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Taxpayer Relief Act
Several new tax benefits became available to students and their families with the enactment of the Balanced Budget Act of 1997 and the Taxpayer Relief Act of 1997. These tax credits will ease the individual income tax burden of some families. Three of these newly established programs are of particular relevance to students: the Hope Credit, Lifetime Learning Credit, and interest deduction of educational loans.
Hope Credit
The Hope Credit is a non-refundable tax credit for students in their first two years of college. A non-refundable tax credit means that if a taxpayer has no tax liability, the tax credits will not be available. This tax credit may be used for tuition and related fees and is applicable to payments starting on January 1, 1998. The credit is equal to 100% of the first $1,100 and 50% of the next $1,100 of qualified tuition and related expenses paid within a tax year by the taxpayer.
The eligibility requirements for the Hope Credit are as follows:
- The student must be enrolled at least half-time for at least one academic period in a program leading to a degree or certificate during the tax year.
- The student must be enrolled in one of their first two (2) years of post secondary education at an eligible institution.
- The student must be free of any conviction for a Federal or State felony offense due to the possession or distribution of a controlled substance.
Additional Hope Credit Information
- The credit is only allowed for two (2) taxable years per student.
- The Hope Credit covers qualified costs, which includes tuition and fees, but specifically excludes books, health insurance, room and board, and expenses involving sports, games, or hobbies unless part of the student's degree program.
- The credit is gradually phased out for taxpayers who have modified adjusted gross income between $45,000 and $55,000 ($90,000 to $110,000 for married taxpayers filing jointly).
- Generally only out-of-pocket expenses including gifts, bequests, inheritances, loans, etc., are used in calculating the credit. Therefore, higher education expenses paid with a tax-free scholarship, Pell grant, or employer-provided educational assistance cannot be used when figuring education credits.
- Taxpayers may first claim the Hope Credit on their 1998 tax returns filed in 1999.
- Both the Hope Credit and the Lifetime Learning Credit cannot be claimed for the same student in a single tax year. However, a taxpayer may use the Hope Credit for certain family members and Lifetime Learning Credit for other family members during the same tax year.
- The credit is NOT available if filing status is married filing separately.
Lifetime Learning Credit
The Lifetime Learning Credit is a nonrefundable tax credit available to students and adults who are pursuing lifelong learning and enrolled in an eligible educational institution. It may be claimed for payments of qualified tuition and related expenses made on or after July 1, 1998, for academic periods beginning or after July 1, 1998. This credit is an amount equal to 20% of the first $5,000 of out-of-pocket qualified tuition and related expenses through the year 2002 and 20% of the first $10,000 of out-of-pocket qualified tuition and related expenses thereafter. The maximum allowable credit to be claimed in a taxable year is $1,000 through 2002 and $2000 thereafter.
The eligibility requirement for the Lifetime Learning Credit is as follows:
- The student must be enrolled in an eligible post-secondary educational institution, however, the Lifetime Learning Credit does not have enrollment status requirements like the Hope Credit.
Additional Lifetime Learning Credit Information
- This tax credit is applicable to those enrolled in undergraduate, graduate education, or education geared to improve or acquire job skills.
- The Lifetime Learning tax credit may be claimed for an unlimited number of years as long as the individual meets the income limits and takes classes at an eligible institution.
- The credit may be used for part-time study, unlike the Hope tax credit requirements which stipulate a half-time enrollment status.
- The Lifetime Learning Credit may be claimed for the taxpayer, the taxpayer's spouse, or an eligible dependent. This credit does not vary according to the number of students in a household.
- The Lifetime Learning Credit covers qualified costs, which includes tuition and fees, but specifically excludes books, health insurance, room and board, and expenses involving sports, games, or hobbies unless part of the student's degree program.
- The credit is gradually phased out for taxpayers who have modified adjusted gross income between $45,000 and $55,000 ($90,000 to $ 110,000 for married taxpayers filing jointly).
- Generally only out-of-pocket expenses including gifts, bequests, inheritances, loans, etc., are used in calculating the credit. Therefore, higher education expenses paid with a tax-free scholarship, Pell grant, or employer-provided educational assistance cannot be used when figuring education credits.
- Taxpayers may first claim the Lifetime Learning Credit on their 1998 tax returns filed in 1999.
- Both the Hope Credit and the Lifetime Learning Credit cannot be claimed for the same student in a single tax year. However, a taxpayer may use the Hope Credit for certain family members and Lifetime Learning Credit for other family members during the same tax year.
- The credit is NOT available if filing status is married filing separately.
Student Loan Interest Deduction
Student Loan Interest Deduction is an adjustment to gross income for interest paid on qualified educational loans used to cover the costs of attendance at an eligible educational institution. This includes payments of interest which are due and paid after December 31, 1997. The amount deducted will be phased in over a five year period of time: the maximum deduction is $ 1,000 in 1998, $1,500 in 1999, $2,000 in 2000, and $2,500 in 2001 and each year following.
Additional Student Loan Interest Deduction Information
- The student loan must have been used to pay the costs of attendance at an eligible educational institution for a student enrolled at least half-time in a program leading to a degree, certificate, or recognized credential.
- Costs of attendance include tuition, fees, room, board, books, equipment, and other necessary items, such as transportation. These costs must be reduced by non-taxable benefits excluding gifts, bequests, or inheritances.
- Interest is deductible for loans taken on the taxpayer's own education, spouses' education or dependent's education, but not for other benefactors or relatives.
- The amount of your student loan interest deduction is phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $50,000 and $65,000 ($105,000 and $135,000 if you file a joint return). You cannot take a student loan interest deduction if your MAGI is $65,000 or more ($135,000 or more if you file a joint return).
- The deduction is available regardless of whether the individual itemizes tax deductions.
- Taxpayers will be able to claim the deductions for the first time on their 1998 tax returns filed in 1999.
- The deduction is NOT available if filing status is married filing separately or if another taxpayer claims you as a dependent.
Resources
The following web sites provide additional information about this tax credit legislation:
