Funding for Higher Education (Part II)
6/21/2004
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2. Hope Scholarship Credit
Hope Scholarship Credit provides an income tax credit to taxpayers that spend college education dollars for anyone in the family: the taxpayer, spouse, or a dependent showing up on the family’s tax return.
The Hope Scholarship Credit is available for the eligible individual’s first two years’ college education cost, including tuition and related fees and expenses. The student must also be enrolled at a qualifying educational institution in at least a half-time program.
The credit is calculated up to $1,500 per year per student in the following manner: 100 percent of the first $1,000 of qualifying expenses and 50 percent of the next $1,000. (It is indexed for inflation but 2004’s numbers remain the same). There is no limit in any given year of how many in a family can qualify for the credit.
However, there is a limitation measured by the taxpayer’s modified adjusted gross income (MAGI) on who would be eligible for the credit. For 2004, a married couple with MAGI over $85,000 would see a phased-out Hope credit and when their MAGI hits $105,000, the credit will be totally unavailable to the couple and their dependents.
For an unmarried taxpayer, the phase-out range is between $42,000 and $52,000 of the taxpayer’s modified adjusted gross income (generally, it’s the number showing on your Form 1040’s first page’s bottom line).
Depending on a taxpayer’s federal tax marginal rate, sometimes it’s more advantageous for one to forego the credit and claim Tuition and Fee Deduction that is “above the line” on your Form 1040’s first page. The limitation on the deduction is $4,000 regardless of the student's college year (including graduate school).
We will introduce another education tax credit, Lifetime Learning Credit, and further discuss how to optimize your tax savings on higher education cost next time. Please stay turned.
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