Hope Scholarship Credit
Questions and Answers
Current as of 1/98. Note that there have been changes to some of the items below in the Technical Corrections Act of 1998.
Introduction
Beginning January 1, 1998, taxpayers may be eligible to claim a nonrefundable Hope Scholarship Credit against their federal income taxes. The Hope Scholarship Credit may be claimed for the qualified tuition and related expenses of each student in the taxpayer’s family (i.e., the taxpayer, the taxpayer's spouse, or an eligible dependent) who is enrolled at least half-time in one of the first two years of postsecondary education and who is enrolled in a program leading to a degree, certificate, or other recognized educational credential. The amount that may be claimed as a credit is generally equal to: (1) 100 percent of the first $1,000 of the taxpayer’s out-of-pocket expenses for each student’s qualified tuition and related expenses, plus (2) 50 percent of the next $1,000 of the taxpayer’s out-of-pocket expenses for each student’s qualified tuition and related expenses. Thus, the maximum credit a taxpayer may claim for a taxable year is $1,500 multiplied by the number of students in the family who meet the enrollment criteria described above.
The amount a taxpayer may claim as a Hope Scholarship Credit is gradually reduced for taxpayers who have modified adjusted gross income between $40,000 ($80,000 for married taxpayers filing jointly) and $50,000 ($100,000 for married taxpayers filing jointly). Taxpayers with modified adjusted gross income over $50,000 ($100,000 for married taxpayers filing jointly) may not claim the Hope Scholarship Credit. Both the dollar limitation on the expenses for which the credit may be claimed and the modified adjusted gross income limitation will be indexed for inflation in 2002 and years thereafter.
The Hope Scholarship Credit may be claimed for payments of qualified tuition and related expenses made on or after January 1, 1998, for academic periods beginning on or after January 1, 1998. Therefore, the first time taxpayers will be able to claim the credit is when they file their 1998 tax returns in 1999. The Hope Scholarship Credit is not available for any amount paid in 1997.
Questions and Answers
Q.1. Who may claim the Hope Scholarship Credit?
A.1. An individual paying qualified tuition and related expenses at a postsecondary
educational institution may claim the credit, provided the student whose expenses are
being paid and the institution meet certain eligibility requirements.
Q.2. May an individual claim a Hope Scholarship Credit for
paying qualified tuition and related expenses for other family members?
A.2. Yes. An individual may claim the credit for his/her own qualified tuition and related
expenses and the qualified tuition and related expenses of his/her spouse and other
eligible dependents (including children) for whom the dependency exemption is claimed.
Generally, a parent may claim the dependency exemption for his/her unmarried child if: (1)
the parent supplies more than half the child’s support for the taxable year, and (2)
the child is under age 19 or is a full-time student under age 24.
Q.3. What are the eligibility requirements for the student?
A.3. A student is eligible for the Hope Scholarship Credit if: (1) for at least one
academic period (e.g., semester, trimester, quarter) beginning during the calendar year,
the student is enrolled at least half-time in a program leading to a degree, certificate,
or other recognized educational credential and is enrolled in one of the first two years
of postsecondary education, and (2) the student is free of any conviction for a Federal or
State felony offense consisting of the possession or distribution of a controlled
substance. For purposes of the Hope Scholarship Credit, a student will be considered to be
enrolled at least half-time if the student is enrolled for at least half the full-time
academic workload for the course of study the student is pursuing as determined under the
standards of the institution where the student is enrolled. The institution’s
standard for a full-time workload must equal or exceed the standards established by the
Department of Education under the Higher Education Act and set forth in 34 C.F.R. §
674.2(b).
Q.4. What are the eligibility requirements for the
institution?
A.4. The college, university, vocational school, or other postsecondary educational
institution where the student is enrolled must be an institution that is described in
section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088) and, therefore, eligible
to participate in the student aid programs administered by the Department of Education.
This category includes virtually all accredited public, nonprofit, and proprietary
postsecondary institutions. (The same eligibility requirements for institutions apply for
the Lifetime Learning Credit, described in another section.)
Q.5. The Hope Scholarship Credit may be claimed only for
amounts spent on qualified tuition and related expenses. Which expenses are included in
qualified tuition and related expenses?
A.5. The term "qualified tuition and related expenses" means the tuition and
fees an individual is required to pay in order to be enrolled at or attend an eligible
institution. Amounts paid for any course or other education involving sports, games, or
hobbies are not eligible for the credit, unless the course or other education is part of
the student’s degree program. Charges and fees associated with room, board, student
activities, athletics, insurance, books, equipment, transportation, and similar personal,
living, or family expenses are not qualified tuition or related expenses. (The same
definition of qualified tuition and related expenses applies for the Lifetime Learning
Credit, described in another section.)
