A primer on the Hope and Lifetime Learning Credits.

• Author: Miller, Estelle, E.

The Taxpayer Relief Act of 1997 (TRA '97) added Sec. 25A, providing the Hope

Scholarship and Lifetime Learning Credits, to foster higher education. Proposed regulations explaining these credits (with many helpful examples) were released for public comment on Jan. 6, 1999.

Hope Scholarship Credit

Beginning Jan. 1, 1998, qualifying taxpayers may claim the Hope Scholarship Credit against their Federal income tax liability. The Hope Credit is a nonrefundable credit for "qualified tuition and related expenses" of each eligible student in a taxpayer's family (the taxpayer, the taxpayer's spouse or an eligible dependent), for whom the taxpayer claims a dependency exemption under Sec. 151 (Sec. 25A(f)).

The maximum credit per student per year is $1,500 for qualifying out-of-pocket expenses, indexed for inflation in tax years beginning after 2001 (Prop. Regs. Sec. 1.25A-3(a)(2)).

Income Limits

Modified adjusted gross income (AGI), the starting point in determining the phaseout, is the sum of the taxpayer's AGI plus any amount excluded under Sec. 911,931 or 933 (income earned abroad and income from certain U.S. possessions or Puerto Rico). The credit is phased out ratably for taxpayers with modified AGI between $40,000 and $50,000 ($80,000 to $100,000 for joint filers). For tax years beginning after 2001, these phaseout thresholds will be indexed for inflation.

The amount of the reduction is computed as Hope Credit + Lifetime Learning Credit x [(Modified AGI -- $40,000)/$10,000]. (Joint filers replace $80,000 for $40,000 and $20,000 for $10,000 in this formula).

Who May Claim the Credit?

Expenses must be incurred for the taxpayer, his spouse and eligible dependents (Sec. 25A(f)(1)). A parent may claim the credit for his unmarried child if the parent supplies more than half the child's support for the tax year and the child is under age 19 (or is a full-time student under age 24). If a parent claims a child as a dependent for the tax year, only the parent may claim the credit, even if the child pays for the qualifying expenses (Prop. Regs. Sec. 1.25A-5(g)). If an eligible taxpayer does not claim the credit, only the child may claim the credit (Prop. Regs. Sec. 1.25A-1(g)). Payments of qualifying expenses made directly to the educational institution by a third party (such as a grandparent) are deemed paid by the student (Prop. Regs. Sec. 1.25A-5(a)) and, thus, may be claimed by the parent or the child, as permitted under the above rules. A divorced parent not entitled to claim the dependency deduction is also treated as a third party. Thus, direct payments of qualified education expenses made by a noncustodial parent are deemed paid by the student, and the credit may be claimed by the custodial parent (or by the student, if the custodial parent does not claim the credit); see the example in Prop. Regs. Sec. 1.25A-5(b)(2)).

Who Is an Eligible Student?

The student must meet all of the following tests for the Hope Credit (Prop. Regs. Sec. 1.25A-3(d)(1)):

1. Degree: For at least one "academic period" (e.g., a...