National
Association of Student Financial Aid
Administrators
Understanding the Hope
Scholarship Tax Credit
What Is
It?
The Hope Scholarship is a tax credit, not a scholarship.
Tax credits are subtracted directly from the tax a family
owes, instead of being subtracted from taxable income like a
tax deduction. A family must file a federal tax return and owe
taxes to get this tax credit. A family cannot get a refund for
the Hope credit if it does not pay taxes. A family that owes
less tax than the maximum amount of the Hope tax credit for
which it is eligible can only take a credit up to the amount
of taxes owed.
For the 2006 tax year, a family may claim a tax credit up
to $1,650 for each eligible dependent for up to two tax years
(100% of the first $1,100 and 50% of the second $1,100 paid
for qualified expenses). The Hope credit is available only
until each student's first two years of postsecondary
education are complete. Gulf Opportunity Zone students may
claim up to $3,300 (100% of the first $2,200 and 50% of the
second $2,200) for the 2006 tax year.
The exact amount of the Hope credit also depends on a
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 the family, rather than a
maximum dollar amount for the family as with 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's spouse. (This means the eligible
taxpayer may also be the eligible student.) In 2006, taxpayers
cannot claim a Hope credit if their Modified Adjusted Gross
Income (MAGI) is $55,000 or more for a single taxpayer, or
$110,000 or more for married taxpayers filing a joint return. MAGI limits were increased by
$2,000 for single taxpayers by $3,000 for married taxpayers
filing jointly in the 2006 tax year.
The Student: An eligible student must be enrolled at
least half-time for at least one academic period beginning in
2006 at an eligible program leading to a degree or certificate
at an eligible school AND can not have completed the first two
years of undergraduate study. 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.) Students convicted of a
federal or state drug felony before the end of 2006 are not
eligible for the Hope credit.
How Do
You Get It?
To apply for the credit, taxpayers 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. Schools are required to send this
information by Jan. 31, 2007 in the form of a 1098-T statement
to each taxpayer and to the IRS. Taxpayers use this
information and their own records about tuition and fees paid
when they fill out IRS form
8863 to claim the tax credit. The statement sent by the
school will also include contact information for someone at
the school who can answer questions about the information on
the form. A taxpayer may wish to talk to a tax advisor for
help in calculating the amount of the credit.
When Is
It Available?
Generally, the credit is allowed for qualified education
expenses paid in 2006 for an academic period that begins in
2006 or during the first three months of 2007 (e.g., paying in
December 2006 for an academic period beginning in the first
three months of 2007).
Can A
Family Claim Multiple Benefits?
A family may claim a Lifetime Learning credit, a Hope
credit, and an exclusion from gross income for certain
distributions from qualified state tuition programs or
education IRAs as long as the same student isn't used as the
basis for each credit or exclusion AND the family doesn't
exceed the Lifetime Learning maximum per family.
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National
Association of Student Financial Aid
Administrators
Understanding the
Lifetime Learning Tax Credit
What Is
It?
The Lifetime Learning credit is a tax credit available to
individuals who file a tax return and owe taxes. The amount of
the credit is subtracted from the taxes owed, rather than
reducing taxable income as with a tax deduction. Individuals
who do not pay taxes are not eligible for a Lifetime Learning
credit. Taxpayers who owe less tax than the maximum amount of
the Lifetime Learning tax credit for which they are eligible
can only take a credit up to the amount of taxes owed.
A family may claim a tax credit of up to $2,000 per tax
year for the taxpayer, taxpayer's spouse, or any eligible
dependents for an unlimited number of tax years ($4,000 for
Gulf Opportunity Zone students). If you are claiming a
lifetime learning credit for both Gulf Opportunity Zone
students and other students, the qualified education expenses
taken into account in Part II of the 8863 form
cannot exceed $10,000 reduced by the qualified education
expenses of the Gulf Opportunity Zone students. The amount of
the Lifetime Learning tax credit is 20% of the first $10,000
of qualified educational expenses paid for all eligible
students. Therefore, the maximum amount of a Lifetime Learning
tax credit is $2,000. The Lifetime Learning credit is
available for all years of postsecondary education and for
courses to acquire or improve job skills, unlike the Hope
credit which is only available for two years.
