The Hope Scholarship is actually a tax credit, not a scholarship. Tax credits are subtracted directly from the tax a family owes, rather than reducing taxable income like a tax deduction. A family must file a tax return and owe taxes to take advantage of it. The Hope credit is not refundable for families who do not pay taxes or who owe less in taxes than the maximum amount of the Hope tax credit for which the family is eligible.

A family may claim a tax credit of up to $1,500 per tax year for each eligible dependent. This can be done for up to two tax years. A family may claim up to 100% of the first $1,000 of eligible expenses and 50% of the next $1,000 for a maximum credit of $1,500.

The actual amount of the credit depends on the family's income, the amount of qualified tuition and fees paid, and the amount of certain scholarships and allowances subtracted from tuition. The total maximum credit also is based on the number of eligible dependents, rather than a maximum dollar amount for the family, as with the Lifetime Learning tax credit.

The Taxpayer: An eligible taxpayer must file a tax return and owe taxes to claim the credit. The taxpayer must also claim the eligible student as a dependent, unless the credit is for the taxpayer or the taxpayer's spouse. The taxpayer is eligible for the maximum benefit with an Adjusted Gross Income (AGI) of up to $40,000 for a single taxpayer (or $80,000 for married taxpayers). The credit amount is phased-out between $40,000 and $50,000 for single taxpayers (or $80,000 and $100,000 for married taxpayers).

The Student: An eligible 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 such undergraduate study. The student may claim the credit if the student is not claimed as a dependent by another taxpayer; this means the eligible student may also be the eligible taxpayer. In addition, the student may not have been convicted of a Federal or State felony drug offense before the end of the tax year in which the academic period occurs.

To qualify for 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. Current law specifies that schools will supply this information in the form of a "return" to individual taxpayers and to the IRS. More information about the return will be available after the Treasury Department issues regulations to implement this law.

The taxpayer may claim the Hope credit for qualified expenses paid January 1, 1998 and after for education furnished in academic periods beginning on or after this date.

Taxpayers may pay educational expenses in a tax year for an academic period that begins following the tax year (e.g., paying in December 1998 for an academic period beginning in the first three months of 1999). Because the law does not take effect until January 1, 1998, these prepayments are not permitted for the first year of the credit.

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.

The Lifetime Learning credit is a tax credit available to individuals who file a tax return and owe taxes. This means the amount of the credit is subtracted directly from a family's actual tax liability, rather than reducing taxable income like a tax deduction does. The Lifetime Learning credit is not refundable.

A family may claim a tax credit of up to $1,000 per tax year (until January 1, 2003) and $2,000 per tax year (after that date) for the taxpayer, taxpayer's spouse, or any eligible dependents for an unlimited number of tax years. A family may claim up to 20% of $5,000 of eligible expenses for expenses paid after June 30, 1998 and prior to January 1, 2003, and up to 20% of $10,000 of eligible expenses (for expenses paid after January 1, 2003 and after).

The actual amount of the credit depends on the family's income, the amount of qualified tuition and fees paid, and the amount of certain scholarships and allowances subtracted from tuition. This credit is family-based (e.g., $1,000 per family) rather than dependent-based like the Hope credit.

The Taxpayer: An eligible taxpayer must file a tax return and owe taxes to claim the credit. The taxpayer must also claim the eligible student as a dependent unless the credit is for the taxpayer or the taxpayer's spouse. The taxpayer is eligible for the maximum benefit with an Adjusted Gross Income (AGI) of up to $40,000 for a single taxpayer (or $80,000 for married taxpayers). The credit amount is phased out between $40,000 and $50,000 for single taxpayers (or $80,000 and $100,000 for married taxpayers).

The Student: An eligible student may be enrolled at least half time in an eligible program leading to an undergraduate or graduate degree at an eligible school during the calendar year or may be enrolled at any enrollment level in any course of instruction at an eligible school to acquire/improve the student's job skills during the calendar year. The student may claim the credit if the student is not claimed as a dependent by another taxpayer.

To qualify for 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. Current law specifies that schools will supply this information in the form of a "return" to individual taxpayers and to the IRS. More information about the return will be available after the Treasury Department issues regulations to implement this law.

The taxpayer may claim the Lifetime Learning credit for qualified expenses paid July 1, 1998 and after.

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 is not used as the basis for each credit or exclusion and the family does not exceed the Lifetime Learning maximum per family.

The above description was provided by the National Association of Financial Aid Administrators (NASFAA) for students and their families. Although the available details are limited, NASFAA hopes that these pieces offer useful information.

For additional information regarding the Hope Scholarship Tax Credit and other provisions of the Taxpayer Relief Act of 1997, refer to the IRS web site.