Hope Credit: Who can still use this educational tax credit?

With the introduction of the American Opportunity Credit, the Hope credit faded away since it offers less benefit. However, if you are living in the Midwestern disaster area, the Hope credit may yield a higher tax benefit than the American Opportunity Credit. So this article is directed for those individuals. So if you do not live in the Midwestern disaster area,  you should take advantage of the American Opportunity Credit instead of the Hope Credit.

Hope credit is a tax credit that helps you offset the cost of higher education by reducing the amount of your income tax liability. For the tax year 2009, the amount of credit is worth up to $1,800 (or $3,600 if the student is in the Midwestern disaster area) for qualified education paid for an eligible student. The credit is a non-refundable credit, meaning that it can reduce your tax liability to zero but you cannot receive any excess credit.

To claim the credit, you must pass the following tests:

  • First Two Years of College Test – You paid expenses for either the first or second year of post-secondary education. In general, this is the freshman and sophomore years of college. Thus, K-12 expenses, junior/senior years in college and graduate school do not qualify.
  • Eligibility Test – You paid expenses for an eligible student such as yourself, spouse, or a dependent that you can claim an exemption.
  • Filing Status Test – Your filing status must not be “married filing separate.”
  • Dependency Test – You are not listed as a dependent on another person’s tax return.
  • MAGI Test – Your modified adjusted gross income (MAGI) for the tax year 2009 is less than $60,000 for single taxpayers (or less than $120,000 for joint filers).
  • Residency Test – You were not a nonresident alien for any part of the tax year and do not elect to be treated as a nonresident for tax purposes.
  • No Double Benefit Test – You did not claim the Lifetime learning credit, the tuition and fees deduction, the tax-free portion of the Coverdell education savings account for the same qualified expenses for the same student.You did not claim qualified expenses paid for by tax-free educational assistance such as scholarships, grants, employer provided educational assistance, or any other tax-free payments received as educational assistance. However, if you have these assistances, you can still claim the excess of qualified expenses that are not covered by these tax free educational assistance. For example, your tuition is $10,000 and you have a scholarship of $8,000. You cannot claim the $8,000 on your tax return but you can still claim the $2,000 difference.
  • American Opportunity Credit Test – You did not claim the American Opportunity credit for ANY student in the tax year.
  • Tuition Refund Test –You did not receive a refund for any qualified education expenses paid.

Who is an eligible student?

  • Student who is enrolled at least half-time of a normal academic load for at least one academic period at the beginning of the tax year.
  • Student has not been convicted of a federal or state felony for possession or distribution of controlled substances in the tax year.
  • Student has not completed the first two years of post-secondary education. A student has completed the first two years of college if he/she has been awarded two years of post-secondary credits.

What expenses qualify?

  1. Expenses paid for an eligible educational institution. An eligible educational institution is any college, university, vocational school or other post-secondary educational institution eligible to participate in a student aid program administered by the US Department of Education.
  2. Tuition fees
  3. Student activity fees and expenses paid for course-related books, supplies and equipment if the expenses must be paid to the institution as a condition of enrollment or attendance
    • Example 1 – Lawrence is a freshman in college in the pre-med program. In addition to tuition, he is required to pay a fee for the rental of laboratory equipment and purchase book from the school. The school has a policy of requiring the students to purchase the books at the institution’s bookstore and to pay the lab rental fees as a requirement of enrollment or attendance. Both student fees and books are qualified educational expenses.
    • Example 2 – Charles and Darwin are sophomore students of California State University and are required to purchase course related books to attend the university. The school does not have a policy on how students should obtain the books, meaning the students can purchase their books from anywhere they wish. Paul bought his books at the university’s bookstore while Piper bought her books from an online bookstore. Both expenses paid for the books are not qualified educational expenses.

What expenses do not qualify?

Medical expenses, insurance, room and board, transportation, similar personal or family expenses even if the expenses must be paid to the institution as a condition of enrollment or attendance.

How do you calculate the Credit?

The Hope credit per eligible student is calculated as follows:
1. 100% of the first $1,200 of the qualified education expenses paid (or $2400 if the student is in the Midwestern disaster area)

2. 50% of the next $1,200 of the qualified education expenses paid (or $2400 if the student is in the Midwestern disaster area)Credit may be reduced based on your MAGI.

Can I claim the hope credit even if I borrowed the funds?

Most students have student loans in order to pay for their education. Borrowing funds count towards the credit since you will be paying for this not now but in the future.

Source: IRS Publication 970