The actual amount of the credit depends on a family's
income, the amount of qualified tuition and fees paid, and the
amount of certain scholarships and allowances subtracted from
tuition. This credit is family-based (up to $2,000 per tax
return or $4,000 for Gulf Opportunity Zone students) rather
than based on the number of dependents in a family as with the
Hope credit.
Who
Qualifies?
The Taxpayer: An eligible taxpayer must file a tax
return and owe taxes to claim the credit. The taxpayer must
also claim the eligible student as a dependent unless the
credit is for the taxpayer or the taxpayer's spouse. (This
means the eligible taxpayer may also be the eligible student.)
You cannot claim a Lifetime Learning credit if your Modified
Adjusted Gross Income (MAGI) is $55,000 or more (if single),
or $110,000 or more (for married taxpayers filing a joint
return). MAGI limits were increased by $2,000 for single
taxpayers and married taxpayers for the 2006 tax year.
Taxpayers that claim the Hope credit or tuition and fees
deduction for a student are not eligible to claim the Lifelong
Learning credit for the same student.
The Student: An eligible student may be enrolled in
an eligible program leading to an undergraduate or graduate
degree at an eligible school during the calendar year OR may
be enrolled in any course of instruction at an eligible school
to acquire/improve the student's job skills during the
calendar year. Students may claim the credit themselves if
they are not claimed as a dependent by another taxpayer. (Once
again, this means that the eligible student may also be the
eligible taxpayer.)
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 specifies that schools will send
this information by January 31, 2007, in the form of a 1098-T
statement to individual taxpayers and to the IRS. Taxpayers
will use this information and their own records about tuition
and fees paid when they fill out the IRS Form
8863 to claim the tax credit. The statement sent by the
school will also include contact information for someone at
the school who can answer questions about the information on
the form. A taxpayer may wish to talk to a tax advisor for
help in calculating the amount of its credit.
When Is
It Available?
Generally, the deduction is allowed for qualified tuition
and expenses paid in 2006 in connection with enrollment at an
institution of higher education during 2006 or for an academic
period beginning in 2006 or in the first three months of 2007.
For instance, if you paid $1,500 in December 2006 for
qualified tuition for a spring 2007 semester that begins in
January 2007, that $1,500 can be used to figure the 2006
deduction.
Can A
Family Claim Multiple Benefits?
A family may claim a Lifetime Learning credit, a Hope
credit, and an exclusion from gross income for certain
distributions from qualified state tuition programs or
education IRAs as long as the same student isn't used as the
basis for each credit or exclusion AND the family doesn't
exceed the Lifetime Learning maximum per family.
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National
Association of Student Financial Aid
Administrators
Understanding the
Tuition and Fees Tax Deduction
What Is
It?
The Tuition and Fees Tax Deduction can reduce taxable
income by as much as $4,000 in 2006. This deduction is taken
as an adjustment to income, which means you can claim this
deduction even if they do not itemize deductions on Schedule A
of Form 1040. This deduction may benefit taxpayers who do not
qualify for either the Hope or Lifetime Learning Education Tax
Credits.
Up to $4,000 may be deducted from tuition and fees required
for enrollment or attendance at an eligible postsecondary
institution. Personal living and family expenses, including
room and board, insurance, medical and transportation, are not
deductible expenses.
The exact amount of the Tuition and Fees Tax Deduction
depends on the amount of qualified tuition and related
expenses paid for one's self, spouse, or dependent for whom
the taxpayer can claim an exemption.
Who
Qualifies?
