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Hope Scholarship Tax Credit

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Mark Kantrowitz

As a nationally recognized financial aid expert and publisher of Fastweb.com and FinAid.org, Mark has been called to testify before Congress about student aid on several occasions.

He has served as a guest columnist for the New York Times and the Huffington Post and has been interviewed regularly by major news outlets, including the Wall Street Journal, USA Today, MSN, CNN, NBC, ABC, CBS, CNBC and more.

Mark is the author of five books, including three about student aid. His most recent book, Secrets to Winning a Scholarship, helps families find and win scholarships. He is also on the editorial board of the Council on Law in Higher Education and the editorial board of the Journal of Student Financial Aid, a member of the board of directors of the National Scholarship Providers Association and a member of the board of trustees of the Center for Excellence in Education.

Mark is ABD on a PhD in computer science from Carnegie Mellon University (CMU) and holds Bachelor of Science degrees in mathematics and philosophy from MIT and a Master of Science degree in computer science from CMU.

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• President Obama Proposes Student Aid Increases in State of the Union Address

The Hope Scholarship provides a federal income tax credit of up to $2,500 (40% refundable) per student based on the first $4,000 in postsecondary tuition, fees and course materials paid by the taxpayer during the tax year. The Hope Scholarship tax credit is 100% of the first $2,000 and 25% of the second $2,000. The tax credit is limited to the first four years of postsecondary education.

Changes for 2009 and 2010

The American Recovery and Reinvestment Act of 2009 (P.L. 111-5) included the American Opportunity Tax Credit, which expands the Hope Scholarship. This expansion is temporary, limited to the 2009 and 2010 tax years. However, President Obama’s FY2010 budget proposes making these changes permanent. The changes are as follows:

• Increases the amount from $1,800 to $2,500.
• The amount of the credit is 100% of the first $2,000 in qualified expenses and 25% of the second $2,000. (Previously it was 100% of the first $1,200 and 50% of the second $1,200.)
• The number of years allowed was increased from 2 to 4.
• The income phaseouts were increased to $80,000/$90,000 (single filers) and $160,000/$180,000 (joint filers).
• Course materials added as a qualified expense in addition to tuition and fees.
• 40% refundable (max $1,000) to allow even low income students who have no tax liability to obtain a partial benefit.
• May offset the AMT.
• Students who qualify for higher Gulf Opportunity Zone amounts may choose that amount.

Amount of Credit

The Hope Scholarship provides a tax credit of up to $2,500 per student per year for qualified higher education expenses during the first four years of post-secondary education. (The amount of the Hope Scholarship is $3,600 for Gulf Opportunity Zone Students.) The amount of the credit is 100% of the first $2,000 of qualified tuition and related expenses per student and 25% of the second $2,000 of qualified tuition and related expenses.

If the family has multiple students that meet the requirements, then multiple Hope Scholarship Credits may be claimed.

The tax credit is partially refundable. If the taxpayer does not have sufficient tax liability to fully offset the tax credit, up to 40% of the amount of the tax credit may be refunded to the taxpayer. For example, if the taxpayer has $4,000 in education expenses (enough for a $2,500 tax credit) but only $1,500 in tax liability, the taxpayer may obtain the remaining $1,000 tax credit as a refund. This means that low income families who have no tax liability may file an income tax return to obtain a refund of up to $1,000 from the Hope Scholarship tax credit.

The Hope Scholarship tax credit is no longer subject to the Alternative Minimum Tax (AMT) starting in 2009.

(If the 2009 and 2010 increases are not made permanent by Congress, the maximum Hope Scholarship will revert to $1,800 in 2011. Except for the 2009 and 2010 changes, the amount of expenses eligible for the tax credit is adjusted annually for inflation and rounded to the nearest $100.)