General
Limitations
Qualified Expenses
Phaseout
Election
Credit Recapture
Alternative Minimum Tax
The HOPE Scholarship credit (hereinafter HOPE credit) provides individual taxpayers with a credit for the cost of higher education tuition and related expenses. The HOPE credit is a nonrefundable tax credit up to $1,500 (subject to AGI phaseout and indexing after 2001) per student for qualified tuition and related expenses paid by the taxpayer for certain individuals enrolled for the first two years of a post secondary degree or certificate program at an eligible educational institution on at least a half-time basis. The HOPE credit is available for expenses paid after December 31, 1997, in taxable years ending after such date, for education furnished in academic periods beginning after such date.
The HOPE credit is equal to the sum of the following amounts:
• 100% of the qualified tuition and related expenses paid by the taxpayer during the
taxable year (for education furnished to the eligible student during any academic period
in such taxable year) as does not exceed $1,000, 283 plus
• 50% of such expenses paid as exceeds $1,000, but does not exceed $2,000. 284
In other words, for taxable years beginning before 2002, the maximum HOPE credit available
is $1,500. 285
/Footnote/ 283 §25A(b)(1)(A). For taxable years beginning after 2001, the $1,000 amount
will be indexed for inflation. §25A(h)(1)(A).
/Footnote/ 284 §25A(b)(1)(B). The $2,000 amount is determined by doubling the $1,000
amount in §25A(b)(1)(A). See §25A(b)(4). For taxable years beginning after 2001, the
$1,000 amount will be indexed for inflation. §25A(h)(1)(A).
/Footnote/ 285 I.e. $1,000 (100% of the first $1,000 of expenses) plus $500 (50% of the
second $1,000 of expenses).
The HOPE credit is only allowed for the first two years of post-secondary education.
286 The HOPE credit is not allowed for a taxable year unless such individual is an
eligible student for at least one academic period which begins during the taxable year.
287 An eligible student means, with respect to any academic period, an individual who is
enrolled in a degree, certificate, or other program leading to a recognized educational
credential at an eligible education institution, 288 on at least a half-time basis. 289 No
credit is allowed for any expense for which a deduction is allowed under another Code
provision. 290
/Footnote/ 286 §25A(b)(2)(A), (C).
/Footnote/ 287 §25A(b)(2)(B).
/Footnote/ 288 §25A(b)(3)(A). An eligible education institution is defined in
§25A(f)(2).
/Footnote/ 289 §25A(b)(3)(B).
/Footnote/ 290 §25A(g)(5).
The HOPE credit is denied for any academic period if the student has been convicted of a
federal or state felony offense consisting of the possession or distribution of a
controlled substance before the end of the taxable year with or within such academic
period ends. 291
/Footnote/ 291 §25A(b)(2)(D).
Married taxpayers incurring qualified expenses must file a joint income tax return in
order to claim the HOPE credit. 292 No credit is allowed for married taxpayers filing
separate returns. In order to claim the credit, the taxpayer must include the student's
name and social security number on his or her tax return. 293
/Footnote/ 292 §25A(g)(6).
/Footnote/ 293 §25A(g)(1). Omission of this information is treated as a mathematical or
clerical error for purposes of the summary assessment procedures. See §6213(g)(2)(J), as
added by P.L. 105-34.
If a child who is claimed as a dependent by another taxpayer incurs qualified tuition and
related expenses, the taxpayer, not the child, is deemed to have paid such expense for
purposes of the HOPE credit 294 and no HOPE credit is allowed to such child. 295
/Footnote/ 294 §25A(g)(3)(B).
/Footnote/ 295 §25A(g)(3)(A). In Notice 97-60, 1997-46 I.R.B. 8, the IRS explained how a
parent claims a HOPE credit for the qualified tuition and related expenses of a dependent
child.
Qualified Expenses
Qualified tuition and related expenses for purposes of the HOPE credit are defined as
tuition and fees required for the enrollment or attendance of the following individuals at
eligible educational institutions: (1) taxpayer, (2) taxpayer's spouse, (3) any dependent
of taxpayer with respect to whom taxpayer is allowed a dependency exemption deduction. 296
Qualified expenses do not include expenditures for books, meals, lodging, student activity
fees, athletic fees, or similar personal or extracurricular activity expenses. 297 Also
disqualified are tuition and fees related to sports, hobbies or games. 298
/Footnote/ 296 §25A(f)(1)(A).
/Footnote/ 297 §25A(f)(1)(C).
/Footnote/ 298 §25A(f)(1)(B). The exclusion for qualified tuition and related expenses
for courses involving sports, games or hobbies, does not apply if such course is part of
the individual's academic program.
Qualified tuition and related expenses generally include only out-of-pocket expenses. The
amount of qualified tuition and related expenses taken into account in determining the
HOPE credit for any individual must be reduced by the sum of any amounts paid for the
benefit of such individual which reduces the tuition expense. 299 Thus, the following
items reduce the qualified tuition amount taken into account in determining the credit:
• a qualified scholarship excludible from gross income; 300
• an educational assistance allowance; 301 and
• any other payment for such individual's education expenses excludible from income
under any law of the United States. 302
/Footnote/ 299 §25A(g)(2).This rule is applied before the dollar amount limitation or the
phaseout of §25A(b), (d).
/Footnote/ 300 §25A(g)(2)(A) (referring to §117).
/Footnote/ 301 §25A(g)(2)(B). Educational assistance allowances under chapters 30, 31,
32, 34, or 35 of title 38 or under chapter 1606 of title 10 of the United States Code.
/Footnote/ 302 §25A(g)(2)(C). However, if the payment is by gift, bequest, devise or
inheritance (under §102(a)) this exception does not apply. Id.
4. Phaseout
The HOPE credit is phased out ratably for taxpayers with modified AGI between $40,000 and
$50,000 ($80,000 and $100,000 for joint returns) (the modification to AGI relates to
certain income earned offshore). 303 The phaseout ranges will be indexed for inflation for
taxable years beginning after 2001. 304
/Footnote/ 303 §25A(d).
/Footnote/ 304 §25A(h)(2).
5. Election
The taxpayer must make an election in order to claim the HOPE credit. 305 The election for
the HOPE credit cannot be made with respect to any individual for any taxable year if any
portion of any distribution during such taxable year from an education individual
retirement account 306 is excluded from gross income. 307
/Footnote/ 305 §25A(e)(1).
/Footnote/ 306 See §530.
/Footnote/ 307 §25A(e)(2) (referring to §530(d)(2)). Notice 97-60, 1997-46 I.R.B. 8,
explains that a student receiving a tax-free distribution from an Education IRA may waive
the tax-free treatment of such distribution and elect to pay any tax that would otherwise
be owed on such distribution so that the student or the student's parents may claim the
HOPE credit for expenses paid in the same year the Education IRA distributions are
received.
The HOPE credit is generally available only for payments of qualified tuition and related
expenses that cover an academic period beginning in the same calendar year as the year in
which payment is made. An exception, however, allows a parent or student to claim the
credit for payments of qualified tuition and related expenses made during the calendar
year to cover an academic period that begins in January, February, or March of the
following year. 307.1
/Footnote/ 307.1 §25A(g)(4). See Notice 97-60, 1997-46 I.R.B. 8. However, because the
HOPE credit does not apply to expenses paid before Jan. 1, 1998, this exception does not
apply to tuition paid in 1997 to cover academic periods beginning in 1998.