| Pub. 970, Tax Benefits for Education |
2006 Tax Year |
This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
Income limits increased. The amount of your Hope credit for 2006 is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is
between $45,000 and
$55,000 ($90,000 and $110,000 if you file a joint return). You cannot claim a credit if your MAGI is $55,000 or more ($110,000
or more if you file a
joint return). This is an increase from the 2005 limits of $43,000 and $53,000 ($87,000 and $107,000 if filing a joint return).
See Effect of the
Amount of Your Income on the Amount of Your Credit, later, for more information.
There are two tax credits available to help you offset the costs of higher education by reducing the amount of your income
tax. They are the Hope
credit and the lifetime learning credit, also referred to as education credits. This chapter discusses the Hope credit. The
lifetime learning credit
is discussed in chapter 3.
This chapter explains:
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Who can claim the Hope credit,
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What expenses qualify for the credit,
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Who is an eligible student,
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Who can claim a dependent's expenses,
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How to figure the credit,
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How to claim the credit, and
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When the credit must be repaid.
What is the tax benefit of the Hope credit.
You may be able to claim a Hope credit of up to $1,650 for qualified education expenses paid for each eligible student.
A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of
income subject to tax, a credit
directly reduces the tax itself. The Hope credit is a nonrefundable credit. This means that it can reduce your tax to zero,
but if the credit is more
than your tax the excess will not be refunded to you.
The Hope credit you are allowed may be limited by the amount of your income and the amount of your tax.
You may be able to take a tuition and fees deduction for your education expenses instead of a Hope credit. You can choose
the one that will give
you the lower tax. See chapter 6 for details about the deduction.
Can you claim both education credits this year.
For each student, you can elect for any year only one of the credits. For example, if you elect to take the Hope credit
for a child on your 2006
tax return, you cannot, for that same child, also claim the lifetime learning credit for 2006.
If you are eligible to claim the Hope credit and you are also eligible to claim the lifetime learning credit for the
same student in the same year,
you can choose to claim either credit, but not both. For 2006, if the total qualified education expenses for a student are
less than $7,500, it will
generally be to your benefit to claim the Hope credit.
If you pay qualified education expenses for more than one student in the same year, you can choose to take credits
on a per-student, per-year
basis. This means that, for example, you can claim the Hope credit for one student and the lifetime learning credit for another
student in the same
year.
Differences between the Hope and lifetime learning credits.
There are several differences between these two credits. For example, you can claim the Hope credit based on the same
student's expenses for no
more than 2 years. However, there is no limit on the number of years for which you can claim a lifetime learning credit based
on the same student's
expenses. The differences between the two credits are summarized in Table 2-1.
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Table 2-1.Comparison of Education Credits |
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Hope Credit
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Lifetime Learning Credit
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Up to $1,650 credit per eligible student |
Up to $2,000 credit per return |
Available ONLY until the first 2 years of post-
secondary education are completed
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Available for all years of postsecondary education and for courses to acquire or improve job skills
|
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Available ONLY for 2 years per eligible student
|
Available for an unlimited number of years
|
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Student must be pursuing an undergraduate degree or other recognized education credential
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Student does not need to be pursuing a degree or other recognized education credential
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Student must be enrolled at least half time for at least one academic period beginning during the year
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Available for one or more courses
|
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No felony drug conviction on student's record
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Felony drug conviction rule does not apply
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The following rules will help you determine if you are eligible to claim the Hope credit on your tax
return.
Generally, you can claim the Hope credit if all three of the following requirements are met.
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You pay qualified education expenses of higher education.
-
You pay the education expenses for an eligible student.
-
The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.
Note.
Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent,
are considered paid by
you.
“Qualified education expenses” are defined later under What Expenses Qualify. “Eligible students” are defined later under
Who Is an Eligible Student. A “dependent for whom you claim an exemption” is defined later under Who Can Claim a Dependent's
Expenses.
You may find Figure 2-1
helpful in determining if you can claim a Hope credit on your tax
return.
Figure 2-1. Can You Claim the Hope Credit for 2006? Summary: This flowchart is used to determine if you qualify to claim the Hope Credit for 2005.Start. This is the start of the flowchart.Decision (1). Did you* pay qualified education expenses in 2005 for an eligible student?
