Publication 970
Tax Benefits for Education

For use in preparing 2002 Returns

Who Is an Eligible Student?

To claim the Hope credit, the student for whom you pay qualified tuition and related expenses must be an eligible student. This is a student who meets all of the following requirements.

1. Did not have expenses that were used to figure a Hope credit in any 2 earlier tax years.
2. Had not completed the first 2 years of postsecondary education (generally, the freshman and sophomore years of college) before 2002.
3. Was enrolled at least half-time in a program that leads to a degree, certificate, or other recognized educational credential for at least one academic period beginning in 2002.
4. Was free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of 2002.

These requirements are also shown in Figure 1-1.

Completion of first 2 years.   A student who was awarded 2 years of academic credit for postsecondary work completed before 2002 has completed the first 2 years of postsecondary education. This student would not be an eligible student for purposes of the Hope credit.

Any academic credit awarded solely on the basis of the student's performance on proficiency examinations is disregarded in determining whether the student has completed 2 years of postsecondary education.

Enrolled at least half-time.   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study.

Figure 1. Who Is an Eligible Student?

The standard for what is half of the normal full-time work load is determined by each eligible educational institution. However, the standard may not be lower than those established by the Department of Education under the Higher Education Act of 1965.

Who Can Claim a Dependent's Expenses?

If there are qualified higher education costs for your dependent for a year, either you or your dependent, but not both of you, can claim a Hope credit for that dependent's expenses for that year.

For you to claim a Hope credit for your dependent's expenses, you must also claim an exemption for that person. You do this by listing his or her name and other required information on line 6c, Form 1040 (or Form 1040A).

Expenses paid by dependent.   If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid by the student as if you had paid them. Include these expenses when figuring the amount of your Hope credit.

Qualified tuition and related expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent.

Expenses paid by others.   If someone other than you, your spouse, or your dependent (such as a relative or former spouse) makes a payment directly to an eligible educational institution to pay for an eligible student's qualified tuition and related expenses, the student is treated as receiving the payment from the other person. The student is treated as paying the qualified tuition and related expenses to the institution. If you claim an exemption on your tax return for the student, you are considered to have paid the expenses.

Example.   Ms. Allen makes a payment directly to an eligible educational institution in 2002 for her grandson Todd's qualified tuition and related expenses. For purposes of claiming a Hope credit, Todd is treated as receiving the money as a gift from his grandmother and, in turn, paying his qualified tuition and related expenses himself.

Unless an exemption for Todd is claimed on someone else's return, only Todd can use the payment to claim a Hope credit.

If anyone, such as Todd's parents, claims an exemption for Todd on his or her tax return, whoever claims the exemption may be able to use the expenses to claim a Hope credit. If anyone else claims an exemption for Todd, Todd cannot claim a Hope credit.

How Is the Credit Figured?

The amount of the Hope credit (per eligible student) is the sum of:

1. 100% of the first $1,000 of qualified tuition and related expenses you paid for the eligible student, and
2. 50% of the next $1,000 of qualified tuition and related expenses you paid for that student.

The maximum amount of Hope credit you can claim in 2002 is $1,500 times the number of eligible students. You can claim the full $1,500 for each eligible student for whom you paid at least $2,000 of qualified expenses. However, the credit may be reduced based on your modified adjusted gross income (MAGI). See Does the Amount of Your Income Affect the Amount of Your Credit, below.

Example.   Jon and Karen Frost are married and file a joint tax return. For 2002, they claim an exemption for their dependent daughter on their tax return. Their MAGI is $70,000. Their daughter is in her sophomore (second) year of studies at the local university. Jon and Karen paid qualified tuition and related expenses of $4,300 in 2002.

Jon and Karen, their daughter, and the local university meet all of the requirements for the Hope credit. Jon and Karen can claim a $1,500 Hope credit in 2002. This is 100% of the first $1,000 of qualified tuition and related expenses, plus 50% of the next $1,000.

Does the Amount of Your Income Affect the Amount of Your Credit?

The amount of your Hope credit is phased out (gradually reduced) if your MAGI is between $41,000 and $51,000 ($82,000 and $102,000 if you file a joint return). You cannot claim a Hope credit if your MAGI is $51,000 or more ($102,000 or more if you file a joint return).

Modified adjusted gross income (MAGI).   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return.

MAGI when using Form 1040A.   If you file Form 1040A, your MAGI is the AGI on line 22 of that form.

MAGI when using Form 1040.   If you file Form 1040, your MAGI is the AGI on line 36 of that form, modified by adding back any:

1. Foreign earned income exclusion,
2. Foreign housing exclusion,
3. Exclusion of income for bona fide residents of American Samoa, and
4. Exclusion of income from Puerto Rico.

You can use Worksheet 1-1 (see next page) to figure your MAGI.

Phaseout.   The phaseout, if any, can be figured in Part III of Form 8863 or as shown in the following example.

Example.   The information is the same as in the previous example for the Frosts, except that Jon and Karen have a MAGI of $88,000.

To figure their allowable credit, they multiply the tentative credit ($1,500) by a fraction. Because the Frosts are filing a joint return, the numerator of the fraction is $102,000 (the upper limit) minus their MAGI. The denominator is $20,000, which is the range of incomes for the phaseout ($82,000 to $102,000). The result is the amount of their Hope credit ($1,050).

How Is the Credit Claimed?

You claim the Hope credit by completing Parts I and III of Form 8863 and submitting it with your Form 1040 or 1040A. Enter the credit on Form 1040, line 48, or Form 1040A, line 31. A filled-in Form 8863 is shown in the Illustrated Example at the end of this chapter.

An eligible educational institution (such as a college or university) that received payment of qualified tuition and related expenses in 2002 generally must issue Form 1098-T, Tuition Payments Statement, to each student by January 31, 2003. The information on Form 1098-T will help you determine whether you can claim an education tax credit for 2002. The eligible educational institution may ask for a completed Form W-9S, Request for Student's or Borrower's Social Security Number and Certification, or similar statement to obtain the student's name, address, and taxpayer identification number.

When Must the Credit Be Repaid (Recaptured)?

If, after you file your 2002 tax return, you receive tax-free educational assistance for, or a refund of, an expense you used to figure a Hope credit on that return, you may have to repay all or part of the credit. You must refigure your Hope credit for 2002 as if the assistance or refund was received in 2002. Subtract the amount of the refigured credit from the amount of the credit you claimed. The result is the amount you must repay. You add the repayment (recapture) to your tax liability for the year you receive the assistance or refund (see the instructions for your tax return for that year). Your original 2002 tax return does not change.

Illustrated Example

Jim Grant, a single taxpayer, enrolled full-time at a local college to earn a degree in computer science. This is the first year of his postsecondary education. During 2002, he paid $1,600 for his qualified 2002 tuition. He and the college meet all of the requirements for the Hope credit. Jim's MAGI is $32,000. His income tax liability, before credits, is $3,345. He figures his credit of $1,300 as shown on the Form 8863 on the next page.

Note.   In Appendix A at the end of this publication there is an example illustrating the use of Form 8863 when both the Hope credit and the lifetime learning credit are claimed on the same tax return.

Form 8863 for Jim Grant

- Continue -