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HOPE & LIFETIME LEARNING CREDITS
With an expected budget of $31 billion, a new provision in the tax
laws took hold in 1998, to help foster higher education. This part
of the Taxpayer Relief Act involves two related tax credits: The
HOPE scholarship credit, and the Lifetime Learning credit. These
credits are one part of the new "Education Trilogy" package that was
recently enacted. The other two parts are the Education IRA and the
Student loan interest deductibility.
All three of these enactments are designed primarily to help low and
middle income families deal with the costs of higher education. In
regard to the HOPE and Lifetime Learning credits, taxpayers will be
eligible for a direct credit against their federal income taxes of
up to $1,500 per year for higher educational expenses paid on behalf
of a qualifying student. A brief rundown of these two credits
follows.
HOPE Scholarship Credit
Beginning with expenses paid after December 31, 1997, this is a
credit for the first two years of a higher educational program. The
expenses must be for tuition and related fees for the taxpayer,
taxpayer's spouse, or taxpayer's qualified dependent.
The credit can be up to $1,500 per year for the first two years,
based on a percentage formula equal to the sum of 100% of the first
$1,000 of tuition plus 50% of the next $1,000 in tuition. So, to get
the full $1,500 credit, you would have to pay at least $2,000 in
qualified tuition expenses.
Lifetime Learning Credit
Congress pegged this supplemental credit to go into effect as of
July 1, 1998. This is a 20% credit on a maximum of $5,000 of annual
educational expenses for post-secondary schooling to improve or
achieve job-related skills. This maximum educational expense amount
will rise to $10,000 by the year 2003.
This translates into a $1,000 maximum credit against one's income
taxes. Also, it is not limited to the first two years like the HOPE
credit. Rather, it is for an unlimited number of years, so it can be
used for graduate school programs as well.
How The Two Credits Interract
Basically, the law says you cannot claim BOTH a HOPE and a Lifetime
Learning credit for the same student during the same year. You must
choose one or the other. Based on this, the most you can take on a
tax credit per student per year is $1,500 for the first two years,
and $1,000 thereafter.
So, if a taxpayer has more than 1 qualifying student in school at
the same time, the HOPE credit will provide the most benefit.
Some Limitations And Caveats
There are four major ways in which these credits may be reduced or
totally eliminated for a taxpayer.
First, there is a phase out limitation based on your modified
adjusted gross income(AGI). For single filers, the credit begins to
get reduced starting at a $40,000 income level, and disappears
entirely at $50,000. For joint filers, these limitation numbers
begin at $80,000 and end at $100,000.
Second, these credits are reduced by scholarships, grants, and other
tax free educational assistance programs the student receives.
Third, you can't take either of the credits in any year that you
withdraw money from the new Education IRA plan to pay for the same
educational expenses.
Fourth, if you cash in certain Series EE Bonds to pay for the
educational expenses, and you take the credits, the interest from
these bonds may not be exempt from tax. So you may have to choose
between taking the credits or exempting the bond interest.
As a final caveat, since these credits are relatively new, there are
some relative unknowns as to how claiming them will affect the
policies of the higher educational facilities themselves when it
comes to their determinants for financial aid. Will they offset any
financial aid to the student if these credits are being taken? And
if so, how much? Only time will tell.
However, these credits are definitely a strong statement from the
Federal Government to support higher learning. For low to middle
income taxpayers, they can make a positive difference in the "bottom
line" when it comes to educational expenses.
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