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IF YES continue to Decision (2)
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IF NO continue to Process (a)
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Decision (2). Did the academic period for which you paid qualified education expenses begin in 2005 or the first 3 months of 2005?
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IF YES continue to Decision (3)
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IF NO continue to Process (a)
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Decision (3). Is the eligible student you, your spouse (if married filing jointly), or your dependent for whom you claim an exemption on
your tax
return?
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IF YES continue to Decision (4)
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IF NO continue to Process (a)
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Decision (4). Are you listed as a dependent on another person's tax return?
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IF YES continue to Process (a)
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IF NO continue to Decision (5)
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Decision (5). Is your filing status married filing separately?
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IF YES continue to Process (a)
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IF NO continue to Decision (6)
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Decision (6). Were you (or your spouse) a nonresident alien for any part of 2005 who did not elect to be treated as a resident alien for
tax
purposes?
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IF YES continue to Process (a)
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IF NO continue to Decision (7)
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Decision (7). Is your modified adjusted gross income (MAGI) less than $53,000 ($107,000 if married filing jointly)?
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IF YES continue to Decision (8)
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IF NO continue to Process (a)
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Decision (8). Do you have a tax liability (Form 1040, line 46 minus lines 47, 48, and 49) (Form 1040A, line 28 minus lines 29 and 30)?
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IF YES continue to Decision (9)
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IF NO continue to Process (a)
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Decision (9). Did you claim a lifetime learning credit or a tuition and fees deduction for the same student?
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IF YES continue to Process (a)
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IF NO continue to Decision (10)
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Decision (10). Did you use the same expenses to claim a deduction or credit, or to figure the tax-free portion of a Coverdell ESA or QTP
distribution?
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IF YES continue to Process (a)
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IF NO continue to Decision (11)
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Decision (11). Were the same expenses paid with tax-free scholarship, fellowship, grant, or employer-provided educational assistance?
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IF YES continue to Process (a)
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IF NO continue to Decision (12)
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Decision (12). Did you, or someone else who paid these expenses on behalf of a student, receive a refund of all the expenses?
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IF YES continue to Process (a)
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IF NO continue to Process (b)
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Process (a). You cannot claim the Hope credit for 2005.
Process (b). You can claim the Hope credit for 2005.
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Continue to End
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* If you claim an exemption for your dependent, qualified education expenses paid by your dependent or by a third party for
your dependent
are considered paid by you.
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End. This is the end of the flowchart.
Who Cannot Claim the Credit
You cannot claim the Hope credit for 2006 if any of the following apply.
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Your filing status is married filing separately.
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You are listed as a dependent in the Exemptions section on another person's tax return (such as your parents'). See Who Can
Claim a Dependent's Expenses, later.
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Your modified adjusted gross income (MAGI) is $55,000 or more ($110,000 or more in the case of a joint return). MAGI is explained
later
under Effect of the Amount of Your Income on the Amount of Your Credit.
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You (or your spouse) were a nonresident alien for any part of 2006 and the nonresident alien did not elect to be treated as
a resident alien
for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens.
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You claim the lifetime learning credit or a tuition and fees deduction for the same student in 2006.
The Hope credit is based on qualified education expenses you pay for yourself, your spouse, or a
dependent for whom you claim an exemption on your tax return. Generally, the credit is allowed for qualified education expenses
paid in 2006 for an
academic period beginning in 2006 or in the first 3 months of 2007.
For example, if you paid $1,500 in December 2006 for qualified tuition for the Spring 2007 semester beginning in January 2007,
you may be able to
use that $1,500 in figuring your 2006 credit.
Academic period.
An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session)
as reasonably determined by
an educational institution. In the case of an educational institution that uses credit hours or clock hours and does not have
academic terms, each
payment period can be treated as an academic period.
Paid with borrowed funds.
You can claim a Hope credit for qualified education expenses paid with the proceeds of a loan. You use the expenses
to figure the Hope credit for
the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan payments sent directly to the
educational institution as
paid on the date the institution credits the student's account.
Student withdraws from class(es).
You can claim a Hope credit for qualified education expenses not refunded when a student withdraws.
Qualified Education Expenses
For purposes of the Hope credit, qualified education expenses are tuition and certain related expenses required for enrollment
or attendance at an
eligible educational institution.
Eligible educational institution.
