Taxpayers can claim one or, in some cases, two new tax credits for expenses they pay for post-secondary education for themselves and their dependent children. These tax credits can directly reduce the amount of federal income tax for returns filed in 1999 or later. The Hope Scholarship Credit is available on a per-student basis for the first two years of post-secondary education, while the Lifetime Learning Credit applies on a tax-return basis and covers a broader time frame and range of educational courses. Education expenses paid for with tax-free grants, scholarships, and employer-education assistance are not eligible for either tax credit. Education expenses paid with loans are eligible for these tax credits.

Hope Scholarship Credit:
A tax credit equal to all of the first $1,000 of tuition and fees (less scholarships, grants, and tax-free tuition benefits) and half of the next $1,000 of tuition and fees is available to parents of dependent students or to students who are not claimed as dependents on their parents' return. The maximum credit of $1,500 will increase for inflation after 2001. The Hope credit can be claimed only for two tax years and applies only to the first two years of post-secondary education. Students must be enrolled at least half-time in a program that leads to a degree, certificate, or other educational credential during at least one academic period that begins during a tax year. Students cannot have had a drug felony conviction in a year that the credit applies. Education expenses paid on or after January 1, 1998 , are eligible for the Hope credit.

Lifetime Learning Credit:
This credit applies to tuition and fees for undergraduate, graduate, and continuing-education course work. A family can claim on its tax return a credit equal to 20 percent of $5,000 of educational expenses; so the maximum benefit is $1,000 each tax year. Eligible education expenses are offset by scholarships, grants, and other tax-free tuition benefits. Starting in 2003, the amount of eligible education expenses increases to $10,000, resulting in a $2,000 maximum tax credit. Education expenses paid on or after July 1, 1998 are eligible for the Lifetime Learning credit.

Who is eligible for the Education Tax Credits?
The full value of both education tax credits is available to married taxpayers filing jointly with an adjusted gross income (AGI) of $80,000 or less and to single taxpayers with an AGI of $40,000 or less. The tax credits phase out gradually. Once married taxpayers' AGI exceeds $100,000 or single taxpayers' AGI exceeds $50,000, they are not eligible for these credits. The income limits will be adjusted for inflation after 2001. Also, taxpayers cannot use both credits for the same student in a single year, nor may they combine these credits with tax-free withdrawals from education IRA's (see next page). Individuals should save their records of tuition and financial aid for tax purposes. Colleges and universities will need to collect Social Security numbers from all students so they can issue information reports to assist families when they file their taxes.

Academic Level For Tax Credits:
Hope Scholarship Credit is for the first two years of undergraduate school.
Lifetime Learning Credit is for undergraduate, graduate and individual courses.

For Example:
In the fall of 1998, Tom's wife, Jessica, returns to school when their son Mike starts at a community college. Their daughter Amy completes her second year in the spring of 1998 and returns to her private college for her junior year. When Tom and Jessica file their tax return for 1998, they can claim a $1,250 Hope credit for Mike based on his $1,500 tuition, a $1,500 Hope credit for Amy based on her second semester sophomore year tuition of $6,000, and a $200 Lifetime Learning credit based on the $1,000 tuition for Jessica's part-time graduate courses. The family's total education tax credits equal $2,950.

Tom & Jessica's Tax Credits in 1999
Mike   $1,000 + (50% of $500)	= $1,250
Amy   $1,000 + (50% of $1,000)	= $1,500
Jessica 20% of $1000	= $200
Total Credit	=$2,950

If Tom's family continues their studies in the following year, the total education tax credit for 1999 equals $2,250. It will be lower than in 1998 because they cannot claim the Hope credit for Amy's junior year. However, her tuition costs are eligible for a Lifetime Learning credit . Amy's and Jessica's combined tuition exceeds the $5,000 cap; so the maximum Lifetime Learning credit is $1,000. In his second year, Mike would still be eligible for the $1,250 Hope credit based on the $1,500 tuition at his community college.

For more information, consult the Internal Revenue Service.