ARRA expands hope scholarship credit.

• Author: Schuster, Steve C.
• Position: American Recovery and Reinvestment Act of 2009

The American Recovery and Reinvestment Act of 2009, P.L. 111-5 (ARRA), includes an expansion of the Hope scholarship credit that will provide additional support to many American families that have members attending postsecondary educational institutions. The expanded credit, called the American opportunity tax credit, modifies the existing Hope credit for tax years 2009 and 2010.

Hope Scholarship Credit

The Hope scholarship credit established a nonrefundable credit for higher education (Sec. 25A(b)). A taxpayer claiming the exemption deduction for an individual attending a qualified educational institution could receive a credit against federal income taxes of up to $1,800 per eligible student (Rev. Proc. 2008-66). The credit phased out for taxpayers with modified adjusted gross income between $50,000 and $60,000 for the 2009 tax year ($100,000 and $120,000 for married taxpayers filing a joint return).

Individuals were eligible to claim the Hope scholarship credit for each of the first two tax years of postsecondary education. The credit is based on qualified tuition and related expenses. Examples of related expenses include books, supplies, and equipment if required for course studies. The expenses must be paid in the tax year for which the Hope credit is claimed. Under the existing Hope scholarship credit, certain prepayments of qualified tuition and related expenses will qualify in the tax year the expenses are paid if the next academic period begins within three months following the tax year. Expenses are reduced by any scholarships, Pell grants, and employer assistance received, if such assistance is deemed nontaxable (other than gifts and inheritance).

Qualified higher education expenses must be incurred by the taxpayer, the taxpayer's spouse, or a dependent of the taxpayer in order to receive the Hope scholarship credit. If the eligible student is claimed as a dependent on the parent's return, the student may not claim a credit on his or her personal return, but the parent can. The eligible student must be enrolled at least half time at an eligible educational institution in a degree or certificate program. The eligible student may not have been convicted of a felony drug offense. The institution must be eligible to participate in the Department of Education student aid programs to qualify.

Practice tip: An eligible student may not claim the Hope scholarship credit while taking a deduction for tuition and fees in the same tax year...