The Hope Scholarship Credit

If you, your spouse, or a dependent for whom you claim an exemption was enrolled at least half-time in the first or second year of college in 2005, you may benefit from the Hope Scholarship credit.

The credit is for the first $1,000 of qualified expenses incurred by the student, and 50 percent of the next $1,000, so that the full credit of $1,500 applies if the student has at least $2,000 in expenses.

Did You Know? The Gulf Opportunity Zone Act of 2005 doubles the Hope Scholarship credit, as well as the Lifetime Learning credit, for individuals who attend an eligible educational institution in the Hurricane Katrina GO Zone (i.e., a presidentially declared disaster area affected by Hurricane Katrina) for any tax year beginning in 2005 or 2006. The Hope credit for qualifying students will be $3,000. In addition, certain room and board expenses qualify. Colleges and universities in New Orleans and along the Gulf Coast suffered extensive damage from Hurricane Katrina. Thousands of students were displaced to other schools. It is hoped that doubling these credits will persuade many temporary transfer students to return to the New Orleans and Gulf Coast. These credits are not limited to students who return; students new to the area also qualify.

The Hope credit is available for each student in your family who meets the qualifications:

• he or she is enrolled in the first or second year of postsecondary education
• is enrolled in a program that leads to a degree, certificate, or other recognized academic credential
• is taking at least one-half of the normal full-time load of classes, for at least one academic period beginning during the calendar year
• has not been convicted of a drug-related felony

The only expenses that count toward the credit are tuition and fees required for attendance. Generally, the expenses can be deducted in the year the class begins, if the expenses were paid during that year. However, if you prepay expenses during one year, for a course that begins in the first three months of the following year, you can count those expenses toward the credit in the year they were paid.

Eligible institutions are any accredited public, nonprofit, or for-profit postsecondary institution eligible to participate in federal student aid programs.

Claiming the credit. To claim the Hope Scholarship credit (or the Lifetime Learning credit) you must complete IRS Form 8863, Education Credits, and attach it to your Form 1040 or 1040A. These credits are subtracted from your tax bill after the credit for child and dependent care expenses, the credit for the elderly and the disabled, and the child tax credit - and if all these credits reduce your tax bill to zero, you will lose any unclaimed amount of the education credits, because they may not be carried over into a subsequent year.

Be aware that there is a phaseout of the credit for those with higher income levels.