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Hope Scholarship Tax Credit

Mark Kantrowitz

May 17, 2009

Qualified Higher Education Expenses

Qualified higher education expenses include tuition, fees and course materials (e.g., textbooks). Nonacademic fees such as student activity fees, athletic fees and insurance are excluded. The expenses must be related to the student’s academic course of instruction. Expenses related to sports, games or hobbies are excluded unless they are part of the student’s degree program.

The expenses must have been paid by the taxpayer or by the student, and the taxpayer must list the student as an exemption on their income tax return. (Any qualified tuition and related expenses paid by the dependent are treated as though they were paid by the taxpayer, per 26 CFR 25A(g)(3).)

Scholarships and financial aid do not count as qualified tuition and related expenses paid by the taxpayer. Only out-of-pocket expenses count. Gifts, bequests and inheritances do count as though paid by the taxpayer.

The credit applies to expenses paid after December 31, 1997.

Limitations and Eligibility Restrictions

The credit is allowed only for the first four tax years of higher education expenses per student. Typically the first tax year will correspond to the fall of the student’s freshman year in college, and the second tax year will correspond to the spring of the freshman year and the fall of the sophomore year.

The student must be enrolled at least half time for at least one academic period that begins during the taxable year.

The credit is also allowed only for the first four academic years of postsecondary education. It cannot be used if the student already has four years of post-secondary education.

The credit will be denied for a student convicted of a felony drug offense.

Coordination Restrictions

The Hope Scholarship can be used in conjunction with other tax benefits, provided that different education expenses form the basis for each benefit.

You cannot use the Hope Scholarship with the Lifetime Learning tax credit for the same student in the same year, but you can use them for different students’ educational expenses in the same year.

In most cases the Hope Scholarship will yield a greater financial benefit than the Lifetime Learning tax credit. The Hope Scholarship is limited per student, while the Lifetime Learning tax credit is limited per taxpayer. The Lifetime Learning tax credit also offers a lower percentage of qualified expenses than the Hope Scholarship. The Lifetime Learning tax credit will mostly be useful for graduate and professional students who are ineligible for the Hope Scholarship of the restriction to the first few years of postsecondary education.

You cannot use the Hope Scholarship and the Tuition & Fees Deduction for the same student in the same year.

Income Phaseouts

If not for the American Opportunity Tax Credit changes, the 2009 income phaseout would have been for incomes from $50,000 to $60,000 (single filers) and $100,000 to $120,000 (married filing joint). (The phaseouts are indexed for inflation.) The American Opportunity Tax Credit increased the phaseouts to $80,000 to $90,000 (single filers) and $160,000 to $180,000 (married filing joint). These higher phaseouts are temporary and are not indexed for inflation.

Taxpayers who are married cannot claim the tax credit if they are filing separate returns.

This article originally appeared on FinAid.org.


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