An eligible educational institution is any college, university, vocational school, or other postsecondary educational
institution eligible to
participate in a student aid program administered by the Department of Education. It includes virtually all accredited public,
nonprofit, and
proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell
you if it is an eligible
educational institution.
Certain educational institutions located outside the United States also participate in the U.S. Department of Education's
Federal Student Aid (FSA)
programs.
Related expenses.
Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education
expenses only if the fees
and expenses must be paid to the institution as a condition of enrollment or attendance.
In the following examples, assume that each student is an eligible student at an eligible educational institution.
Example 1.
Jackson is a sophomore in University V's degree program in dentistry. This year, in addition to tuition, he is required to
pay a fee to the
university for the rental of the dental equipment he will use in this program. Because the equipment rental fee must be paid
to University V for
enrollment and attendance, Jackson's equipment rental fee is a qualified expense.
Example 2.
Donna and Charles, both first-year students at College W, are required to have certain books and other reading materials to
use in their mandatory
first-year classes. The college has no policy about how students should obtain these materials, but any student who purchases
them from College W's
bookstore will receive a bill directly from the college. Charles bought his books from a friend, so what he paid for them
is not a qualified education
expense. Donna bought hers at College W's bookstore. Although Donna paid College W directly for her first-year books and materials,
her payment is not
a qualified expense because the books and materials are not required to be purchased from College W for enrollment or attendance
at the institution.
Example 3.
When Marci enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her
tuition. This activity
fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as
the student newspaper and
the student government. No portion of the fee covers personal expenses. Although labeled as a student activity fee, the fee
is required for Marci's
enrollment and attendance at College X. Therefore, it is a qualified expense.
Gulf Opportunity Zone students (GOZ students).
The definition of qualified education expenses for a GOZ student has been expanded. In addition to tuition and fees
required for the student's
enrollment or attendance at an eligible educational institution, qualified education expenses for a GOZ student include the
following.
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Books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.
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For a special needs student, expenses that are necessary for that person's enrollment or attendance at an eligible educational
institution.
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For a student who is at least a half-time student, the reasonable costs of room and board, but only to the extent that the
costs are not
more than the greater of the following two amounts.
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The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of
attendance (for
federal financial aid purposes) for a particular academic period and living arrangement of the student.
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The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.
You will need to contact the eligible educational institution for qualified room and board costs.
For more information, see Form 8863.
No Double Benefit Allowed
You cannot do any of the following.
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Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim a Hope credit
based on those
same expenses.
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Claim a Hope credit in the same year that you are claiming a tuition and fees deduction for the same student.
-
Claim a Hope credit and a lifetime learning credit based on the same qualified education expenses.
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Claim a Hope credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education
savings
account (ESA) or qualified tuition program (QTP). See Coordination With Hope and Lifetime Learning Credits in chapter 7 (Coverdell ESA) and
chapter 8 (QTP).
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Claim a credit based on qualified education expenses paid with a tax-free scholarship, grant, or employer-provided educational
assistance.
See Adjustments to Qualified Education Expenses, next.
Adjustments to Qualified Education Expenses
If you pay qualified education expenses with certain tax-free funds, you cannot claim a credit for those amounts. You must
reduce the qualified
education expenses by the amount of any tax-free educational assistance and refund(s) you received.
Tax-free educational assistance.
This includes:
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The tax-free parts of scholarships and fellowships (see chapter 1),
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Pell grants (see chapter 1),
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Employer-provided educational assistance (see chapter 11),
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Veterans' educational assistance (see chapter 1), and
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Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.
Refunds.
Qualified education expenses do not include expenses for which you, or someone else who paid qualified education expenses
on behalf of a student,
receive a refund. (For information on expenses paid by a dependent student or third party, see Who Can Claim a Dependent's Expenses, later
in this chapter.)
If a refund of expenses paid in 2006 is received before you file your tax return for 2006, simply reduce the amount
of the expenses paid by the
amount of the refund received. If the refund is received after you file your 2006 tax return, see When Must the Credit Be Repaid
(Recaptured), later.
You are considered to receive a refund of expenses when an eligible educational institution refunds loan proceeds
to the lender on behalf of the
borrower. Depending on when you are considered to receive the refund, follow the above instructions or see When Must the Credit Be Repaid
(Recaptured), later.
Amounts that do not reduce qualified education expenses.
