Hope Scholarship Credit
Lifetime Learning Credit
Education IRAs Education Incentives

A key aspect of the Taxpayer Relief Act of ‘97 focuses on encouraging education beyond high school. New credits, deductions, and savings incentives form the core of these education related changes. Because there are numerous exceptions, elections, phaseouts, etc. associated with these tax benefits, you may wish to obtain professional advice from an Enrolled Agent.

Credits: Beginning in 1998, two new credits are available for taxpayers who pay qualified tuition and related expenses.

Hope Scholarship Credit. The Hope Scholarship Credit is allowed for tuition and related expenses for the first two years of post secondary education. A maximum credit of $1,500 is allowed, determined by taking 100 percent of the qualified expenses paid during the tax year up to $1,000 plus 50 percent of the next $1000.

Students must be at least a half-time student pursuing a degree or recognized credential at an educational institution. The credit may be claimed for more than one family member.

The Lifetime Learning Credit. A credit is allowed for up 20 percent of the amount of the qualified tuition and related expenses not to exceed $5,000. The maximum credit is $1,000. The credit is effective for eligible expenses paid after June 30, 1998. The LLC is allowed for undergraduate and graduate level courses as well as any course of instruction at an eligible institution to acquire or improve job skills. There is no requirement to be a half-time student. The LLC is calculated on a per family basis rather than a per student basis.

Special Rules Applicable to Both Credits
Eligible Expenses

• Tuition and fees for the taxpayer, taxpayer's spouse, or a dependent of the taxpayer.
• Payments for room, board, student activities, and books are not eligible for the credits.
• Qualified expenses are reduced by any amounts that are excluded from income by any other provision of the law.
• Expenses for which a taxpayer elects the Hope credit would not be eligible for the LLC.
• Expenses must generally be paid during the year for an academic period that begins in that tax year, but there is a prepayment rule that allows a credit for expenses paid in one tax year for academic period that begins in first 3 months of the following year.
• Tuition expenses paid with loan proceeds are eligible for the credit in the year the tuition is paid, not when the loan is repaid.

Phaseout. Both credits have an AGI phaseout for taxpayers with modified AGI between $40,000 and $50,000 ($80,000 to $100,000 for joint returns). Who's Eligible. Credits may be taken for the taxpayer, spouse, or a dependent. A dependent isn't allowed the credit even if he or she pays the expense. The taxpayer claiming the dependency exemption may claim the credits for expenses paid by the dependent. Neither of the credits are allowed if a taxpayer files married filing separately. Taxpayers who are nonresident aliens for any portion of the tax year aren't allowed the credits.

Deductions: Interest payments on educational loans may be deductible as an adjustment to income for certain qualified taxpayers. The new law phases in the deduction over several years starting in 1998. The maximum allowable amount for each year is:
1998 - $1,000
1999 - $1,500
2000 - $2,000
2001 and beyond - $2,500

An educational loan means any loan incurred to pay qualified higher educational expenses which were incurred by the taxpayer, spouse, or dependent.

Limitations

• Deduction allowed for interest paid during the first 60 months in which interest payments are required.
• Deduction is phased out for taxpayers with modified AGI between $40,000 and $55,000 ($60,000 and $75,000 for joint filers).
• Married couples must file a joint return to claim the deduction.
• Dependents are not allowed the deduction.

The deduction does not depend on whether or not the loan was federally guaranteed or subsidized. Refinancing won't cause the loan to lose its qualifications.

Former students whose loans are already in repayment may be eligible for this deduction as long as the payments are for the first 60 months that interest payments are required on the loan.

Savings Incentives: Now there's a new way for taxpayers to save for the future costs of higher education.

Education IRA. An Education IRA is an IRA created exclusively for the purpose of paying higher education costs for a designated beneficiary. A nondeductible cash contribution of up to $500 per year can be made for the beneficiary until age 18. Anyone (including the child) may contribute to a child's Education IRA. Contributions can be made starting on or after January 1, 1998.

The $500 contribution is phased out if the contributor's AGI is between $95,000 and $110,000 ($150,000 and $160,000 MFJ).

There is no limit as to the number of Education IRAs that may be established for a particular child. However, in any given taxable year the total contributions to all accounts for a particular child may not exceed $500.

Distributions. Distributions from the Education IRA are not taxable if used to pay qualified educational expenses.

If distributions are not used to pay educational expenses, a portion may be taxable and subject to a 10 percent additional tax. Beneficiaries must withdraw the amounts in the Education IRA before reaching age 30.

Rollovers. Amounts remaining in an account when the beneficiary finishes his or her education or before reaching age 30 can be rolled over to another member of the original beneficiary's family. It is also possible just to change the designated beneficiary of an account.

Tax laws are subject to change at any time.

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