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Several new tax benefits are available to help families meet the cost of post-secondary education. These tax benefits are intended to help students and their parents, as well as all working Americans, to fulfill a variety of educational objectives.
Taxpayers can claim one or, in some cases, two new tax credits for expenses they pay for postsecondary education for themselves and their dependent children. These tax credits can directly reduce the amount of federal income tax for returns filed in 1999 or later. The Hope Scholarship Credit is available on a per-student basis for the first two years of postsecondary education, while the Lifetime Learning Credit applies on a tax-return basis and covers a broader time frame and range of educational courses. Education expenses paid for with tax-free grants, scholarships, and employer provided education assistance are not eligible for either tax credit. Education expenses paid with loans are eligible for these tax credits.
Hope Scholarship Credit
A tax credit equal to all of the first $1,000 of tuition and fees (less scholarships, grants, and tax-free tuition benefits) and half of the next $1,000 of tuition and fees is available to parents of dependent students or to students who are not claimed as dependents on their parents' return. The maximum credit of $1,500 will increase for inflation after 2001. The Hope credit can be claimed only for two tax years and applies only to the first two years of postsecondary education. Students must be enrolled at least half time in a program that leads to a degree, certificate, or other educational credential during at least one academic period that begins during a tax year. Students cannot have had a drug felony conviction in a year that the credit applies. Education expenses paid on or after January 1, 1998, are eligible for the Hope Credit
Lifetime Learning Credit
This credit applies to tuition and fees for undergraduate, graduate, and continuing education coursework. A family can claim on its tax return a credit equal to 20 percent of $5,000 of educational expenses; the maximum benefit is $1,000 each tax year. Eligible education expenses are offset by scholarships, grants, and other tax-free tuition benefits. Starting in 2003, the amount of eligible education expenses increases to $10,000, resulting in a $2,000 maximum tax credit. Education expenses paid on or after July 1, 1998, are eligible for the Lifetime Learning Credit.
For more information IRS Publication 970, Tax Benefits for Higher Education, and Publication 520, Scholarships and Fellowships, are available from the IRS Web site at http://www.irs.ustreas.gov or by calling 1-800-TAX-FORM.
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