As of January 1, 1998, taxpayers, if eligible, were able to claim, Hope Scholarship Credit, and/or Lifetime Learning Tax Credit; and deduct student loan interest paid. Below is a brief explanation of each program with frequently asked questions. For detailed information, refer to Internal Revenue Service Publication 970.
Temple University has contracted with the Tax Credit Reporting Service (TCRS) to handle inquiries pertaining to the Hope Scholarship and Lifetime Learning credit process. Students may contact TCRS at their web site www.1098-t.com to review their individual information concerning tax credits or to print a duplicate 1098-T form. If you have specific questions that cannot be answered on the web, their toll free telephone number is 1-877-467-3821.
Hope Scholarship Credit
This credit can be claimed for qualified tuition and related expenses for each student in the taxpayer's family who is enrolled at least half time in one of the first two years of post-secondary education. The student(s) must be enrolled in a program leading to a degree, certificate, or other recognized credential. The amount that may be claimed is generally equal to:
- 100% of the first $1,000 of the taxpayer's out-of-pocket expenses for each student's qualified tuition and expenses, plus
- 50% of the next $1,000 of the taxpayer's out-of-pocket expenses for each student's qualified tuition and expenses
As a result the maximum credit a taxpayer can claim for a taxable year is $1,500 multiplied by the number of students in the family who meet the enrollment criteria above. The amount a taxpayer may claim as a Hope Scholarship Credit is gradually reduced for taxpayers that have a modified adjusted gross income between $40,000 and $50,000 ($80,000 and $100,000 for married taxpayers filing jointly). Taxpayers who income exceed the limits above may not claim the Hope Scholarship Credit
- May an individual claim a Hope Scholarship Credit for paying qualified tuition and related expenses for other family members?
Yes. The credit can be claimed for your own qualified tuition and related expenses and/or the qualified tuition and expenses of your spouse or other eligible dependent for whom you claim the dependency exemption.
- What are the eligibility requirements for the student?
Generally a parent can claim the dependency exemption for their unmarried child if the parent supplies more than half of the child's total support for the taxable year, and the child is under 19 or a full-time student under age 24.
- What expenses are included in qualified tuition and related expenses?
A student is eligible for the Hope Scholarship Credit if: For at least one academic period beginning during the calendar year, the student is enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential and is enrolled in one of the first two years of post-secondary education, and The student is free of any conviction for a Federal or State felony offense consisting of the possession or distribution of a controlled substance. "Qualified and related expenses" means the tuition and fees an individual is required to pay in order to be enrolled at or attend an eligible institution. Amounts paid for any course or other education involving sports, games, or hobbies are not eligible for the credit, unless the course is part of the student's degree program. Charges and fees associated with room, board, student activities, athletics, insurance, books, equipment, transportation, and other similar personal, living or family expenses do not qualify.
- Is there a limit to the number of times a taxpayer can claim the credit for one student?
Yes. The credit may be claimed no more than two years for each student, no matter how long it takes a student to advance to the next grade level.
Lifetime Learning Credit
The Lifetime Learning Credit may be claimed for qualified tuition and related expenses of the students in a taxpayer's family who are enrolled in eligible institutions. Through 2002, the amount that may be claimed as a credit is equal to 20% of the taxpayer's first $5,000 of out-of-pocket qualified tuition and related expenses for all of the students in the family. The maximum credit a taxpayer can claim for a taxable year is $1,000 through 2002 and $2,000 thereafter. The amount a taxpayer may claim as a Lifetime Learning Credit is gradually reduced for taxpayers that have a modified adjusted gross income between $40,000 and $50,000 ($80,000 and $100,000 for married taxpayers filing jointly). Taxpayers who income exceed the limits above may not claim the Lifetime Learning Credit.
- Who is able to claim the Lifetime Learning Credit?
An individual paying qualified tuition and related expenses at a postsecondary educational institution may claim the credit, provided the institution is an eligible institution. Students are not required to be enrolled at least half-time in one of the first two years of postsecondary education.
- Can a Taxpayer claim a lifetime Learning Credit for more than one family member?
Yes. However it is calculated on a per family, rather than per student basis. Therefore the maximum available credit does not vary with the number of family members and is capped at $1,000.
Student Loan Interest Deduction
The Taxpayer Relief Act of 1997 restores the deduction for interest paid on student loans. This new tax break can significantly reduce the cost of repaying loans issued under the Federal Family Education Loan Program, but it does come with a few strings. The following Q&A has been prepared to help answer general questions on whether and how borrowers can take advantage of the student loan interest deduction. Clearly, their ability to claim this tax break depends on their individual circumstances. To determine whether they can benefit from the deduction, borrowers are urged to consult a qualified accountant or tax adviser.
- Just how much interest can borrowers deduct?
Federal Tax Year Maximum Deduction
| 1998 |
$1,000 |
| 1999 |
$1,500 |
| 2000 |
$2,000 |
| 2001 & thereafter |
$2,500 |
The deduction is only available for interest payments made during the first 60 months of repayment. After 2001, the maximum deduction will remain at $2,500. Under the statue, the limit will not be adjusted to take into account the effects of inflation.
