Tax credits can be refundable or non-refundable. Non-refundable credits are only good against your actual tax bill. If, in the previous example, you owed the state only $400, you could claim only a $400 tax credit. You could not claim a refund for the additional $100 difference between the size of the credit and the size of your total state tax burden. Refundable credits, as their name implies, do allow such refunds. Even individuals who paid no taxes could receive a $500 payment if the aforementioned tax credit was designed to be refundable.
Hope Tax Credit
The HOPE legislation
allows eligible students pursuing the first two years of postsecondary
education to receive a tax credit for 100 percent of the first $1,000
of tuition and fees and 50 percent of the second $1,000 on their
federal income tax. Students must be enrolled at least half-time (6
credit hours) in a degree, certificate or other program leading to a
recognized education credential. The measure went into effect January
1, 1998, and applies to education provided and paid for in academic
periods beginning after that date.
The Clinton Administration made the HOPE Scholarship the centerpiece of its 1997 education/tax-cut package, vowing to make the first two years of college the new standard for U.S. students. The tax credit is one of a series of measures aimed at making a college education affordable to the majority of low- and middle-income citizens.
HOPE does come with a few strings attached. Individual filers who earn more than $50,000 (adjusted gross income), and joint filers with adjusted gross income exceeding $100,000 do not qualify. In addition, students who have been convicted of a felony for the possession or distribution of a controlled substance are ineligible. And, students who receive other forms of financial aid such as a Pell Grant will have the amount of their eligibility for HOPE reduced by the amount of aid they receive.
In addition to the HOPE tax credit, a number of other Tax Relief Act features make college the best buy it has been in years.
Life-long Learning Credit
College juniors, seniors, graduate students, adults returning to
college and students attending less than half time are eligible for a
new lifetime learning credit. The credit is worth 20 percent of the
first $5,000 of tuition and fees through 2002 and 20 percent of the
first $10,000 after that. The same income restrictions that apply to
HOPE are in effect for this benefit. The credit is available for
expenses paid after June 30, 1998.
Exemption of Employer-Provided Assistance
Section 127 of the IRS Code allows working adults to exclude annually
from taxable income up to $5,250 in employer-provided educational
assistance. The law is retroactive to May 31, 1997, and applies only
to undergraduate programs.
Deduction of Student Loan Interest
The new law allows a deduction of up to $2,500 per year of interest on
education loans for expenses of students enrolled in higher education.
The maximum deduction is $1,000 in 1999, increasing in $500 increments
until it reaches $2,500. The deduction is allowed only for the first
60 months of interest payments, and has income level restrictions
similar to the HOPE tax credit.
Saving Incentives
Now individuals may make penalty-free withdrawals from an IRA to pay
for higher education. The measure also creates education IRAs for
children under age 18. Annual contribution to these accounts is
limited to $500 per beneficiary.
Exemption of Scholarship and Tuition Remissions
Section 117 of the IRS Code excludes for taxable income amounts
received as a qualified scholarship, as well as tuition remission
support for relatives of employees of colleges and universities.
It is recommended that students considering the HOPE Scholarship contact their tax advisor to discuss the tax credit and how it might apply to them.
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