Understanding current tax rules regarding higher education expenses help students and parents save thousands of dollars.
Definition and Examples of the Hope Credit
The Hope Credit was a tax credit for college students that offered up to $1,500 (increased over time to $1,800) that students could claim for the first two years of higher education. The credit was created as part of the Taxpayer Relief Act of 1997 and was in effect from 1998 to 2008:
Alternate definition: The state of Georgia offers similar aid programs with a similar name, including the HOPE Scholarship, HOPE Grant, HOPE GED Grant, and HOPE Career Grant, although these are not tax credits Alternate name: Hope Scholarship Credit
An example: A student paid $1,500 in September 2007 for the semester’s tuition. If she qualifies, she could use that $1,500 expense to claim the Hope Credit on her taxes the following April.
How the Hope Credit Worked
The Hope Credit allowed higher education students—or parents who claimed students as their dependents—to reduce taxes owed on paying qualified educational expenses, like tuition. This program targeted more traditional full-time students attending college for the first time and those attending community college. The Hope Credit, and now the AOTC, is available to students who:
Hadn’t yet finished the first two years of postsecondary education Enrolled in a program leading to a degree, certificate, or other recognized credentialEnrolled at least half time in the course of study for at least one academic period Hadn’t been convicted of a felony for possessing or distributing a controlled substance
Throughout its existence, calculating the tax credit meant taking 100% of the first amount in qualified expenses and then 50% of the next amount. In 1999, that meant applying 100% of the first $1,000 plus 50% of the next $1,000 of qualified tuition and related expenses. Inflation influenced the qualifying amounts, so by 2008, the tax credit was 100% of the first $1,200 and 50% of the next $1,200. To claim the full $1,800, a taxpayer needed to spend at least $2,400 on qualified educational expenses. At the time, taxpayers first received a 1098-T Tuition Statement, then filled out Form 8863 to claim the Hope Credit and submitted with income taxes.
Hope Credit vs. American Opportunity Tax Credit
Here are some differences between the older Hope Credit and the newer American opportunity tax credit. The 2009 stimulus bill, however, changed the Hope Credit. The American Opportunity tax credit allows a tax credit of up to $2,500 per year for four years. The expanded credit is an incentive for community college students straining to pay third- and fourth-year expenses after a college transfer.