- How much can a borrower save by taking advantage of this tax deduction?
Taxpayers who enter repayment in 1998 or later can deduct as much as $9,500 to $12,500 in student loan interest paid over a five-year period. For a borrower in the 15 percent tax bracket, this deduction translates into potential, cumulative tax savings of $1,425 to $1,875. For a taxpayer in the 28 percent tax bracket, the deduction could reduce the amount of tax paid over five years by as much as $2,660 to $3,500. Just how much an individual borrower can expect to save depends on the amount borrowed, the interest rate charged, the length of the payback period, and the borrower's tax bracket.
- Who is eligible to take the deduction?
In general, the deduction is available to any borrower with a "qualified" education loan who meets the required income test. The borrower may be a student or the parent or spouse of the student whose studies are funded by the loan. A student cannot file for the deduction if he or she is claimed as a dependent on a parent's tax return. A married borrower must file a joint tax return to claim the deduction.
- What are the income limits?
The government applies different income limits, depending on the borrower's marital status. The income limits take into account the borrower's adjusted gross income.* Single borrowers who report adjusted gross incomes of $40,000 or less will be able to take the full deduction. The deduction will be phased out for single taxpayers earning $40,000 to $55,000. Those earning $55,000 or more will not be eligible to deduct any student loan interest. For example, a single borrower reporting an AGI of $47,500 would be eligible to take 50 percent of the maximum deduction. Thus, the borrower could deduct up to $500 in student loan interest paid in 1998. Many, if not most, single college graduates can expect to qualify for the deduction, in full or in part. According to the annual, starting salary survey conducted by the National Association of Colleges and Employers, members of the Class of 1997 typically can anticipate job offers ranging from $23,000 to $44,000. Married taxpayers who report incomes of $60,000 or less can take the full deduction. The deduction will be gradually reduced for couples reporting annual adjusted gross incomes of $60,000 to $75,000. The interest deduction is not available to married taxpayers who earn $75,000 or more a year. The income list is based on a modified adjusted gross income. However, student borrowers should be able to use their unmodified AGI to estimate their eligibility for the interest deduction.
- Will the income limits be adjusted for inflation?
Yes, but the annual adjustments will not begin until 2003. The new law stipulates that the adjusted income level must be rounded down to the nearest multiple of $5,000.
- What loans qualify for the deduction?
A loan is eligible if the proceeds are used to fund direct higher education expenses. These expenses are limited to tuition, fees, books, equipment, and room and board. Eligible loans, thus, would include:
- Federal Stafford Loans
- Federal PLUS Loans
- Federal and Direct Consolidation Loans
- Federal Perkins Loans
- Loans issued under the federal loan programs for health-care professionals
- Education loans issued by banks and other private lenders
- Loans issued to students or parents by schools
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Are there any loans that are not eligible?
Borrowers cannot deduct the interest they pay on personal loans they receive from a relative.
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When does the deduction take effect?
Taxpayers may deduct interest paid on or after January 1, 1998. Thus, taxpayers may start claiming the deduction in 1999, when they file their federal income tax returns for 1998. Does the taxpayer have to itemize deductions to claim the student loan deduction? No. Borrowers will be able to claim the deduction whether or not they itemize their deductions. Tax filers who use the so-called short form will be able to deduct their student loan interest payments.
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Is there a limit on how long a borrower can claim the deduction?
Yes. A taxpayer currently can deduct the interest paid during the first 60 months of a loan's repayment period. This 60-month period does not include any periods of deferment or forbearance.
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Is a borrower who is already in repayment eligible to take the interest deduction?
Yes. Subject to the income test, a borrower may deduct the interest-portion of any loan payments made on or after January 1, 1998, provided that the borrower is still in the first 60 months of repayment.
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Can a borrower renew the deduction eligibility by consolidating his or her loans?
No. Any months spent in repayment before the borrower's loans were consolidated will count toward the 60-month limit for the deduction. Consider, for example, a borrower who begins repayment of $20,000 in Stafford loans in January 1998, but two years later consolidates the remaining balance of the loans. The borrower will be able to deduct the interest paid on the unconsolidated loans in 1998 and 1999. In addition, the borrower will be able to deduct the interest paid on the consolidation loan during the years 2000, 2001 and 2002.
- How will the borrower know how much interest to deduct each year?
Lenders will provide borrowers with an annual statement, listing interest paid during the tax year. To determine whether you can benefit from the deduction, you are urged to consult your nearest Internal Revenue Service office or tax accountant. The Internal Revenue Service, Notice 97-60, has provided all information regarding the Educational Tax Credits.
- What about home equity loans?
Interest on home equity loans or home equity lines of credit is already deductible, subject to certain limits. Taxpayers who claim the home equity deduction cannot deduct this interest under the student loan deduction.
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