The Hope Credit is one of the lifetime education tax credits in the U.S. that provides financial assistance to taxpayers or their children who are pursuing post-secondary education. The creation of the Hope Credit, under the Tax Relief Act of 1997, was meant to provide a college tuition tax credit to taxpayers from lower- and middle-income families.
The enactment of the Hope Credit and other forms of permanent learning credits reflected a desire to increase attendance at post-secondary educational institutions by lowering tuition costs for parents.
The Hope Credit is designed to provide tax credits to make higher education affordable for taxpayers and their children.
As part of the Tax Relief Act of 1997, the Hope Credit serves as an alternative for education aid programs that cover tuition fees and other expenses required to attain higher education.
The eligibility requirements associated with the tax benefit are dependent on the type of postsecondary education pursued, the number of courses, and the type of expenses.
History of the Hope Credit
The Hope Credit came into being as part of the Tax Relief Act of 1997 and signed into law by then-President Bill Clinton. The provision was in the form of two education tax credits – the Hope Credit and the Lifetime Learning Credit – designed to allow taxpayers to offset the burden of higher education costs.
The Hope Credit and other forms of college education credits evolved to provide an alternative to education aid programs and to reduce the financial burden required for enrolling in post-secondary educational institutions. It is available for eligible students to counterbalance tuition fees and other school expenses, such as costs for purchasing course materials. However, a number of the expenses – such as travel costs, insurance, medical expenses, among others – do not qualify for the education credit.
Qualified Expenses in the Hope Credit
Beneficiaries of the Hope Credit receive up to a maximum of $1,500 credit per year – which is adjustable for inflation – for tuition costs for the first two years of post-secondary education. The payment covers the first $1,000 for qualified expenses and 50% of the second $1,000.
Those who are ineligible for or already exhausted the Hope Credit can apply for the Lifetime Learning Credit. However, the latter education credit differs from the former, in that it allows for a single or more courses, allows an unlimited number of years in which to claim credit, and can be claimed even for the non-degree courses taken to improve job skills.
Parents who shoulder the tuition fees of their children can use the inclusion of qualifying educational expenses to claim the Hope Credit on their tax returns, subject to some limitations. Parents are usually required to claim a Hope Tax Credit using Form 1040 or 1040A, alongside Form 8863 (Education Credits).
Beneficiaries of the Hope Credit
The core objective of the Hope Credit was to provide financial assistance to students from middle-income families. Still, it also benefited even the lower-income and the upper-middle-income taxpayers since it is awarded based on the adjusted gross income (AGI) level.
The Hope Credit reduces the tax burden of the value of the credit, but, in essence, cannot offer tax relief below zero. Hence, sufficient income is needed for a taxpayer to owe taxes and eventually qualify for claiming benefits. Several restrictions apply to the Hope Credit, which students must meet to be eligible for the education credit:
Must be enrolled in a program that leads to a certificate, degree, or any other recognized post-secondary education credential
Must be enrolled in one of the first two years of trade of higher education in which they may receive an education
Must not be a convict of any federal or state felony for distributing or possessing controlled drugs
Must be taking at least half of the full-time course requirements for at least one full academic year
From the Hope Credit to AOTC
In 2009, the Hope Credit was temporarily extended to the American Opportunity Tax Credit (AOTC) as part of the American Recovery and Reinvestment Act (ARRA). It was aimed at reducing taxpayers’ income taxes by up to $2,000 for each eligible beneficiary. As a result, several parameters of the Hope Credit were modified.
The American Opportunity Tax Credit was further extended to 2011 and 2012, and subsequently for five more years. The AOTC became permanent after the Protecting Americans from Tax Hikes (PATH) Act was introduced, eliminating the Hope Credit.
As with the Hope Credit, the new education credit phases for individuals with income above certain limits. Specifically, the credit is available for taxpayers with modified adjusted gross income exceeding $80,000. For a couple filing jointly, the AOTC begins to phase out the tax when income is over $160,000. What sets the Hope Credit and the AOTC apart is that the latter is refundable, meaning individuals with little to no tax liability may still benefit.
Impact of the Hope Credit
The introduction of education credits in the U.S. to lower tuition costs have increased college attendance. Specifically, the Hope Credit and the Lifetime Learning Credit have been effective in boosting college attendance when set alongside other education incentives. From an economic perspective, the Hope Credit promotes desired behavior among individuals – in such cases, pursuing post-secondary education; hence, it is an effective tax policy.
Even so, some experts have voiced concerns that increasing college attendance has little to do with the education tax credits, especially for the primary beneficiaries. Thus, the Hope Credit may be benefiting taxpayers who would have pursued post-secondary education without it.
Analysts have claimed that the main purpose of education tax credits was to provide tax relief that would be popular with the upper- and middle-income family voters, as opposed to enhancing college attendance.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: