What Was the Hope Credit?
The Hope Credit, or the Hope Scholarship Tax Credit, was a nonrefundable education tax credit offered to eligible American taxpayers. Qualifying students could claim this tax credit for their first two years of postsecondary education.
The Hope and other lifetime learning credits were enacted to encourage higher education and provide a measure of tuition reimbursement for parents (or students) who are paying college tuition and fees.
The American Opportunity Tax Credit (AOTC) replaced the Hope Credit in tax year 2009.
- The Hope Credit allowed eligible students to qualify for a maximum $1,800 income tax credit for the first two years of college.
- This credit was a nonrefundable tax credit that can only reduce a taxpayer’s liability to zero; any amount that remains from the credit is automatically forfeited by the taxpayer.
- To qualify, taxpayers were subject to eligibility requirements such as the income thresholds of the household and the enrollment status of the student.
- In 2009, the American Opportunity Tax Credit replaced the Hope credit.
The Basics of the Hope Credit
The Hope Credit was one of two nonrefundable education credits available for taxpayers. Recipients could take the Hope Credit for tuition and fees and other expenses such as books. Room and board, medical expenses, and insurance do not qualify for the Hope Credit. The student incurring the expenses could have been either the taxpayer, spouse, or dependent.
The other available credit is the Lifetime Learning Credit, which could not have been claimed with the Hope Credit.
As of 2009, the Hope Credit became part of the American Opportunity Tax Credit (AOTC).
As of 2022, the maximum AOTC credit is $2,500. Any individual who incurs qualifying educational expenses can claim an education credit. Qualifying educational expenses include tuition and fees. Parents who pay tuition and fees for their children can claim this type of credit on their tax returns, subject to certain income restrictions.
When the Hope Credit was expanded and renamed the American Opportunity Tax Credit, a portion of the tax credit also became refundable. This means if the credit brings the amount of tax the taxpayer owes to zero, they can have 40% of the remaining amount of the credit (up to $1,000) refunded to them.
Special Considerations: Education Tax Credits
The American Recovery and Reinvestment Act (ARRA) expanded the Hope Credit in 2009. This made the credit more accessible to parents and students. Now more people qualify for the Hope Credit under the auspices of the American Opportunity Tax Credit. The AOTC made the Hope Credit available to a broader range of taxpayers, expanding eligibility to those with higher incomes and those who owe no tax. The tax is available to individuals with a modified adjusted gross income (MAGI) of $80,000 or less ($160,000 or less for joint filers).
The IRS considers a student qualified if they are enrolled at an accredited postsecondary institution at least part-time in one academic year. That student must still be enrolled at the institution at the beginning of the tax year, taking courses toward a degree or another recognized educational qualification, and must not have been convicted of any felony drug offense by the end of the tax year.
Taxpayers can claim the credit for up to four years of postsecondary education to reduce the costs of tuition and other eligible expenses. According to the IRS, a qualified educational expense includes tuition paid to the school and expenses for books, supplies, and equipment that may have been bought from external sources. These expenses qualify if taxpayers use student loans to pay for them but not if they use scholarships, grants, or funds from a 529 savings plan.