Understanding the Hope Scholarship
What Is It?
The Hope Scholarship is a tax credit, not a scholarship. Tax credits are subtracted directly from the tax a family owes, instead of being subtracted from taxable income like a tax deduction. A family must file a federal tax return and owe taxes to get this tax credit. A family cannot get a refund for the Hope credit if it does not pay taxes. A family that owes less tax than the maximum amount of the Hope tax credit for which it is eligible can only take a credit up to the amount of taxes owed.
For the 2006 tax year, a family may claim a tax credit up to $1,650 for each eligible dependent for up to two tax years (100% of the first $1,100 and 50% of the second $1,100 paid for qualified expenses). The Hope credit is available only until each student's first two years of postsecondary education are complete. Gulf Opportunity Zone students may claim up to $3,300 (100% of the first $2,200 and 50% of the second $2,200) for the 2006 tax year.
The exact amount of the Hope credit also depends on a family's income, the amount of qualified tuition and fees paid, and the amount of certain scholarships and allowances subtracted from tuition. The total credit is also based on how many eligible dependents are in the family, rather than a maximum dollar amount for the family as with the Lifetime Learning tax credit.
The Taxpayer: An eligible taxpayer must file a federal tax return and owe taxes to claim the Hope credit. In addition, the taxpayer must claim an eligible student as a dependent on the tax return, unless the credit is for the taxpayer or the taxpayer's spouse. (This means the eligible taxpayer may also be the eligible student.) In 2006, taxpayers cannot claim a Hope credit if their Modified Adjusted Gross Income (MAGI) is $55,000 or more for a single taxpayer, or $110,000 or more for married taxpayers filing a joint return. MAGI limits were increased by $2,000 for single taxpayers by $3,000 for married taxpayers filing jointly in the 2006 tax year.
The Student: An eligible student must be enrolled at least half-time for at least one academic period beginning in 2006 at an eligible program leading to a degree or certificate at an eligible school AND can not have completed the first two years of undergraduate study. You may claim the credit yourself if you are not claimed as a dependent by another taxpayer. (Once again, this means that the eligible student may also be the eligible taxpayer.) Students convicted of a federal or state drug felony before the end of 2006 are not eligible for the Hope credit.
How Do You Get It?
To apply for the credit, taxpayers must report the amount of tuition and fees paid as well as the amount of certain scholarships, grants, and untaxed income used to pay the tuition and fees. Schools are required to send this information by Jan. 31, 2007 in the form of a 1098-T statement to each taxpayer and to the IRS. Taxpayers use this information and their own records about tuition and fees paid when they fill out IRS form 8863 [pdf] to claim the tax credit. The statement sent by the school will also include contact information for someone at the school who can answer questions about the information on the form. A taxpayer may wish to talk to a tax advisor for help in calculating the amount of the credit.
When Is It Available?
Generally, the credit is allowed for qualified education expenses paid in 2006 for an academic period that begins in 2006 or during the first three months of 2007 (e.g., paying in December 2006 for an academic period beginning in the first three months of 2007).
Can A Family Claim Multiple Benefits?
A family may claim a Lifetime Learning credit, a Hope credit, and an exclusion from gross income for certain distributions from qualified state tuition programs or education IRAs as long as the same student isn't used as the basis for each credit or exclusion AND the family doesn't exceed the Lifetime Learning maximum per family.