Trim First And Second-Year Expenses With The Hope Tax Credit

A Tax Fact from The Tax Institute at H&R Block

With the many expenses families face today, saving for college sometimes slips on the priority list. The Hope credit, worth up to $1,800 in tax savings (for 2008) for each qualifying student in the first two years of college or vocational school, can help cushion the financial blow of higher education.

Am I eligible?
If your dependent child attended college in 2008, you may use the Hope credit if he or she was:

• Enrolled in one of the first two years of post-secondary education - generally the freshman and sophomore years of college;
• Enrolled in a program that leads to a degree, certificate or other recognized educational credential;
• Took at least one-half the normal full-time workload for his or her study course during at least one 2008 academic period; and
• Free of felony convictions for the possession or sale of illegal substances.

Income is also a factor in Hope credit eligibility. If you're single, the 2008 Hope credit is phased out as your Adjusted Gross Income (AGI) reaches $48,000 and completely disappears at $58,000. If you're married and file jointly, the AGI phaseout range for the 2008 Hope credit lies between $96,000 and $116,000. Taxpayers who file using the married filing separately status cannot take advantage of the credit.

How much can the Hope Credit help me?
As an eligible individual, you may claim the Hope credit for 100 percent of the first $1,200 and 50 percent of the next $1,200 of qualified expenses, which include tuition and fees required for enrollment. Because this is a per-student limit, not a per-return limit, the maximum Hope credit you may claim for 2008 is $1,800 times the number of eligible students claimed on your tax return.

The Midwestern Disaster Area
For students who attended an eligible school in a core county of the Midwestern Disaster Area, the maximum credit is doubled—that is, the maximum credit is $3,600. To see whether a school qualifies, check Table I in IRS’s Publication 970, Tax Benefits for Education.

Using the Credit wisely
The Hope credit for tax year 2008 is nonrefundable, so if your credit exceeds your tax, the difference isn't refunded to you. On the other hand, the credit can also be used for prepaid expenses, such as tuition paid in December for January classes. This feature may be especially useful for students whose tuition and fees fluctuate from semester to semester.

New for 2009 and 2010 – an ‘enhanced’ Hope Credit
Good news for 2009 and 2010! A key provision of the recently-signed stimulus bill is an ‘enhanced’ Hope Credit, known as the ‘American Opportunity Tax Credit,’ which provides 100% credit for the first $2,000 of qualified expenses and 25% for the next $2,000 qualified expenses such as tuition, fees and required books. That’s $2,500 per student on your 2009 and 2010 federal returns versus only $1,800 per student in 2008.

More good news. The credit is also 40% refundable, meaning even taxpayers who have no tax liability can receive a credit of 40% of qualified college expenses, up to $1,000. Another change: Course materials (such as required books) are included in qualified expenses.

Note: The 2009 credit for students in the Midwestern Disaster Area still maxes out at $3,600, not $5,000!

But you do have to wait until 2010 when you file your federal 2009 return to claim the credit for 2009 expenses. You’ll claim the credit for 2010 expenses in 2011 when you file your 2010 return. Remember, the cost of education has never been higher, but with careful planning the Hope credit for 2008 and the enhanced Hope Credit for 2009 and 2010 can keep college within reach.

This Tax Fact is brought to you by The Tax Institute at H&R Block.

To view other helpful tax information or listen to our Tax Fact podcasts, visit www.digits.hrblock.com

As always . . . everyone’s tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.

This Tax Fact is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties.