Hope Scholarship is helpful even if it isn't a scholarship

Staying Ahead

November 23, 1998|By Jane Bryant Quinn | Jane Bryant Quinn,Washington Post Writers Group

I'VE GOTTEN a letter from a frustrated parent, Burton C. Bradshaw Jr., a machinist working for Union Camp Corp. in Franklin, Va.

He's rounding up college money for his daughter, who wants to study clinical psychology. She'll attend James Madison College in Harrisonburg, Va. For state residents, one semester's tuition and fees come to $2,128.

Bradshaw writes that he has heard about the new Hope Scholarship, a $1,500 tax credit. But he can't find out how to apply for it and the brochure the college sent him sheds no light. "It sounds like a real nice benefit, but nobody is telling us how to go about it," he says.

I'm not surprised that he's confused. The very name "scholarship," makes you want to hunt for an application form.

But it's not actually a scholarship. It's an income-tax credit aimed middle-income people. You pay the college the full amount you owe. When you file your tax return, you subtract the amount of your credit from the tax you owe. Effectively, the government gives you up to $1,500 back.

"We're hoping that the word 'scholarship' eventually gets phased out," says IRS spokesman Don Roberts.

Parents, by the way, aren't the only people trying to figure out the Hope. The schools are getting questions, too.

"If the schools aren't gearing up for this, they're really going to get blindsided at tax time," Jack Joyce of the College Scholarship Service in New York told my associate, Dori Perrucci.

To combat fraud, the schools will be sending the IRS the names and Social Security numbers of their students, plus the amount of tuition paid. The IRS will match them against the tax returns that claim the credit.

There are actually two new higher-education tax credits on offer.

The Hope credit goes to students in their first or second academic year, as long as they're enrolled at least half time. You can claim as many credits as you have qualified students. If your twins are freshmen, you get up to $3,000.

The credit equals 100 percent of the first $1,000 paid in tuition and fees and 50 percent of the second $1,000, for a total of $1,500, for qualified expenses since Jan. 1. (It can't be applied to other expenses, such as books, room, board and student activities.)

The Lifetime Learning credit can be taken by any student, of any age, for any number of years. It's available even for minimal study -- say, an adult-education course or a single course to improve your job skills.

Currently, the credit is worth up to $1,000 (20 percent of the first $5,000 paid in tuition and fees), for qualified expenses since July 1. You can take only one Lifetime Learning credit per tax return. If you have two students, you still get only $1,000.

Here are the eligibility rules for both tax credits:

They're for you, your spouse, or your dependent child. If you're divorced and claim your child as your dependent, but your spouse pays the tuition, neither of you gets the credit.

You can use them at qualified institutions of higher learning -- trade schools, community colleges, four-year schools.

Singles get the full credit if their adjusted gross income is under ,, $40,000. Between $40,000 and $50,000, the credit phases out. Marrieds get the full credit up to $80,000, phasing out at $100,000.

You can't use both credits at once, for a single student. But you can claim a Hope credit for one child and a Lifetime Learning credit for another, on the same tax return.

When you claim your child as a dependent, the credits go on your tax return, not the child's. When the child is independent, the child gets the credit if he or she also pays the tuition.

Warning: You have to pay the tuition in the calendar year when the credit is claimed, says Kalman Chany, president of Campus Consultants in New York. To claim a credit for the spring semester 1999, for example, pay after January. If you prepay in December 1998, you can only use any credit remaining for '98.

To get the most from this tax break, students who started school this fall should take the Lifetime Learning credit on their 1998 returns. Use the Hope credit in 1999, and again in 2000. That gets you three credits during the first two academic years. Starting in 2001, use the Lifetime Learning credit again.

Students starting a community college that costs them less than $1,000 might prepay the second-semester tuition before year's end. That maximizes what you spend in this calendar year, giving you the largest credit possible.

Pub Date: 11/23/98

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