Do not reduce qualified education expenses by amounts paid with funds the student receives as:
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Payment for services, such as wages,
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A loan,
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A gift,
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An inheritance, or
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A withdrawal from the student's personal savings.
Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's
tax return in the following
situations.
-
The use of the money is restricted to costs of attendance (such as room and board) other than qualified education expenses.
-
The use of the money is not restricted and is used to pay education expenses that are not qualified (such as room and board).
Example 1.
Jackie paid $3,000 for tuition and $5,000 for room and board at University X. The university did not require her to pay any
fees in addition to her
tuition in order to enroll in or attend classes. To help pay these costs, she was awarded a $2,000 scholarship and a $4,000
student loan.
The terms of the scholarship state that it may be used to pay any of Jackie's college expenses. Because she applied it toward
her tuition, the
scholarship is tax free. Therefore, for purposes of figuring an education credit (either Hope or lifetime learning), she must
first use the $2,000
scholarship to reduce her tuition (her only qualified education expense). The student loan is not tax-free educational assistance,
so she does not use
it to reduce her qualified expenses. Jackie is treated as having paid $1,000 in qualified education expenses ($3,000 tuition
- $2,000
scholarship).
Example 2.
The facts are the same as in Example 1, except that Jackie uses the $2,000 scholarship to pay
room and board, and, therefore, reports her entire scholarship as income on her tax return. In this case, the scholarship
is allocated to expenses
other than qualified education expenses. Jackie is treated as paying the entire $3,000 tuition with other funds and can figure
her education credit on
the entire $3,000.
Expenses That Do Not Qualify
Qualified education expenses do not include amounts paid for:
-
Insurance,
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Medical expenses (including student health fees),
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Room and board,
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Transportation, or
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Similar personal, living, or family expenses.
This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.
Sports, games, hobbies, and noncredit courses.
Qualified education expenses generally do not include expenses that relate to any course of instruction or other education
that involves sports,
games or hobbies, or any noncredit course. However, if the course of instruction or other education is part of the student's
degree program, these
expenses can qualify.
Comprehensive or bundled fees.
Some eligible educational institutions combine all of their fees for an academic period into one amount. If you do
not receive or do not have
access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses,
such as those listed
above, contact the institution. The institution is required to make this allocation and provide you with the amount you paid
(or were billed) for
qualified education expenses on Form 1098-T, Tuition Statement. See Figuring the Credit, later, for more information about Form 1098-T.
Who Is an Eligible Student
To claim the Hope credit, the student for whom you pay qualified education expenses must be an eligible
student. This is a student who meets all of the following requirements.
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The student did not have expenses that were used to figure a Hope credit in any 2 earlier tax years.
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The student had not completed the first 2 years of postsecondary education (generally, the freshman and sophomore years of
college) before 2006.
-
For at least one academic period beginning in 2006, the student was enrolled at least half-time in a program leading to a
degree,
certificate, or other recognized educational credential.
-
The student was free of any federal or state felony conviction for possessing or distributing a controlled substance as of
the end of
2006.
These requirements are also shown in Figure 2-2.
Completion of first 2 years.
A student who was awarded 2 years of academic credit for postsecondary work completed before 2006 has completed the
first 2 years of postsecondary
education. This student generally would not be an eligible student for purposes of the Hope credit.
Exception.
Any academic credit awarded solely on the basis of the student's performance on proficiency examinations is disregarded
in determining whether the
student has completed 2 years of postsecondary education.
Enrolled at least half-time.
A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for
his or her course of study.
The standard for what is half of the normal full-time work load is determined by each eligible educational institution.
However, the standard may
not be lower than any of those established by the Department of Education under the Higher Education Act of 1965.
Example 1.
Marty graduated from high school in June 2005. In September, he enrolled in an undergraduate degree program at College U,
and attended full time
for both the 2005 Fall and 2006 Spring semesters. For the 2006 Fall semester, Marty was enrolled less than half-time. Because
Marty was enrolled in an
undergraduate degree program on at least a half-time basis for at least one academic period that began during 2005 and at
least one academic period
that began during 2006, he is an eligible student for tax years 2005 and 2006 (including the 2006 Fall semester when he enrolled
at College U on less
than a half-time basis).
Example 2.
