Hope Credit

The Hope Credit is a tax credit that can help offset the costs of higher education by directly reducing the amount of your taxable income. The Hope Tax Credit has been around since January 1998, and allows you to claim a tax credit for of up to $2,500 in qualified education expenses for each student enrolled in school.

Hope Tax Credit

In this publication, we're going to talk about the Hope Tax Credit, which is also referred to as the Hope Education Tax Credit.  We're going to start by discussing the eligibility rules for the Hope Tax Credit, followed by some definitions of the qualifying expenses, institutions, and students.

Many of the rules and qualifying expenses of the Hope Credit are similar to those of the Lifetime Learning Credit.  Keep in mind that you cannot claim the Hope Credit and the Lifetime Learning credit in the same tax year for the same student.

We're going to finish this topic by briefly discussing the Hope Scholarship, which is a different program.  This scholarship has nothing to do with federal income taxes, but is sometimes confused with the Hope Tax Credit.

Tax Credits versus Deductions

The Hope Scholarship Credit, as increased by the American Opportunity Tax Credit, is equal to 100% of qualified tuition and related expenses not in excess of $2,000, plus 25% of those same expenses in excess of $2,000, but not in excess of $4,000.  This means the maximum Hope Credit remains at $2,500 in 2012.

As a taxpayer, it's important to understand the difference between a deduction and a tax credit.  A tax deduction allows you to reduce income that is subject to taxes.  A tax credit is applied directly to your tax bill.

For example, if you owe the federal government $7,500 in income taxes, the Hope Tax Credit would reduce this tax bill to $7,500 minus $2,500 or $5,000 in 2012.

The offer of a tax credit under the Hope program is far more valuable than a tax deduction.

Hope Tax Credit Eligibility Rules

Before you can claim the Hope Credit, you must meet some fairly narrow eligibility rules or criteria.  For example, you can only claim the Hope Tax Credit if you meet all three of the following requirements:

1. You are the individual that pays for qualifying higher education expenses such as tuition.
2. The education payments, or expenses, mentioned above must be for a qualified student.
3. That qualified student must be you, your spouse, or a dependent, which you claim on your federal tax return.

In addition to the qualifying rules mentioned above, you cannot claim the Hope Credit on your taxes if any of the following four conditions apply:

• Your tax filing status is married filing separately.
• You are listed as a dependent on another person's federal income tax return.
• You, or your spouse, were a non-resident alien during any portion of the tax year, and that person did not elect to be treated as a resident alien for tax purposes.
• You're already claiming the Lifetime Learning credit for the same student during that tax year.

Qualified Students, Expenses, and Institutions

We'd like to further define this eligibility policy, since each set of the rules above specifically mention the word "qualify" for the following three terms:

• Qualified Students
• Qualified Educational Institutions
• Qualified Expenses

Qualifying Students

To be eligible for the tax credit, there must be a qualifying student involved.  The IRS tax law for the Hope Credit defines a qualifying student as:

• Students that have not completed the first two years of postsecondary education (Hope Credits typically apply to freshman and sophomore years of college).
• Students that did not have expenses that were used to calculate a Hope Credit in any two earlier tax years.
• Students need to be enrolled at least half-time in an academic program that leads to a degree, certificate, or other recognized credential.
• Students convicted of a federal or state felony involving a controlled substance may not be eligible for the Hope Credit.

Qualifying Educational Institution

It's fairly easy to be considered a qualifying educational institution.   To qualify, the institution must be a college, university, vocational school, or other postsecondary educational institution that is also eligible to participate in the Department of Education's student aid program.

This would include virtually all accredited public and private postsecondary educational institutions.

Qualifying Expenses

The tax law associated with the Hope Credit further defines qualifying expenses as those expenses such as tuition, and related costs, required for enrollment or attendance at the qualifying educational institution.

Related expenses are those associated with student activities, fees and expenses for course books, supplies, and equipment.  This rule applies if these expenses are a condition of enrollment, or attendance, at the educational institution.

Typical expenses that would not qualify under the Hope Credit include insurance payments, medical expenses, room and board, transportation expenses, or similar types of living and family-related costs.  Expenses associated with sports, school clubs, and non-credit courses usually do not qualify for this credit.

Hope Credit Income Limits

In 2011 and 2012, the amount of the Hope Credit you can take on your federal income taxes is reduced if your modified adjusted gross income is over $80,000 for single filers and $160,000 if you're filing a joint return.  The credit is phased out completely if your modified adjusted gross income is over $90,000 or $180,000 for joint filers.

The tax form that you use for the Hope Credit is IRS Form 8863.

Hope Scholarships

The HOPE Scholarship is run by the state of Georgia, and it is an acronym for Helping Outstanding Students and Pupils Educationally.  The Hope Scholarship is not a tax credit, but a college scholarship offered to students meeting the following eligibility criteria.

The basic student requirements of this scholarship program include:

• Must be a resident of the state of Georgia
• Graduated high school with a 3.0 GPA; a "B" average or better
• Maintain a 3.0 GPA while in college

The Hope Scholarship pays full tuition costs plus $150 per semester for books.  The student must attend a public university / college in Georgia until the semester in which they take their 127th academic hour, which is roughly the time required to earn an undergraduate bachelor's degree.

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