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Hope Scholarship & Lifetime Learning Tax Credits Information

Attending a North Carolina community college is more affordable than ever. Tuition at North Carolina's community colleges is among the lowest in the country. Also, federal Pell Grants provide financial assistance to many students attending one of our 58 community colleges.

In addition to federal assistance available, the North Carolina General Assembly provides a generous financial aid fund for community college students. Need-based grants are available to full-time and part-time students.

Students with qualifying income levels can also take advantage of federal tax incentives to make attending a North Carolina community college even more financially attainable. The Hope Scholarship and Lifetime Learning Tax Credits are available to community college students.

The Hope Scholarship tax credit may be claimed for payments of qualified tuition and related expenses made on or after January 1, 2005, for academic periods beginning on or after January 1, 2005.

The Lifetime Learning Credit may be claimed for the same expenses made on or after January 1, 2005. In any one tax year, you may claim either the Hope Scholarship tax credit or the Lifetime Learning Credit for a student's expenses. If you pay qualified expenses for more than one dependent student, you may choose which tax credit to take for each student.

For the Hope Scholarship, a taxpayer may claim a credit of 100 percent of the first $1,000 of out-of-pocket expenses for each student's qualified tuition and related expenses plus 50 percent of the next $1,000. Thus the maximum credit a taxpayer may claim for a taxable year is $1,500 multiplied by the number of students in the family who meet the enrollment criteria.

For the Lifetime Learning Credit, the credit amount is equal to 20 percent of the taxpayer's first $10,000 of out-of-pocket qualified tuition and related expenses. The maximum for a taxable year is $2,000. The Lifetime Learning Credit is calculated on a per-family rather than a per-student basis. The amounts a taxpayer may claim are gradually reduced based on their income.

Credit may be claimed for the qualified tuition and related expenses of each student in the taxpayer's family (i.e., the taxpayer, the taxpayer's spouse, or an eligible dependent).

The Hope Scholarship credit may be claimed for the student who meets the following requirements:

• Has not completed the first two years of community college;
• Is enrolled in a program that leads to a degree, certificate, or other recognized educational credential;
• Is taking at least one-half the normal full-time workload in a course of study for the academic period during the calendar year; and
• Has never been convicted of a felony for possessing or distributing a controlled substance.

Who is eligible for the Lifetime Learning Credit?

• The Lifetime Learning Credit is not based on the student's workload. It is allowed for one or more courses.
• The Lifetime Learning Credit is not limited to students in the first two years of post secondary education.
• Expenses for graduate-level degree work are eligible.
• There is no limit on the number of years for which the Lifetime Learning Credit can be claimed for each student.
• The amount you can claim as a lifetime learning credit does not vary based on the number of students for whom you pay qualified expenses.
• Nonresident aliens who did not elect to be treated as a resident alien for tax purposes are not eligible for either tax credit. More information can be found in Publication 519, U.S. Tax Guide for Aliens.
  

Individuals may claim the credit for their own qualified tuition and related expenses and the qualified tuition and related expenses for his/her spouse and other eligible dependents (including children) for whom the dependency exemption is claimed. Generally, parents may claim the dependency exemption for their unmarried child if:

1. The parent supplies more than half the child's support for the taxable year, and
2. The child is under age 19 or is a full-time student under age 24.

Taxpayers with a modified adjusted gross income (MAGI) of up to $43,000 for single filers and $87,000 for joint filers may be eligible for the full tax credit. Education credit is gradually phased out for joint filers between $87,000 and $107,000 of income, and for single filers between $43,000 and $53,000. See the 2005 IRS Form 8863 for the revised AGI limits.

You cannot claim any higher education credits if your modified adjusted gross income is $53,000 or more for a single return ($107,000 for a joint return).

To apply for the credit, the taxpayer must figure the amount of education credits by completing IRS Form 8863. Use Part I for the Hope Scholarship credit and Part II for the Lifetime Learning Credit. In both parts, enter the student's name and taxpayer identification number (usually a social security number) and the amount of qualified expenses paid in 2005. Then complete Part III to compute the amount to enter on line 44 of Form 1040 or line 29 of 1040A. Attach the completed IRS Form 8863 to your return.

The community college will send you Form 1098-T, a statement of payment of qualified tuition and related expenses and other information, by January 31, 2006.

Information on Form 8863 will help you determine whether you qualify for an education tax credit for 2005. If you do qualify, the following information should be included on the 2005 form:

1. The name, address, and taxpayer identification number of the community college.
2. The name, address, and taxpayer identification number of the student.
3. Whether the student was enrolled for at least half of the full-time academic workload.

Your community college may ask for a completed Form W-9S, Request for Student's or Borrower's Social Security Number and Certification, or similar statement, to obtain the information needed to complete #2 above.

Further information and examples are available in the IRS publication 970.(Chapter 35 – Education Credits)

This information is not a substitute for professional tax advice.