What are Hope (American Opportunity) & Lifetime Learning Credits?

The 1997 tax act established two distinct new higher education, the Hope Scholarship Credit, and the Lifetime Learning Credit. These are available for qualifying expenses paid (and for courses started) after 12/31/97 and after 6/30/98, respectively. You cannot claim both credits on the same education expenses.

Both credits are based on "qualified higher education expenses" which include tuition and course fees, but NOT books, board, meals, transportation or other "fees" assessed by the educational institution. Elective courses (no degree credit) involving sports, games or hobbies do not qualify. Also excluded are tuition and fees paid through employer reimbursement plans, scholarships and fellowships, courses deducted as a business expense, courses paid through a distribution from an Educational IRA, or excluded interest from a series "EE" US Savings Bond.

Amounts paid with gifts from private individuals do qualify for the credit. The qualifying expenses must be paid during the tax year for courses that begin during that same tax year (or within three months of the start of the following year).

The expenses must be paid for the taxpayer, his spouse, or someone who is the taxpayer's dependent for the tax year. (Dependent filers can not claim the credit. Only the parent claiming the child can claim the credit, even if the child paid the expenses with his own money.)

The basic difference between the two credits:

• The HOPE (American Opportunity Credit) credit covers only the first FOUR years of post-secondary education, while the Lifetime Learning credit can apply all the way through grad school (and even for qualifying courses that do not lead to any kind of a degree or certificate).
  
  
• The HOPE (American Opportunity Credit) credit requires that the student attend at least "half time" (as defined by the school) and is studying toward a degree or recognized certification. (There are no such restrictions in the Lifetime Learning credit. Elective courses to improve one's job skills will qualify.)
  
  
• The HOPE (American Opportunity Credit) credit limitations apply per STUDENT, while the Lifetime Learning credit limits apply per TAXPAYER.

The HOPE (American Opportunity Credit) scholarship credit permits a maximum credit of two years $2,500 for the first of postcredit is -secondary education. The credit is enhanced with a new refundable feature: 40% of the credit, up to $1,000, is generally refundable, meaning it is allowed even if it exceeds your tax liability. The HOPE credit is not allowed for students who are convicted, before the end of the tax year, of federal or state felony possession of a controlled substance.

The Lifetime Learning credit is 20% of the first $10,000 in qualified educational expenses that you paid for eligible students.

Income Limits Increased for Hope and Lifetime Learning Credits

For 2009, the amount of your Hope (American Opportunity Credit) or lifetime learning credit is phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return).

Lifetime learning credit is phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $50,000 and $60,000 ($100,000 and $120,000 if you file a joint return).

You cannot claim an education credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return). This is an increase from the 2007 limits of $47,000 and $57,000 ($94,000 and $114,000 if filing a joint return). For more information, see chapters 2 and 3 in Publication 970, Tax Benefits for Education.