Income-Related Phaseout of Education Credits

Unfortunately, the Hope Scholarship credit (as well as the Lifetime Learning credit) is phased out for those at higher income levels.

Warning Although either the student or the parent (but not both) can claim a Hope Scholarship or Lifetime Learning credit, you can't avoid the high-income phaseouts for either of these credits by having the student claim the credit, unless the student is not claimed as a dependent on the parent's tax return.

The 2007 phaseout occurs in the income range of $47,000 to $57,000 for singles and the range of $94,000 to $114,000 for marrieds filing a joint return. To determine whether your credit will be affected by the phaseout, you must consider your modified adjusted gross income; that is, your AGI as shown on Line 38 of Form 1040 (or Line 22 on Form 1040A), plus any foreign earned income exclusion, plus amounts derived from sources in American possessions if you are a resident of the possession (Guam, American Samoa, the Northern Mariana Islands, or Puerto Rico).

The phaseout is computed by reducing the amount of your credit by a fraction. The fraction is found by taking the amount of your modified AGI that exceeds $47,000 (or $94,000 if filing jointly) and dividing it by $10,000 (or by $20,000 if filing jointly).

Example Steve and Kit are married filing jointly, and have twin sons who are both freshmen in college in 2007. For each of the boys, tuition costs exceed $2,200. Steve and Kit would normally have a Hope credit of $1,650 for each son, or $3,300 in total. However, their AGI is $98,000 so they must reduce their credit as follows: Their AGI exceeds $94,000 by $4,000, and they divide $4,000 by $20,000 to get a fraction of 1/5. Therefore, 1/5 of their credit will not be allowed, and they can claim a Hope credit of only $2,640 for 2007.