Q.6. The Hope Scholarship Credit is available only if a
taxpayer’s modified adjusted gross income is below a specified amount. How does a
taxpayer know what his/her modified adjusted gross income is?
A.6. For most taxpayers, modified adjusted gross income is the same as adjusted gross
income. Taxpayers compute adjusted gross income as part of completing a Federal income tax
return. For those few taxpayers who earn income abroad or receive income from certain
American territories or possessions, modified adjusted gross income will be greater than
adjusted gross income. In those cases, the individual’s adjusted gross income will be
increased by: (1) certain amounts that the individual earns abroad, (2) amounts
effectively connected with the individual’s conduct of a trade or business or derived
from sources in Guam, American Samoa, or the Northern Mariana Islands (if the individual
is a resident of the possession where the source of the income is located), and (3)
amounts derived from sources in Puerto Rico (if the individual is a Puerto Rican
resident). (The same rules apply for the Lifetime Learning Credit, described in another
section.)
Q.7. May a nonresident alien claim the Hope Scholarship
Credit?
A.7. Generally no. There is an exception for certain nonresident aliens who are married to
U.S. citizens or resident aliens. Nonresident aliens should consult a U.S. tax advisor to
determine whether the exception applies to them. (The same rules apply to the Lifetime
Learning Credit, described in another section.)
Q.8. Are qualified tuition and related expenses for
graduate-level degree work eligible for the Hope Scholarship Credit?
A.8. No. However, the Lifetime Learning Credit is available for these expenses
Q.9. May an individual claim a Hope Scholarship Credit for
more than one family member?
A.9. Yes. Furthermore, the credit is calculated on a per student, rather than a per
family, basis. For example, if an individual whose modified adjusted gross income is
$35,000 pays over $2,000 in qualified tuition and related expenses for himself and over
$2,000 in qualified tuition and related expenses for his dependent child, and both he and
his dependent child meet the eligibility requirements, the individual may claim a Hope
Scholarship Credit of $3,000 (i.e., a credit of $1,500 for his expenses plus a credit of
$1,500 for his child’s expenses).
Q.10. May both the parent and a dependent child claim the
Hope Scholarship Credit for the child’s qualified tuition and related expenses in the
same year?
A.10. No. Either the parent or the child, but not both, may claim the credit for the
child’s expenses in a particular year. If an individual claims the child as a
dependent on his/her Federal income tax return for the year, only the individual may claim
the Hope Scholarship Credit for the child’s qualified tuition and related expenses.
If no one claims the child as a dependent on a Federal income tax return for the year,
only the child may claim the Hope Scholarship Credit for the child’s expenses. (The
same rules relating to individuals and dependents apply for the Lifetime Learning Credit,
described in another section.)
Q.11. If a married taxpayer files a separate return, may
the taxpayer claim a Hope Scholarship Credit on his/her income tax return?
A.11. No. Married taxpayers may claim the credit only if the taxpayer and the
taxpayer’s spouse file a joint return for the taxable year. (The same rules apply for
the Lifetime Learning Credit, described in another section.)
Q.12. How does a parent claim a Hope Scholarship Credit for
the qualified tuition and related expenses of a dependent child?
A.12. The parent may claim the credit on his/her tax return even if the child files
his/her own tax return. When a child is claimed as a dependent on a parent’s return,
any qualified tuition or related expenses paid by the child during the year are treated as
if the parent had paid them. Therefore, these expenses are included in calculating the
parent’s Hope Scholarship Credit. A child may not claim a Hope Scholarship Credit on
his/her tax return for a particular year if the child’s parent claims the child as a
dependent in that same year. (The same rules apply for the Lifetime Learning Credit,
described in another section.)
Q.13. What is the maximum Hope Scholarship Credit a
taxpayer may claim for an eligible student?
A.13. Until 2002 (when the dollar limitations are indexed for inflation), for each student
who meets the eligibility requirements, the credit amount is 100 percent of the first
$1,000 of the taxpayer’s out-of-pocket expenses for qualified tuition and related
expenses, plus 50 percent of the next $1,000 of the taxpayer’s out-of-pocket expenses
for qualified tuition and related expenses. Therefore, the maximum credit amount for the
expenses of an eligible student is $1,500. If the taxpayer is claiming a credit for more
than one person, the credit amount for each student in the taxpayer’s family is added
together to determine the maximum total credit the taxpayer may claim.
Q.14. The amount a taxpayer may claim as a Hope Scholarship
Credit is gradually reduced for taxpayers with modified adjusted gross income between
$40,000 and $50,000 (between $80,000 and $100,000 for married taxpayers filing jointly).
How does this reduction work?
