Tax Benefits For Higher Education

The Federal Relief Act of 1997 may provide opportunities for tax savings through the Hope Credit or the Lifetime Learning Credit.  The following is a brief description of the credits (obtained from the Internal Revenue Service) as well as a table (from USA Today) summarizing these credits and other deductions and college savings plans.  Please consult with a tax professional to discuss your personal situation and any changes or revisions to the tax law.

• The Hope Credit and The Lifetime Learning Credit
• Qualifying for Lifetime Learning Credit and
• Hope Scholarship Credit
• Student Loan Interest Deduction
  Benefits Schedule
   

The Hope Credit and The Lifetime Learning Credit

The Hope Credit is a tax credit of up to $1500 for qualified expenses available to students for the first two years of post-secondary study.  The student must be enrolled in at least one post-secondary course at an eligible institution.  The Lifetime Learning Credit is available for students who have completed the first two years of postsecondary education.  The amount of the credit is 20% of the first $5,000 out-of-pocket payments for tuition and required fees (does not include room and board, books, or any other related educational expenses) paid on or after July 1, 1998.   The maximum credit is $1,000 per family. 

Qualifying for Lifetime Learning Credit and Hope Scholarship Credit

The amount a taxpayer may claim as a Lifetime Learning Credit or a Hope Scholarship Credit is gradually reduced for taxpayers who have a modified adjusted gross income between $40,000 ($80,000 for married taxpayers filing jointly) and $50,000 ($100,000 for married taxpayers filing jointly).  Taxpayers with a modified adjusted gross income over $50,000 ($100,000 for married taxpayers filing jointly) may not claim the Lifetime Learning Credit or the Hope Scholarship Credit.  An eligible institution is a university, college, vocational school, or other post-secondary school that is qualified to participate in federal student aid programs.  A taxpayer cannot claim the Lifetime Learning Credit and the Hope Scholarship in the same year for the same student.  In the year 2002, income limitations and tuition expenses will be adjusted for inflation.  These credits are reported on IRS Form 8863.

 Student Loan Interest Deduction

Taxpayers who have taken loans to finance an education at an eligible institution (definition above) may be qualified to deduct interest they pay on loans for themselves, spouse or their dependent.

Year	Maximum Deduction
1998	$1,000
1999	$1,500
2000	$2,000
2001 and After	$2,500

Beginning January 1, 1998, the deduction can only be used on any payment made during the first 60 months that interest payments are required on the loan.  The student must be enrolled at least halftime in an eligible institution.   Expenses that are eligible for the deduction include tuition, fees, books, room and board, supplies, and other related educational expenses.  The amount of the deduction is gradually reduced for taxpayers with a modified adjusted gross income between $40,000 and $55,000 (between $60,000 and $75,000 for married taxpayers filing jointly).   Taxpayers who have a modified adjusted gross income above $55,000 ($75,000 for married taxpayers filing jointly) cannot claim the student loan interest deduction.  If a student is claimed as a dependent on another taxpayer's return or if his/her filing status is married filing separately, then he/she cannot claim the deduction during that tax year.  After 2002, the income limitations will be adjusted for inflation.

Please see IRS Publication 970 for more details about these credits.