After taking classes at College V on a half-time basis for the 2005 Spring and Fall semesters, Sharon became a full-time student
for the 2006
Spring semester. College V classified Sharon as a second-semester sophomore for the 2006 Spring semester and as a first-semester
junior for the 2006
Fall semester. Because College V did not classify Sharon as having completed the first two years of postsecondary education
as of the beginning of
2006, Sharon is an eligible student for tax year 2006. Therefore, the qualified education expenses paid for the 2006 Spring
semester and the 2006 Fall
semester are taken into account in calculating any Hope credit for 2006.
Example 3.
During the 2005 Fall semester, Luis was a high school student who took classes on a half-time basis at College X. Luis was
not enrolled as part of
a degree program at College X because College X only admits students to a degree program if they have a high school diploma
or equivalent. Because
Luis was not enrolled in a degree program at College X during 2005, Luis was not an eligible student for tax year 2005.
Example 4.
The facts are the same as in Example 3. During the 2006 Spring semester, Luis again attended College X but not as part of a degree
program. Luis graduated from high school in June 2006. For the 2006 Fall semester, Luis enrolled as a full-time student in
College X as part of a
degree program, and College X awarded Luis credit for his prior coursework at College X. Because Luis was enrolled in a degree
program at College X
for the 2006 Fall term on at least a half-time basis, Luis is an eligible student for all of tax year 2006. Therefore, the
qualified education
expenses paid for classes taken at College X during both the 2006 Spring semester (during which Luis was not enrolled in a
degree program) and the
2006 Fall semester are taken into account in computing any Hope credit.
Example 5.
Diana graduated from high school in June 2004. In January 2005, Diana enrolled in a one-year postsecondary certificate program
on a full-time basis
to obtain a certificate as a travel agent. Diana completed the program in December 2005, and was awarded a certificate. In
January 2006, she enrolled
in a one-year postsecondary certificate program on a full-time basis to obtain a certificate as a computer programmer. Diana
is an eligible student
for both tax years 2005 and 2006 because she meets the degree requirement, the work load requirement, and the year of study
requirement for those
years.
Figure 2-2. Who Is an Eligible Student for the Hope Credit? Summary: This flowchart is used to determine if a student is eligible for the Hope credit.Start. This is the starting of the flowchart.Decision (1). Did the student complete the first 2 years of postsecondary education before the beginning of the tax year?
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IF Yes Continue To Process (a)
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IF No Continue To Decision (2)
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Decision (2). Was the credit claimed in at least 2 prior tax years for this student?
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IF Yes Continue To Process (a)
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IF No Continue To Decision (3)
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Decision (3). Was the student enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational
credential for at
least one academic period beginning during the tax year?
|
IF Yes Continue To Decision (4)
|
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IF No Continue To Process (a)
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Decision (4). Is the student free of any federal or state felony conviction for possessing or distributing a controlled substance as of
the end of the tax
year?
|
IF Yes Continue To Process (b)
|
|
IF No Continue To Process (a)
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Process (a). The student is not an eligible student.
Process (b). The student is an eligible student.
End. This is the ending of the flowchart.
Who Can Claim a Dependent's Expenses
If there are qualified education expenses for your dependent for a year, either you or your
dependent, but not both of you, can claim a Hope credit for your dependent's expenses for that year.
For you to claim a Hope credit for your dependent's expenses, you must also claim an exemption for your dependent. You do
this by listing your
dependent's name and other required information on Form 1040 (or Form 1040A), line 6c.
|
IF you...
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THEN only...
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claim an exemption on
your tax return for a
dependent who is an
eligible student
|
you can claim the Hope credit based on that dependent's expenses. The dependent cannot claim the credit.
|
|
do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled
to the exemption)
|
the dependent can claim the Hope credit. You cannot claim the credit based on this dependent's
expenses.
|
Expenses paid by dependent.
If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid
(or deemed paid) by your
dependent as if you had paid them. Include these expenses when figuring the amount of your Hope credit.
Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved
divorce decree are
treated as paid by your dependent.
Expenses paid by you.
If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when
figuring the amount of the
Hope credit. If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses
you paid when figuring
the Hope credit.
Expenses paid by others.
Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly
to an eligible educational
institution to pay for an eligible student's qualified education expenses. In this case, the student is treated as receiving
the payment from the
other person and, in turn, paying the institution. If you claim an exemption on your tax return for the student, you are considered
to have paid the
expenses.