A.14. The reduction works on a sliding scale that reflects where the taxpayer’s
modified adjusted gross income is in the phase-out range. For example, until 2002 (when
the dollar limitations on the credit and the income ranges are indexed for inflation), if
an eligible student (who is not anyone’s dependent for tax purposes) pays $2,000 or
more in qualified tuition and related expenses in a particular year, and the
student’s modified adjusted gross income for the year is $45,000 (half way along the
$10,000 phase-out range), the credit amount for the student is limited to $750. By
contrast, if the same student’s modified adjusted gross income was $35,000, the
credit amount for the student would be the maximum $1,500.
Q.15. How does a taxpayer claim the Hope Scholarship
Credit?
A.15. The first year that the credit will be available is 1998. Thus, taxpayers will not
be able to claim the credit until they file their 1998 tax returns in 1999. Instructions
accompanying the 1998 tax forms (for returns required to be filed in 1999) will explain
how to calculate the credit and how to claim it on the tax return.
Q.16. Is there a limit to the number of times a taxpayer
may claim the Hope Scholarship Credit for each student?
A.16. Yes. The credit may be claimed in no more than two years for each student. Thus, for
example, a couple with a child who starts as a freshman in the fall of 1998, continues as
a sophomore in 1999, and meets the eligibility requirements may claim the credit for their
child’s expenses in 1998 and again in 1999. After 1999, neither the parents, the
student, nor anyone else may claim any additional Hope Scholarship Credits for this
student's qualified tuition and related expenses. However, in 2000 and thereafter, the
Lifetime Learning Credit may be available for this child’s expenses. Furthermore, if
the couple has another child who starts as a freshman in the fall of 1999, the couple may
claim the Hope Scholarship Credit for that child’s expenses in 1999 and one
additional year.
Q.17. May an individual claim both the Hope Scholarship
Credit and the Lifetime Learning Credit for a student's expenses in a single taxable year?
A.17. No. For each year in which a student meets the eligibility requirements for the Hope
Scholarship Credit, the student’s expenses may be used as the basis for a Hope
Scholarship Credit or a Lifetime Learning Credit, but not both. If, for example, an
eligible student pays more than $2,000 in qualified tuition and related expenses during
the calendar year, the student (or the individual claiming the student as a dependent) may
not claim the Hope Scholarship Credit for the first $2,000 of expenses and the Lifetime
Learning Credit for the rest.
Q.18. If a couple has two children, one who is a freshman
and one who is a junior, may the couple claim a Hope Scholarship Credit for the
freshman’s expenses and a Lifetime Learning Credit for the junior’s expenses?
A.18. Yes. Assuming the applicable eligibility requirements have been met for each credit,
a taxpayer may claim the Hope Scholarship Credit for one student’s expenses and the
Lifetime Learning Credit for another student’s expenses in the same year.
Q.19. May a parent or student claim a Hope Scholarship
Credit for tuition paid in advance of when the academic period begins?
A.19. Generally, the credit is available only for payments of qualified tuition and
related expenses that cover an academic period beginning in the same calendar year as the
payment is made. (An academic period begins on the first day of classes, and does not
include periods of orientation, counseling, or vacation.) An exception, however, allows a
parent or student to claim a Hope Scholarship Credit for payments of qualified tuition and
related expenses made during the calendar year to cover an academic period that begins in
January, February, or March of the following taxable year. Because
the Hope Scholarship Credit does not apply to expenses paid before January 1, 1998, this
exception does not apply to tuition paid in 1997 to cover academic periods beginning in
1998.
Q.20. If a student (who is not claimed as a dependent on
anyone’s Federal income tax return) pays qualified tuition and related expenses using
a combination of a Pell Grant, a loan, a gift from a family member, and some personal
savings, what expenses may be taken into account in calculating the Hope Scholarship
Credit the student may claim?
A.20. The student may take into account only out-of-pocket expenses in calculating the
credit. Qualified tuition and related expenses paid with the student’s earnings, a
loan, a gift, an inheritance, or personal savings (including savings from a qualified
state tuition program) are taken into account in calculating the credit amount. However,
qualified tuition and related expenses paid with a Pell Grant or other tax-free
scholarship, a tax-free distribution from an Education IRA, or tax-free employer-provided
educational assistance are not taken into account in calculating the credit amount. (The
same rules apply for the Lifetime Learning Credit, described in another section.)
Q.21. May a student’s parents claim the Hope
Scholarship Credit for the student’s expenses for a taxable year in which the student
takes money out of an Education IRA on a tax-free basis?
A.21. No. If a student is receiving a tax-free distribution from an Education IRA in a
particular taxable year, none of that student’s expenses may be claimed as the basis
for a Hope Scholarship Credit for that taxable year. However, the student may waive the
tax-free treatment of the Education IRA distribution and elect to pay any tax that would
otherwise be owed on the Education IRA distributions received in any taxable year so that
the student or the student's parents may claim a Hope Scholarship Credit for expenses paid
in the same year the Education IRA distributions are received.
© Copyright 1997 Raymond S. Kulzick. All rights reserved. 971107.
This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance.