The Taxpayer Relief Act of 1997 created two types of tax credits for families to offset tuition costs. These are nonrefundable tax credits, not scholarships, that reduce the amount of federal income tax families must pay. Families who will benefit are middle- and lower-middle-income families who do not receive enough gift aid to cover tuition payments.
The Hope tax credit is valued up to $1,500 per tax year, per child, for the first two years of undergraduate study. The Lifetime tax credit is up to $2,000 per year, per family, for an unlimited number of years. The credit varies according to family income, tuition costs and amount of gift assistance received.
To be eligible, a taxpayer must file a tax return, must owe taxes and must claim the student as an exemption (self, spouse or dependent). Additionally, married filers must file jointly. The tax credit is phased out completely for single tax filers with adjusted gross incomes of more than $51,000 and more than $103,000 for joint filers. Tax filers should contact their tax adviser for details.