though that child earns income but may be better off paying the college expenses and claiming the credit

(2) This is especially so where the parent's AGI is too high to entitle him or her to the credit

(3) If the child wants to claim the credit, he/she cannot be claimed as a dependent on the parent's return

C.   Requirements for claiming the credit

(1) For at least one academic period (e.g., semester, trimester, quarter) during the year, the student must be enrolled at least half-time in one of the first two years of post-secondary education in a program leading to a degree, certificate or other recognized educational credential

(2)No credit can be claimed if the student has any state or federal felony conviction for possession of a controlled substance

D.   Amount of credit

(1) Amount of the credit is 100% of the first $1,000 of out-of-pocket expenses, plus 50% of the next $1,000 of eligible expenses

(a) Maximum credit, then, is $1,500 per student

(2) Full credit can only be claimed by those with modified AGI below $40,000 for singles ($80,000 on a joint return)

(a) Credit phases out for singles with MAGI between $40,000 and $50,000 (between $80,000 and $100,000 on a joint return)

(i) Example: If a married couple's MAGI is $90,000 and they have qualified expenses over $2,000, the top credit would be $750

(3) Married persons must file jointly to claim the credit

(4) For most people MAGI is the same as AGI

(a) Those claiming the foreign earned income exclusion must figure AGI without the exclusion for purposes of the income limit on the HOPE scholarship credit

(5) Dollar limits on the credit and the phase-out ranges will be indexed for inflation after 2001

E.  Qualified expenses for the credit

(1) Qualified expenses include tuition and related expenses, such as fees required to be paid in order to be enrolled or attend the institution

(a) Not included are amounts paid for a course involving sports, games, or hobbies unless they are part of a degree program

(b) Not treated as eligible expenses are room, board, equipment, transportation, student activity fees, insurance, books, equipment and other personal living expenses

(c) Tuition and related fees for graduate level courses are not eligible for the HOPE scholarship credit, but may be eligible for the lifetime learning credit

(2) Only out-of-pocket expenses are taken into account

(a) These include amounts paid with savings, earnings, gifts, inheritances and loans

(b) Savings from qualified state tuition programs are treated as out-of-pocket expenses

(c) Out-of-pocket expenses do not include expenses paid with a Pell Grant or other tax-free scholarship, a distribution from an education IRA, or employer-provided educational assistance

(d) However, the student can waive tax-free treatment for distributions from education IRAs in order to allow the parent to claim the HOPE scholarship credit

F.  Other Rules

(1) Coordination of the HOPE credit with the lifetime learning credit

(a) Generally choose whichever is more favorable if both apply

(b) Example: Your freshman in college has expenses exceeding $2,000. You can't take both the HOPE scholarship credit and the lifetime learning credit for the same student. However, you can take a HOPE credit for your freshman and the lifetime learning credit for your senior

(2) Credit generally applies only to expenses paid in the academic period to which they relate

(a) Exception: Payment of expenses before the academic period beginning in January, February or March can be taken into account when paid

(b) Exception does not make tuition paid in December 1997 eligible for the credit for courses begun in January 1998; only expenses paid after 1997 are eligible for the credit

Estate Planning 

Tax Incentives for Saving for Higher Education

Qualified State Tution Programs

Education IRA's

Lifetime Learning Credit

Penalty-free IRA Withdrawals

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