SECTION 1. THE HOPE — Internal Revenue Bulletin 1997-46

SCHOLARSHIP CREDIT

Beginning January 1, 1998, taxpayers may be eligible to claim a nonrefundable Hope Scholarship Credit against their federal income taxes. The Hope Scholarship Credit may be claimed for the qualified tuition and related expenses of each student in the taxpayer’s family (i.e., the taxpayer, the taxpayer’s spouse, or an eligible dependent) who is enrolled at least half-time in one of the first two years of postsecondary education and who is enrolled in a program leading to a degree, certificate, or other recognized educa

tional credential. The amount that may be claimed as a credit is generally equal to: (1) 100 percent of the first $1,000 of the taxpayer’s out-of-pocket expenses for each student’s qualified tuition and related expenses, plus (2) 50 percent of the next $1,000 of the taxpayer’s out-ofpocket expenses for each student’s qualified tuition and related expenses. Thus, the maximum credit a taxpayer may claim for a taxable year is $1,500 multiplied by the number of students in the family who meet the enrollment criteria described above.

The amount a taxpayer may claim as a Hope Scholarship Credit is gradually reduced for taxpayers who have modified adjusted gross income between $40,000 ($80,000 for married taxpayers filing jointly) and $50,000 ($100,000 for married taxpayers filing jointly). Taxpayers with modified adjusted gross income over $50,000 ($100,000 for married taxpayers filing jointly) may not claim the Hope Scholarship Credit. Both the dollar limitation on the expenses for which the credit may be claimed and the modified adjusted gross income limitation will be indexed for inflation in 2002 and years thereafter.

The Hope Scholarship Credit may be claimed for payments of qualified tuition and related expenses made on or after January 1, 1998, for academic periods beginning on or after January 1, 1998. Therefore, the first time taxpayers will be able to claim the credit is when they file their 1998 tax returns in 1999. The Hope Scholarship Credit is not available for any amount paid in 1997. Q1: Who may claim the Hope Scholar ship Credit? A1: An individual paying qualified tu ition and related expenses at a postsecondary educational institution may claim the credit, provided the student whose expenses are being paid and the institution meet certain eligibility requirements. Q2: May an individual claim a Hope

Scholarship Credit for paying qualified tuition and related expenses for other family members? A2: Yes. An individual may claim the

credit for his/her own qualified tuition and related expenses and the qualified tuition and related ex

November 17, 1997 8 1997–46 I.R.B.

expenses. If no one claims the child as a dependent on a Federal income tax return for the year, only the child may claim the Hope Scholarship Credit for the child’s expenses. (The same rules relating to individuals and dependents apply for the Lifetime Learning Credit, described in the next section.) Q11: If a married taxpayer files a sepa rate return, may the taxpayer claim a Hope Scholarship Credit on his/her income tax return? A11: No. Married taxpayers may claim

the credit only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year. (The same rules apply for the Lifetime Learning Credit, described in the next section.) Q12: How does a parent claim a Hope

Scholarship Credit for the qualified tuition and related expenses of a dependent child? A12: The parent may claim the credit on

his/her tax return even if the child files his/her own tax return. When a child is claimed as a dependent on a parent’s return, any qualified tuition or related expenses paid by the child during the year are treated as if the parent had paid them. Therefore, these expenses are included in calculating the parent’s Hope Scholarship Credit. A child may not claim a Hope Scholarship Credit on his/her tax return for a particular year if the child’s parent claims the child as a dependent in that same year. (The same rules apply for the Lifetime Learning Credit, described in the next section.) Q13: What is the maximum Hope Schol arship Credit a taxpayer may claim for an eligible student? A13: Until 2002 (when the dollar limita tions are indexed for inflation), for each student who meets the eligibility requirements, the credit amount is 100 percent of the first $1,000 of the taxpayer’s out-of-pocket expenses for qualified tuition and related expenses, plus 50 percent of the next $1,000 of the taxpayer’s out-of-pocket expenses for qualified tuition and related expenses. Therefore, the maximum credit

ondary institutions. (The same eligibility requirements for institutions apply for the Lifetime Learning Credit, described in the next section.) Q5: The Hope Scholarship Credit may be

claimed only for amounts spent on “qualified tuition and related expenses.” Which expenses are included in qualified tuition and related expenses? A5: The term “qualified tuition and re lated expenses” means the tuition and fees an individual is required to pay in order to be enrolled at or attend an eligible institution. Amounts paid for any course or other education involving sports, games, or hobbies are not eligible for the credit, unless the course or other education is part of the student’s degree program. Charges and fees associated with room, board, student activities, athletics, insurance, books, equipment, transportation, and similar personal, living, or family expenses are not qualified tuition or related expenses. (The same definition of “qualified tuition and related expenses” applies for the Lifetime Learning Credit, described in the next section.) Q6: The Hope Scholarship Credit is

