The Hope Scholarship Credit
Besides just investing for education, you can also claim education tax breaks to lessen the impact of these rapidly rising costs. In fact, you may be eligible to claim the Hope Scholarship tax credit to offset qualified education expenses that you, your spouse, or a dependent incurred. For 2008, the Hope Scholarship credit is for the first $1,200 of qualified education expenses, and 50 percent of the next $1,200 ($1,100 for 2007). In other words, the full credit of $1,800 ($1,650 for 2007) applies if the student has a minimum of $2,400 in qualified expenses for 2008 ($2,200 for 2007). The only expenses that count toward the credit are the tuition and fees required for attendance at eligible institutions. Eligible institutions are any accredited public, nonprofit, or for-profit postsecondary institution eligible to participate in financial aid programs. The Hope Scholarship credit is available for each student in your family who meets the necessary qualifications:
- enrollment in the first or second year of postsecondary education
- enrollment in a program that leads to a degree, certificate, or other recognized academic credential
- taking at least one-half of the normal full-time load of classes, for at least one academic period beginning during the calendar year
- hasn't been convicted of any drug-related felony
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Did You Know?
The Gulf Opportunity Zone Act of 2005 doubles the Hope Scholarship credit for individuals who attend an eligible educational institution in the Hurricane Katrina GO Zone (i.e., a declared disaster area affected by Hurricane Katrina) for any tax year beginning in 2005 or 2006. In addition, certain room and board expenses qualify.
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The expenses can generally be deducted in the year school starts, if, of course, the expenses are paid in that year.
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Tip
If you prepay expenses during one year for a class that begins in the first three months of the following year, you can count those expenses toward the credit in the year they were paid.
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So far so good, right? Now, let's get to the inevitable when it comes to tax breaks; the credit you're able to take is phased out until it is eliminated altogether once you reach a specified level of adjusted gross income. For purposes of the Hope Scholarship credit, your adjusted gross income is modified by adding back any of the foreign earned income exclusion, adding any amounts derived from sources in American possessions if are a resident of the possession. Possessions include American Samoa, Guam, the Northern Mariana Islands, and Puerto Rico.
If you are a parent and claim your child as a dependent, you have to use your adjusted gross income in determining whether you're eligible for the credit. You can't avoid the income limitations by having your dependent child claim the credit.
For single individuals, the credit starts to phase out when their modified adjusted gross income reaches $48,000 for 2008 ($47,000 for 2007) and is completely phased out when the adjusted gross income is $58,000 for 2008 ($57,000 for 2007). Married folks, who must file a joint tax return to claim the Hope Scholarship credit, start to lose the credit when their modified adjusted gross income reaches $96,000 for 2008 ($94,000 for 2007) and completely lose the credit when their adjusted gross income reaches $116,000 in 2008 ($114,000 in 2007). These amounts may be adjusted annually for inflation.
It's extremely important to be aware of the fact that if you are eligible for the Hope Scholarship credit and you decide to claim it, you could be precluded from claiming other education deductions and credits. For example, if you claim the Hope Scholarship credit, you cannot claim the Lifetime Learning credit in the same year. Also, you can't take a tax deduction for education expenses in the same year that you claim the Hope scholarship credit. And while you can claim a Hope Scholarship credit in the same year that you receive a distribution from Coverdell Education Savings Account, that's only true if the distribution is not used to pay for the same expenses for which you claimed the Hope credit.
If you're interested in claiming the Hope Scholarship credit, you will have to complete IRS Form 8863, Education Credits, and attach it to your income tax return.
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