Education Tax Credit Information

Understanding The Hope Scholarship
(For Students and Families)

What Is It?

The Hope Scholarship is a tax credit, not a scholarship. Tax credits are subtracted from the tax your family owes, instead of subtracting them from taxable income like a tax deduction. Your family must file a federal tax return and owe taxes to get this tax credit. You can't get a refund for the Hope credit if your family doesn't pay taxes. If your family owes less in taxes than the maximum amount of the Hope tax credit for which your family is eligible, you can only take the credit for the amount you owe in taxes.

Your family may claim a tax credit up to $1,500 for each eligible dependent for up to two tax years. In other words, your family may claim up to 100% of the first $1,000 of eligible expenses and 50% of the next $1,000 for a maximum credit of $1,500.

The exact amount of the Hope credit depends on your family's income, the amount of qualified tuition and fees paid, and the amount of certain scholarships and allowances subtracted from tuition. The total credit is also based on how many eligible dependents are in your family, rather than a maximum dollar amount for the family, like the Lifetime Learning tax credit.

Who Qualifies?

The Taxpayer: An eligible taxpayer must file a federal tax return and owe taxes to claim the Hope credit. In addition, the taxpayer must claim an eligible student as a dependent on the tax return, unless the credit is for the taxpayer or the taxpayer' spouse. (This means the eligible taxpayer may also be the eligible student.) Taxpayers may be eligible for the largest credit with an Adjusted Gross Income (AGI) of up to $40,000 for a single taxpayer, or $80,000 for married taxpayers. The credit amount is gradually reduced for families with incomes between $40,000 and $50,000 if single, or $80,000 and $100,000 if married. After the 2001 tax year, the income limits will be adjusted for inflation. See the 2002 IRS Form 8863 for the revised AGI limits.

The Student: The tax law says an eligible student must be enrolled at least half-time in an eligible program leading to a degree or certificate at an eligible school during the calendar year AND must not have completed the first two years of undergraduate study. The college you attend can help you figure out whether you meet this requirement. You may claim the credit yourself if you are not claimed as a dependent by another taxpayer. (Once again, this means that the eligible student may also be the eligible taxpayer.) Also, you may not have been convicted of a Federal or State felony drug offense before the end of the tax year in which you are enrolled.

How Do You Get It?

To apply for the credit, the taxpayer must report the amount of tuition and fees paid as well as the amount of certain scholarships, grants, and untaxed income used to pay the tuition and fees. The law says that schools must send this information in the form of a statement to each taxpayer and to the IRS. For the 2002 tax year, this statement will include: (1) the name, address, and taxpayer ID number of the school; (2) the name, address, and taxpayer ID of the student for whom tuition was paid; (3) whether the student was enrolled at least half-time; and (4) whether the student was enrolled only in a graduate-level program. Your school will mail this to you by January 31, 2003, for the 2002 tax year. This statement from the school will also include the phone number of a person you can call at the school if you have questions. You will use this information and your own records about tuition and fee amounts you paid to fill out the IRS Form 8863 to claim the tax credit. You may wish to talk to a tax advisor for help in calculating the amount of your credit.

When Is It Available?

The taxpayer may claim the Hope credit for qualified expenses paid in tax years beginning January 1, 1998, and after, for education furnished in academic periods beginning on or after this date.

Taxpayers may pay educational expenses in a tax year for an academic period that begins following the tax year (e.g., paying in December 2000 for an academic period beginning in the first three months of 2001). Because the law did not take effect until January 1, 1998, you were not allowed to prepay for the first year of the credit.

Can A Family Claim Multiple Benefits?

A family may claim a Hope credit, a Lifetime Learning credit and an exclusion from gross income for certain distributions from qualified State tuition programs or education IRAs as long as the same student is not used as the basis for each credit or exclusion AND the family does not exceed the Lifetime Learning maximum per family.

Revised February 27, 2002, NASFAA Web Site www.nasfaa.org
Copyright 2002, National Association of Student Financial Aid Administrators
Permission to reprint, distribute, and/or post on web sites is granted to NASFAA Members.


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