The Taxpayer: An eligible taxpayer must file a
federal tax return to claim the Tuition and Fees Tax
Deduction. The taxpayer must also claim an eligible student
(an individual enrolled in one or more courses at an eligible
educational institution) as a dependent on the tax return. The
deduction may also be for the taxpayer or the taxpayer's
spouse. The amount of qualified education expenses that can be
deducted through the Tuition and Fees Deduction remained level
for the 2006 tax year at $4,000 for taxpayers with a Modified
Adjusted Gross Income (MAGI) of $65,000 or less ($130,000 or
less for married couples filing jointly). The maximum Tuition
and Fees Deduction is $2,000 for taxpayers with a MAGI greater
than $65,000 ($130,000 for married couples filing jointly),
but not greater than $80,000 ($160,000 for married couples
filing jointly). Taxpayers with a MAGI greater than $80,000
($160,000 for married couples filing jointly) are not eligible
for this deduction.
The Student: An eligible student must be enrolled in
one or more courses at an eligible educational institution. An
eligible educational institution is any college, university,
vocational school, or other postsecondary educational
institution eligible to participate in a student aid program
administered by the U.S. Department of Education. According to
the IRS, "it includes virtually all accredited, public,
nonprofit, and proprietary postsecondary institutions."
Colleges can provide information on whether they meet this
requirement. Students may claim this deduction for themselves
if they are not claimed as a dependent by another
taxpayer.
How Do
You Get It?
Because Congress passed last-minute legislation to extend
the Tuition and Fees Tax Deduction, the IRS urges taxpayers to
use IRS e-file because software will be updated so taxpayers
can easily claim this deduction. The paper form used to claim
this deduction was created before the extension was passed so
people using a paper 1040 must take several special steps.
Taxpayers must use existing lines on the current Form 1040 and
other tax documents to claim this deduction. Instructions on
the paper forms contain a cautionary note to taxpayers that
the legislation was pending at the time of printing.
People using a paper 1040 and claiming the Tuition and Fees
Tax Deduction should follow these steps:
- Taxpayers must file Form 1040 to take this deduction for
up to $4,000 of tuition and fees paid to a post-secondary
institution. It cannot be claimed on Form 1040A.
- The deduction for tuition and fees will be claimed on
Form 1040, line 35, "Domestic production activities
deduction." Enter "T" on the blank space to the left of that
line entry if claiming the tuition and fees deduction, or
"B" if claiming both a deduction for domestic production
activities and the deduction for tuition and fees. For those
entering "B," taxpayers must attach a breakdown showing the
amounts claimed for each deduction.
An eligible institution that received payment for tuition
and fees in the 2006 tax year generally must issue IRS Form
1098-T (the Tuition Statement) to each student by January 31,
2007. The information on that form will help taxpayers
determine whether they can claim a deduction for 2006.
When Is
It Available?
Generally, the deduction is allowed for qualified tuition
and expenses paid in 2006 in connection with enrollment at an
institution of higher education during 2006 or for an academic
period beginning in 2006 or in the first three months of 2007.
For instance, if you paid $1,500 in December 2006 for
qualified tuition for a spring 2007 semester that begins in
January 2007, that $1,500 can be used to figure the 2006
deduction.
Can A
Family Claim Multiple Benefits?
Taxpayers may claim this deduction along with a Hope
credit, a Lifetime Learning credit, and an exclusion from
gross income for certain distributions from qualified state
tuition programs or education IRAs, if a different student is
used for each deduction, credit, or exclusion AND the family
does not exceed the Lifetime Learning maximum per family.
Taxpayers cannot take the Tuition and Fees Tax Deduction if
they deduct tuition and fees expenses under any other
provision of the law (for example, as a business expense).
This deduction cannot be claimed if the tuition and fees
were paid with tax-free scholarships, grants (including
Federal Pell Grants), or other educational assistance
including employer-provided education assistance and other
non-taxable benefits received to pay for education
expenses.
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