available only if a taxpayer’s “modified adjusted gross income” is below a specified amount. How does a taxpayer know what his/her modified adjusted gross income is? A6: For most taxpayers, modified ad justed gross income is the same as adjusted gross income. Taxpayers compute adjusted gross income as part of completing a Federal income tax return. For those few taxpayers who earn income abroad or receive income from certain American territories or possessions, modified adjusted gross income will be greater than adjusted gross income. In those cases, the individual’s adjusted gross income will be increased by: (1) certain amounts that the individual earns abroad, (2) amounts effectively connected with the individual’s conduct of a trade or business or derived from sources in Guam, American Samoa, or the Northern Mariana Islands (if the individual is a resident

of the possession where the source of the income is located), and (3) amounts derived from sources in Puerto Rico (if the individual is a Puerto Rican resident). (The same rules apply for the Lifetime Learning Credit, described in the next section.) Q7: May a nonresident alien claim the

Hope Scholarship Credit? A7: Generally no. There is an exception

for certain nonresident aliens who are married to U.S. citizens or resident aliens. Nonresident aliens should consult a U.S. tax advisor to determine whether the exception applies to them. (The same rules apply to the Lifetime Learning Credit, described in the next section.) Q8: Are qualified tuition and related ex penses for graduate-level degree work eligible for the Hope Scholarship Credit? A8: No. However, the Lifetime Learning

Credit is available for these expenses. (See Sec. 2, Q&A5.) Q9: May an individual claim a Hope

Scholarship Credit for more than one family member? A9: Yes. Furthermore, the credit is cal culated on a per student, rather than a per family, basis. For example, if an individual whose modified adjusted gross income is $35,000 pays over $2,000 in qualified tuition and related expenses for himself and over $2,000 in qualified tuition and related expenses for his dependent child, and both he and his dependent child meet the eligibility requirements, the individual may claim a Hope Scholarship Credit of $3,000 (i.e., a credit of $1,500 for his expenses plus a credit of $1,500 for his child’s expenses). Q10: May both the parent and a depen dent child claim the Hope Scholarship Credit for the child’s qualified tuition and related expenses in the same year? A10: No. Either the parent or the child,

1997–46 I.R.B. 9 November 17, 1997

paid in advance of when the academic period begins? A19: Generally, the credit is available

only for payments of qualified tuition and related expenses that cover an academic period beginning in the same calendar year as the payment is made. (An academic period begins on the first day of classes, and does not include periods of orientation, counseling, or vacation.) An exception, however, allows a parent or student to claim a Hope Scholarship 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 taxable year. Because the Hope Scholarship Credit does not apply to expenses paid before January 1, 1998, this exception does not apply to tuition paid in 1997 to cover academic periods beginning in 1998. Q20: If a student (who is not claimed as a

dependent on anyone’s Federal income tax return) pays qualified tuition and related expenses using a combination of a Pell Grant, a loan, a gift from a family member, and some personal savings, what expenses may be taken into account in calculating the Hope Scholarship Credit the student may claim? A20: The student may take into account

only “out-of-pocket” expenses in calculating the credit. Qualified tuition and related expenses paid with the student’s earnings, a loan, a gift, an inheritance, or personal savings (including savings from a qualified state tuition program) are taken into account in calculating the credit amount. However, qualified tuition and related expenses paid with a Pell Grant or other tax-free scholarship, a tax-free distribution from an Education IRA, or tax-free employer-provided educational assistance are not taken into account in calculating the credit amount. (The same rules apply for the Lifetime Learning Credit, described in the next section.) Q21: May a student’s parents claim the

Hope Scholarship Credit for the student’s expenses for a taxable

amount for the expenses of an eligible student is $1,500. If the taxpayer is claiming a credit for more than one person, the credit amount for each student in the taxpayer’s family is added together to determine the maximum total credit the taxpayer may claim. Q14: The amount a taxpayer may claim

as a Hope Scholarship Credit is gradually reduced for taxpayers with modified adjusted gross income between $40,000 and $50,000 (between $80,000 and $100,000 for married taxpayers filing jointly). How does this reduction work? A14: The reduction works on a sliding

scale that reflects where the taxpayer’s modified adjusted gross income is in the phase-out range. For example, until 2002 (when the dollar limitations on the credit and the income ranges are indexed for inflation), if an eligible student (who is not anyone’s dependent for tax purposes) pays $2,000 or more in qualified tuition and related expenses in a particular year, and the student’s modified adjusted gross income for the year is $45,000 (half way along the $10,000 phase-out range), the credit amount for the student is limited to $750. By contrast, if the same student’s modified adjusted gross income was $35,000, the credit amount for the student would be the maximum $1,500. Q15: How does a taxpayer claim the

