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Understanding Hope Scholarships
What is it?
The Hope Scholarship is actually not a scholarship, but a tax credit. Therefore, students do not apply for it, but include the credit on their tax returns if the qualifications are met. A tax credit is subtracted from the taxes a family owes, instead of reducing taxable income like a tax deduction. The Hope tax credit is based on the number of eligible students in the household – in other words, a credit can be claimed for each eligible student on a family’s tax return.
What is the amount?
The maximum credit changes each year. In 2008, the amount was calculated as 100% of the first $1,200 of qualified higher education expenses, plus 50% of the second $1,200 of qualified expenses, for a maximum total of $1,800. The credit was available for two years for each eligible person in 2008.
For 2009 and 2010 tax years, temporary expansions of the Hope Scholarship Tax Credit were put in effect through The American Recovery and Reinvestment Act of 2009, which included the American Opportunity Tax Credit. Those changes (effective only for the 2009 and 2010 tax years) were as follows:
- Increased the amount from $1,800 to $2,500.
- The amount of the credit was 100% of the first $2,000 in qualified expenses and 25% of the second $2,000.
- The number of years allowed was increased from two to four.
- The income phaseouts were increased to $80,000/$90,000 (single filers) and $160,000/$180,000 (joint filers).
- Course materials were added as a qualified expense in addition to tuition and fees.
- 40% refundable (max $1,000) to allow even low income students who have no tax liability to obtain a partial benefit.
- May offset the AMT.
- Students who qualify for higher Gulf Opportunity Zone amounts may choose that amount.
The above changes may be made permanent by Congress. If they are not made permanent, the maximum Hope Scholarship will revert to $1,800 for the 2011 tax year.
Who qualifies?
An eligible taxpayer must file a federal tax return and owe taxes to claim the Hope credit (see 40% refundable exception for 2009 and 2010 above). In addition, the taxpayer must claim an eligible student (see below for the definition of 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.) There is also a limit on the Adjusted Gross Income (AGI) of the eligible tax payer. In 2008, taxpayers could not claim a Hope credit if their modified adjusted gross income (AGI) was $58,000 or more for a single taxpayer ($116,000 or more for those filing a joint return). Also in 2008, the Hope credit amount was reduced gradually for families with incomes between $48,000 and $58,000 ($96,000 and $116,000 for joint returns). These limits were temporarily increased for the 2009 and 2010 tax years. The limits will revert to 2008 amounts (plus an adjustment for inflation) if the changes are not made permanent by Congress.
In order qualify as an eligible student, a student must be enrolled at least half-time in an eligible program leading to a degree or certificate at an eligible school during the calendar year AND must 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. This means that the eligible student may also be the eligible taxpayer. In addition, the student cannot have been convicted of a federal or state felony drug offense before the end of the tax year in which the student is enrolled.
How is it obtained?
To obtain the credit, the taxpayer 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. The law says that schools must send this information in the form of a statement to each taxpayer and to the IRS. The school sends out these statements (Form 1098T) through a third party (ECSI) each January for the preceding tax year. The information on the 1098T, as well as personal records about tuition and fee amounts that were paid, are used to fill out the IRS Form 8863 and claim the tax credit.
Can a family claim multiple benefits?
A family may claim a Hope credit, a Lifetime Learning credit and an exclusion from gross income for certain distributions from qualified state tuition programs or education IRAs as long as the same student is not used as the basis for each credit or exclusion AND the family does not exceed the Lifetime Learning maximum per family.
What about further questions?
Please note that Geneva College cannot provide tax advice. Please contact a tax professional or the IRS with additional questions.