Hope of a Lifetime May Provide Some Credit

The Taxpayer Relief Act of 1997 created a number of provisions designed to lighten the financial burden of higher education. Two new additions to the college-saving arsenal are the Hope Scholarship and the Lifetime Learning credits.

The Hope Scholarship credit is available to assist low- and middle-income families and students pay for post-secondary education. A tax credit can be claimed of up to $1,500 per year per student for each of the first two years of college. This amount consists of 100% of the first $1,000 of eligible expenses and 50% of the second $1,000 of eligible expenses.

The Lifetime Learning credit picks up where the Hope Scholarship credit leaves off. It is available for the remaining years of college, graduate school and classes attended to acquire or improve job skills. For expenses paid there is a $2,000 maximum credit amount each year per family. The credit is calculated as 20% of the first $10,000 of eligible expenses.

Like the Lifetime Learning credit, the Hope Scholarship credit may be claimed by the student or the parents. However, the Lifetime Learning credit is available per family where the Hope Scholarship credit is available per student. It is a distinction that is easily overlooked and may be a big difference when it comes to the total amount of potential assistance. Both of these credits are nonrefundable to the taxpayer, that is, the taxpayer can only reduce their tax liability to zero. This restriction may actually keep some taxpayers from using the full amount of the credit, especially if the family is able to claim other types of credits.

The ability to claim the Hope Scholarship and Lifetime Learning credits are phased-out according to level of adjusted gross income (AGI). The phaseout range for a single tax filer is between $40,000 and $50,000, and a joint filer's phaseout range is between $80,000 and $100,000. Taxpayers whose AGI exceeds these phaseout ranges are not able to utilize these credits. Individuals claiming married filing separately status may not claim the credit(s). Also, these credits cannot be claimed in the year a student receives a distribution from a Coverdell Education Savings Account (formerly the Education IRA).

Qualified expenses are limited to tuition and fees. Unfortunately, room and board, books and supplies are not considered qualified expenses and, therefore, are not covered. (note: these may be covered by a 529 savings plan, Click here for more The amount of eligible expenses are determined after scholarships and other forms of financial aid that are excludable from the student's income are taken into account.

Of course, this brief article is no substitute for a careful consideration of all of the advantages and disadvantages of this matter in light of your unique personal circumstances. Before implementing an education planning strategy, contact and consult with your Financial Advisor and tax professional.