You Can Save Taxes on Higher Education

The law provides for two non refundable tax credits, the Hope Scholarship and the Lifetime Learning Credits, as explained below. Both credits will reduce a taxpayer's tax liability dollar for dollar until the tax reaches zero. Any credit in excess of the tax liability is lost. The credit is not allowed for taxpayers who file married separate returns.

The credits are elective and the taxpayer must choose between the two credits for each student. In general, most taxpayers will find it more beneficial to take the Hope Scholarship Credit in the first two years of the student's education and the Lifetime Learning Credit after the first two years.

The allowable credits phase out when a taxpayer's modified AGI is between $40,000 and $50,000 for single taxpayers and between $80,000 and $100,000 for joint return filers. These phase out levels will be inflation adjusted after the year 2002.

Hope Scholarship Credit

The Hope Scholarship is a credit of up to $1,500 per student per year, covering the first two years of post-secondary education. The credit is 100% of the first $1,000 of qualifying expenses plus 50% of the next $1,000.

Example: A taxpayer's child is in the first year of college, attending on a full-time basis. The tuition is $1,500 which is paid during the year by the taxpayer; there is no reimbursement or other tax benefit claimed for the tuition expense. The taxpayer is entitled to a lax credit of $1,250 (100% of the first $1,000 plus 50% of balance) for the lax year.

Lifetime Learning Credit

The Lifetime Learning Credit is a credit of up to 20% of the first $5,000 of qualifying educational expenses for: (1) undergraduate, graduate, or certificate level courses for a student attending classes on at least a half-time basis, or (2) any course at an eligible institution to acquire or improve job skills of the student (no attendance time requirements). Expenses must have been incurred and paid after 6/30/98.

Example: A taxpayer has two children attending college on a full-time basis. The taxpayer pays qualified tuition expenses for the two children in the amount of $7,500 and there is no reimbursement or other tax benefit claimed for the tuition expense. The taxpayer is entitled to a tax credit of $1,000 (20% of the first $5,000) for the tax year.

Qualifying expenses.. for both credits include tuition and fees but not expenses for room, board, books, and other non-academic fees such as student activity, athletic, insurance, etc. Also excluded are expenses for courses that involve sports, games or hobbies that are not part of a degree program. Expenses qualifying for the credit must be reduced by tax-free scholarships or fellowships and other tax-free educational benefits.

Qualifying students—must attend a qualified educational institution (one that is eligible to participate in U.S. Dept. of Education student aid programs). The student must be the taxpayer, spouse, or someone who is a dependent of the taxpayer.

In addition, in the case of the Hope Scholarship Credit, the student must have no federal or state felony drug convictions for the academic period to which the credit would apply.

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