Example.
In 2006, Ms. Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education
expenses. For
purposes of claiming a Hope credit, Todd is treated as receiving the money as a gift from his grandmother and, in turn, paying
his qualified education
expenses himself.
Unless an exemption for Todd is claimed on someone else's 2006 tax return, only Todd can use the payment to claim a Hope credit.
If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2006 tax return, whoever claims the exemption
may be able to use the
expenses to claim a Hope credit. If anyone else claims an exemption for Todd, Todd cannot claim a Hope credit.
Tuition reduction.
When an eligible educational institution provides a reduction in tuition to an employee of the
institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. If it is
taxable, the employee is
treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student.
For more information on
tuition reductions, see Qualified Tuition Reduction in chapter 1.
The amount of the Hope credit (per eligible student) is the sum of:
-
100% of the first $1,100 of qualified education expenses you paid for the eligible student, and
-
50% of the next $1,100 of qualified education expenses you paid for that student.
The maximum amount of Hope credit you can claim in 2006 is $1,650 times the number of eligible students. You can claim the
full $1,650 for each
eligible student for whom you paid at least $2,200 of qualified education expenses. However, the credit may be reduced based
on your modified adjusted
gross income (MAGI). See Effect of the Amount of Your Income on the Amount of Your Credit, below.
Example.
Jon and Karen Frost are married and file a joint tax return. For 2006, they claim an exemption for their dependent daughter
on their tax return.
Their MAGI is $70,000. Their daughter is in her sophomore (second) year of studies at the local university. Jon and Karen
paid qualified education
expenses of $4,300 in 2006.
Jon and Karen, their daughter, and the local university meet all of the requirements for the Hope credit. Jon and Karen can
claim a $1,650 Hope
credit in 2006. This is 100% of the first $1,100 of qualified education expenses, plus 50% of the next $1,100.
Form 1098-T.
To help you figure your Hope credit, you should receive Form 1098-T. Generally, an eligible educational institution
(such as a college or
university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2007. An institution
may choose to report either
payments received (box 1), or amounts billed (box 2), for qualified education expenses. In addition, your Form 1098-T should
give you other
information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements
or refunds, and
whether you were enrolled at least half-time or were a graduate student.
The eligible educational institution may ask for a completed Form W-9S, Request for Student's or Borrower's Taxpayer
Identification Number and Certification, or similar statement to obtain the student's name, address, and taxpayer identification
number.
Gulf Opportunity Zone students (GOZ students).
The Hope credit for a GOZ student is increased to 100% of the first $2,200 in qualified education expenses and 50%
of the next $2,200 of qualified
education expenses for a maximum credit of $3,300 per student.
Effect of the Amount of Your Income on the Amount of Your Credit
The amount of your Hope credit is phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between
$45,000 and $55,000
($90,000 and $110,000 if you file a joint return). You cannot claim a Hope credit if your MAGI is $55,000 or more ($110,000
or more if you file a
joint return).
Modified adjusted gross income (MAGI).
For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return.
MAGI when using Form 1040A.
If you file Form 1040A, your MAGI is the AGI on line 22 of that form.
MAGI when using Form 1040.
If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any:
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Foreign earned income exclusion,
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Foreign housing exclusion,
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Exclusion of income for bona fide residents of American Samoa, and
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Exclusion of income from Puerto Rico.
You can use Worksheet 2-1, next,
to figure your MAGI.
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Worksheet 2-1.MAGI for the Hope Credit |
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1.
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Enter your adjusted gross income
(Form 1040, line 38)
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1.
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2.
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Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form
2555-EZ, line 18)
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2.
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3.
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Enter the amount of income from Puerto Rico that you are excluding
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3.
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4.
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Enter the amount of income from American Samoa that you are excluding (Form 4563,
line 15)
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4.
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5.
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Add the amounts on
lines 2, 3, and 4
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5.
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6.
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Add the amounts on lines 1 and 5.
This is your modified adjusted
gross income. Enter this amount
on Form 8863, line 9
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6.
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Phaseout.
If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit
using lines 7-13 of Form
8863. The same method is shown in the following example.
Example.
You are filing a joint return and your MAGI is $91,000.
