IRS issues guidance on education tax incentives.

• Author: Schwartzma, Randy A.

The IRS recently issued Notice 97-60, which provides guidance on the higher education tax incentives enacted as part of the Taxpayer Relief Act of 1997 (TRA '97). After a brief introductory discussion, the Service elaborated, in question and answer format, on each of the seven new education tax incentives introduced by the TRA '97. Provided below is a brief summary of each incentive followed by some of the more important issues outlined in the notice. (For further analysis and a table listing the various education opportunities and benefits, see Bukofsky and Sherr, "Diverse Planning Opportunities Available Under the TRA '97 (Part II)," this issue, page 108.)

Hope Scholarship Credit

The Hope Scholarship Credit (Hope credit) is a nonrefundable tax credit up to $1,500 per student for qualified tuition and related expenses paid by the taxpayer. The student must be enrolled within one of the first two years of a post-secondary degree or certificate program at an eligible educational institution on at least a half-time basis.

The Hope credit is available for expenses paid after Dec. 31, 1997, for education furnished in academic periods beginning after such date. The allowable credit is phased out ratably for single taxpayers with modified adjusted gross income (AGI) between $40,000 and $50,000 and married taxpayers with modified AGI between $80,000 and $100,000.

Sec. 25A(f)(1) defines "qualified tuition and related expenses" for purposes of the Hope credit as tuition and fees required for the enrollment or attendance of the taxpayer, the taxpayer's spouse or any dependent of the taxpayer. The TRA '97 specifically excluded from the definition expenditures for books, meals, lodging, student activity fees, athletic fees, or similar personal or extracurricular activity expenses.

The notice clarified the following items with respect to the Hope credit:

* "Qualified tuition and related expenses" do not include room and board.

* Qualified tuition and related expenses paid with tax-free assistance (e.g., a Pell Grant, other tax-free scholarships, a tax-free distribution from an individual retirement account (IRA), or tax-free employer-provided education assistance) are not taken into account in calculating the credit amount. Qualified expenses not paid with tax-free assistance (e.g., loan proceeds, personal savings, etc.) are eligible for the credit.

* Although the credit is available only for qualified payments in an academic period beginning in the same calendar year as the payment is made, an exception allows advance payments to cover academic periods beginning in January, February or March of the following tax year. However, it is important to note that, since the Hope credit applies only to qualified expenses paid after Dec. 31, 1997, tuition paid in 1997 to cover 1998 academic periods does not fall within this exception.

* Although the credit could normally be claimed by either a parent or a student, only a student may claim the Hope credit in a year in which the student takes a tax-free withdrawal from an Education IRA. Moreover, the student cannot claim the credit in the year in...