Hope Scholarship Credit? A15: The first year that the credit will be

available is 1998. Thus, taxpayers will not be able to claim the credit until they file their 1998 tax returns in 1999. Instructions accompanying the 1998 tax forms (for returns required to be filed in 1999) will explain how to calculate the credit and how to claim it on the tax return. Q16: Is there a limit to the number of

times a taxpayer may claim the Hope Scholarship Credit for each student? A16: Yes. The credit may be claimed in

no more than two years for each student. Thus, for example, a couple with a child who starts as a

freshman in the fall of 1998, continues as a sophomore in 1999, and meets the eligibility requirements may claim the credit for their child’s expenses in 1998 and again in 1999. After 1999, neither the parents, the student, nor anyone else may claim any additional Hope Scholarship Credits for this student’s qualified tuition and related expenses. However, in 2000 and thereafter, the Lifetime Learning Credit may be available for this child’s expenses. Furthermore, if the couple has another child who starts as a freshman in the fall of 1999, the couple may claim the Hope Scholarship Credit for that child’s expenses in 1999 and one additional year. Q17: May an individual claim both the

Hope Scholarship Credit and the Lifetime Learning Credit for a student’s expenses in a single taxable year? A17: No. For each year in which a stu dent meets the eligibility requirements for the Hope Scholarship Credit, the student’s expenses may be used as the basis for a Hope Scholarship Credit or a Lifetime Learning Credit, but not both. If, for example, an eligible student pays more than $2,000 in qualified tuition and related expenses during the calendar year, the student (or the individual claiming the student as a dependent) may not claim the Hope Scholarship Credit for the first $2,000 of expenses and the Lifetime Learning Credit for the rest. Q18: If a couple has two children, one

who is a freshman and one who is a junior, may the couple claim a Hope Scholarship Credit for the freshman’s expenses and a Lifetime Learning Credit for the junior’s expenses? A18: Yes. Assuming the applicable eligi bility requirements have been met for each credit, a taxpayer may claim the Hope Scholarship Credit for one student’s expenses and the Lifetime Learning Credit for another student’s expenses in the same year. Q19: May a parent or student claim a

Hope Scholarship Credit for tuition

November 17, 1997 10 1997–46 I.R.B.

Q4: Is the Lifetime Learning Credit

available for a student taking only one course? A4: Yes. For example, a student who has

just graduated from high school and is taking a single course at a community college may claim the Lifetime Learning Credit if the student comes within the income limits and is not claimed as a dependent by someone else. Q5: Are qualified tuition and related ex penses for graduate- level education eligible for the Lifetime Learning Credit? A5: Yes. Q6: May an individual claim a Lifetime

Learning Credit for more than one family member? A6: Yes. However, unlike the Hope

Scholarship Credit, the Lifetime Learning Credit is calculated on a per family, rather than a per student, basis. Therefore, the maximum available credit does not vary with the number of students in the family. For example, if in 1999 a married individual whose modified adjusted gross income is $35,000 pays $5,000 of qualified tuition and related expenses to attend an eligible educational institution, the individual may claim a $1,000 Lifetime Learning Credit. If in the same year the individual also pays another $2,000 in qualified tuition and related expenses for his spouse to attend an eligible educational institution, the individual’s Lifetime Learning Credit is still $1,000. Q7: May both the parent and a dependent

child claim the Lifetime Learning Credit for the child’s qualified tuition and related expenses in the same year? A7: No. Either the parent or the child,

but not both, may claim the credit for the child’s expenses in a particular year. If an individual claims the child as a dependent on his/her Federal income tax return for the year, only the individual may claim the Lifetime Learning Credit for the child’s qualified tuition and related expenses. If no one claims the child as a dependent on a Federal income tax return for the year, only the child may claim the Lifetime Learning Credit for the child’s expenses.

year in which the student takes money out of an Education IRA on a tax-free basis? A21: No. If a student is receiving a tax free distribution from an Education IRA in a particular taxable year, none of that student’s expenses may be claimed as the basis for a Hope Scholarship Credit for that taxable year. However, the student may waive the tax-free treatment of the Education IRA distribution and elect to pay any tax that would otherwise be owed on the Education IRA distributions received in any taxable year so that the student or the student’s parents may claim a Hope Scholarship Credit for expenses paid in the same year the Education IRA distributions are received.