HOPE credit and Lifetime Learning credit for qualified tuition and related expenses of higher education
The HOPE credit and the Lifetime Learning credit for "qualified tuition and related expenses" (see below) 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 a taxpayer may claim is $1,500 per year per student, for the first two years of undergraduate education at an eligible educational
institution. The maximum HOPE credit amount will be adjusted for inflation after 2001. The maximum Lifetime Learning credit that may be claimed is $1,000 per
year ($2,000 per year after 2002) per taxpayer, for any post-high school education (including graduate-level courses and courses to acquire or improve job skills)
at an eligible educational institution. The maximum Lifetime Learning credit will not be adjusted for inflation.
Generally, eligible educational 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 an eligible student, i.e., a student who's enrolled in a degree or certificate program
on at least a half-time basis at an eligible educational institution, and who has never been convicted of a federal or state felony drug offense. The Lifetime Learning
credit is not subject to the eligible student/felony drug offense 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 individual retirement account (that is, an education IRA).
The HOPE/Lifetime Learning credits may not be claimed in the same tax year for the same expenses, but each may be claimed for different expenses. For example,
in the same tax year, a taxpayer may claim the HOPE credit for the qualified tuition and related expenses of one or more qualifying dependents, and may claim the
Lifetime Learning credit for the qualified tuition and related expenses incurred for himself.
In order 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 January 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 l997, for education furnished in academic periods starting on or after January 1, 1998. The Lifetime Learning
credit is available for expenses paid after June 30, l998, 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. 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 educational 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. That is, the credit is reduced if the modified AGI is above $80,000 and is unavailable if it's $100,000 or more. For
taxpayers who aren't married filing jointly, the phase-out range is $40,000 to $50,000. After 2001, the phase-out amounts will be adjusted for inflation.
Neither the HOPE credit nor the Lifetime Learning credit is available for taxpayers who are married filing separately. In addition, 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 HOPE/Lifetime Learning 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.
Note that beginning in 1999, the HOPE and Lifetime Learning credits will be allowed only to the extent that the taxpayer's regular income tax liability exceeds his or
her tentative minimum tax.
Eligibility for the HOPE and Lifetime Learning credits are subject to a number of technical requirements not discussed above. Please feel free to call our offices if
you would like to discuss your eligibility for these credits and how to claim them.
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