You figure a tentative Hope credit (100% of the first $1,100 of qualified education expenses, plus 50% of the next $1,100
of qualified education
expenses) of $1,650.
Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit
($1,650) by a fraction.
The numerator of the fraction is $110,000 (the upper limit for those filing a joint return) minus your MAGI. The denominator
is $20,000, the range of
incomes for the phaseout ($90,000 to $110,000). The result is the amount of your phased out (reduced) Hope credit ($1,568).
You claim the Hope credit by completing Parts I and III of Form 8863 and submitting it with your Form 1040 or
1040A. Enter the credit on Form 1040, line 50, or on Form 1040A, line 31. A filled-in Form 8863 is shown at the end of this
chapter.
When Must the Credit Be Repaid (Recaptured)
If, after you file your 2006 tax return, you or someone else receives tax-free educational assistance for, or a
refund of, an expense you used to figure a Hope credit on that return, you may have to repay all or part of the credit. You
must refigure your Hope
credit for 2006 as if the assistance or refund was received in 2006. Subtract the amount of the refigured credit from the
amount of the credit you
claimed. The result is the amount you must repay. You add the repayment (recapture) to your tax liability for the year in
which you receive the
assistance or refund. See the Form 8863 instructions for that year to find out how to report the recapture amount. Your original
2006 tax return does
not change.
Jim Grant, a single taxpayer, enrolled full-time at a local college to earn a degree in computer science. This is the first
year of his
postsecondary education. During 2006, he paid $2,600 for his qualified 2006 tuition. He received Form 1098-T (shown later)
from the college. He and
the college meet all of the requirements for the Hope credit. Jim's MAGI is $34,000. His income tax liability, before credits,
is $3,404. He figures
his credit of $1,650 as shown on the Form 8863 on page 16.
Note.
In Appendix A at the end of this publication there is an example illustrating the use of Form 8863
when both the Hope credit and the lifetime learning credit are claimed on the same tax return.
Form 8863 Education Credits (Hope and Lifetime Learning Credits) 2006. Summary: This is an example of Form 8863 (2006) as pertains to the description in the text. The line items completed are:
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“Name(s) shown on return” field contains Jim Grant
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“Your social security number” field contains 000-00-4321
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Under
“Part I: Hope Credit.”:
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“1a. Student's name (as shown on page 1 of your tax return)”
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“First name” field contains Jim
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“Last name” field contains Grant
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“1b. Student's social security number (as shown on page 1 of your tax return)” field contains 000-00-4321
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“1c. Qualified expenses (but do not enter more than $2,200 for each student). See instructions” field contains 2,200
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“1d. Enter the smaller of the amount in column (c) or $1,100” field contains 1,100
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“1e. Add column (c) and column (d)” field contains 3,300
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“1f. Enter one-half of the amount in column (e)” field contains 1,650
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“2. Tentative Hope credit. Add the amounts on line 1, column (f). If you are claiming the lifetime learning credit, go to Part
II; otherwise,
go to Part III” field contains 1,650
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Under
“Part III: Allowable Education Credits”:
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“7. Tentative education credits. Add lines 2 and 6” field contains 1,650
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“8. Enter: $110,000 if married filing jointly; $55,000 if single, head of household, or qualifying widow(er)” field contains
55,000
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“9. Enter the amount from Form 1040, line 38, or Form 1040A, line 22” field contains 34,000
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“10. Subtract line 9 from line 8. If line 9 is equal to or more than line 8, stop; you cannot take any education credits” field
contains 21,000
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“11. Enter: $20,000 if married filing jointly; $10,000 if single, head of household, or qualifying widow(er)” field contains
10,000
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“13. Multiply line 7 by line 12” field contains 1,650
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“14. Enter the amount from Form 1040, line 46, or Form 1040A, line 28” field contains 3,404
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“15. Enter the total, if any, of your credits from Form 1040, lines 47 through 49, or Form 1040A, lines 29 and 30” field contains
0
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“16. Enter the amount from Form 6251, line 31” field contains 0
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“17. Add lines 15 and 16” field contains 0
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“18. Subtract line 17 from line 14. If zero or less, stop; you cannot take any education credits” field contains 3,404
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“19. Education credits. Enter the smaller of line 13 or line 18 here and on Form 1040, lines 49, or Form 1040A, line 31” field contains
1,650
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