The Taxpayer Relief Act of 1997 encourages post-secondary and continuing education by providing tax benefits to students and their families. Qualified taxpayers may
claim a credit on their federal income tax liability for tuition paid or may take a deduction for interest paid on educational loans.New Credits for Tuition Expenses
Two new types of credits were introduced as part of the 1997 Taxpayer Relief Act.
Hope Scholarship Credit
The Hope Scholarship Credit is a tax credit available for the first two years of college or
post-secondary education (e.g. vocational training). Beginning in 1998, it will be offered to students and/or parents who pay tuition and related expenses (such as books, fees, supplies, etc.) for attendance at least
half time in a degree-granting program. Tuition paid out-of-pocket using cash, credit card, or check is eligible. Tuition paid with proceeds from a loan, including Federal Stafford and PLUS loans, is also eligible.
Unlike a scholarship or a tax deduction, the Hope Scholarship Credit is a tax credit and can therefore be subtracted directly from the total federal tax liability on a return.
The amount of the credit depends on the
taxpayer's income and the amount of tuition paid. In 1998, the credit can total up to $1,500 per student for eligible taxpayers with modified adjusted gross annual incomes of up to $40,000 (or $80,000 for married
couples filing jointly). The credit is gradually reduced for taxpayers with incomes between $40,000 and $50,000 (or between $80,000 and $100,000 for married couples filing jointly). Taxpayers with incomes greater than
$50,000 (or $100,000 for married couples filing jointly) are not eligible for the credit.
An eligible parent may claim the credit only for the tuition paid on behalf of a dependant child. Generally, a parent may
claim his/her unmarried child as a dependant if: (1) the parent supplies more than half the child's support for the taxable year and (2) the child is under age 19 or is a full-time student under age 24.
Eligible
parents or students can apply the Hope Scholarship Credit on their individual federal income tax returns when filing for 1998. Tuition paid in 1998 for classes begun in 1998 will qualify for the tax credit. Tuition paid
in 1997 or before does not apply. Any qualifying expenses paid after December 31, 1998 are applicable to the 1999 tax year.
Lifetime Learning Credit
For tuition and related expenses incurred after June
30, 1998, the Lifetime Learning Credit provides a tax credit to parents and/or students of up to 20% of the first $5,000 of total annual educational expenses, up to $1,000 annually. The income restrictions described
above for the Hope Scholarship Credit also apply to the Lifetime Learning Credit. Unlike the Hope Scholarship Credit, the Lifetime Learning Credit does not require students to be in their first two years of study and
does not require at least half time enrollment. Taxpayers may not claim both the Hope Scholarship Credit and the Lifetime Learning Credit for the same student in the same tax year.
New Deductions for Student Loan Interest
The interest paid in 1998 and beyond on educational loans may be deductible from taxpayer income. Both student and parent loans are eligible. Interest can be taken as
a tax deduction from gross income during the first 60 months (5 years) of repayment on the loan. The deduction is available even if the taxpayer does not itemize deductions on Schedule A.
In 1998, the maximum
deduction for interest paid on educational loans is $1,000. This amount will increase in 1998 through 2001 in $500 increments. Only the interest portion of payments is deductible. Principal repayment is not deductible.
You lender will provide annual statements of interest paid.
NOTE: This information describes the new tax benefits in general terms. Your ability to claim these tax benefits depends on your individual
circumstances. Contact us for assistance in determining your personal eligibility.
