Hope Credit

You may be able to claim a Hope credit of up to $1,500 for qualified tuition and related expenses paid for each eligible student.

Eligible Student

For purposes of the Hope credit, an eligible student is a student who meets all of the following requirements.

1. Did not have expenses that were used to figure a Hope credit in any 2 earlier tax years.
2. Had not completed the first 2 years of postsecondary education (generally, the freshman and sophomore years of college) before 2002.
3. Was enrolled at least half-time in a program that leads to a degree, certificate, or other recognized educational credential for at least one academic period beginning in 2002.
4. Was free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of 2002.

Completion of first 2 years.   A student who was awarded 2 years of academic credit for postsecondary work completed before 2002 has completed the first 2 years of postsecondary education. This student would not be an eligible student for purposes of the Hope credit.

Any academic credit awarded solely on the basis of the student's performance on proficiency examinations is disregarded in determining whether the student has completed 2 years of postsecondary education.

Enrolled at least half-time.   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study.

The standard for what is half of the normal full-time work load is determined by each eligible educational institution. However, the standards may not be lower than those established by the Department of Education under the Higher Education Act of 1965.

Amount of Credit

The amount of the Hope credit (per eligible student) is the sum of:

1. 100% of the first $1,000 of qualified tuition and related expenses you paid for the eligible student, and
2. 50% of the next $1,000 of qualified tuition and related expenses you paid for that student.

The maximum amount of Hope credit you can claim in 2002 is $1,500 times the number of eligible students. You can claim the full $1,500 for each eligible student for whom you paid at least $2,000 of qualified expenses. However, the credit may be reduced based on your modified adjusted gross income (MAGI). See Does the Amount of Your Income Affect the Amount of Your Credit, earlier.

Example.   Jon and Karen are married and file a joint tax return. For 2002, they claim an exemption for their dependent daughter on their tax return. Their MAGI is $70,000. Their daughter is in her sophomore (second) year of studies at the local university. Jon and Karen paid qualified tuition and related expenses of $4,300 in 2002.

Jon and Karen, their daughter, and the local university meet all of the requirements for the Hope credit. Jon and Karen can claim a $1,500 Hope credit in 2002. This is 100% of the first $1,000 of qualified tuition and related expenses, plus 50% of the next $1,000.

How to figure the credit.   The Hope credit is figured in Parts I and III of Form 8863. An illustrated example using Form 8863 appears at the end of this chapter.

Lifetime Learning Credit

You may be able to claim a lifetime learning credit of up to $1,000 for qualified tuition and related expenses paid for all eligible students enrolled in eligible educational institutions.

The lifetime learning credit is different from the Hope credit in the following ways.

1. The lifetime learning credit is not based on the student's work load. It is allowed for one or more courses.
2. Expenses for undergraduate- and graduate-level degree work are eligible. Also eligible for the lifetime learning credit are nondegree courses taken to acquire or improve job skills.
3. Expenses related to a course of instruction or other education that involves sports, games, hobbies, or other noncredit courses are eligible for the lifetime learning credit if they are part of a course of instruction to acquire or improve job skills.
4. There is no limit on the number of years for which the lifetime learning credit can be claimed for each student. It is not limited to students in the first 2 years of postsecondary education.
5. The amount you can claim as a lifetime learning credit does not change based on the number of students for whom you pay qualified expenses.

Amount of Credit

The amount of the lifetime learning credit is 20% of the first $5,000 of qualified tuition and related expenses you paid for all eligible students. The maximum amount of lifetime learning credit you can claim for 2002 is $1,000 (20% × $5,000). However, that amount may be reduced based on your modified adjusted gross income (MAGI). See Does the Amount of Your Income Affect the Amount of Your Credit, earlier.

Example.   Bruce and Toni are married and file a joint tax return. For 2002, their MAGI is $50,000. Toni is attending the community college (an eligible educational institution) to earn credits toward an associate's degree in nursing. She already has a bachelor's degree in history and wants to become a nurse. In August 2002, Toni paid $4,000 for her fall 2002 semester. Bruce and Toni can claim an $800 (20% × $4,000) lifetime learning credit on their 2002 joint tax return.

How to figure the credit.   The lifetime learning credit is figured in Parts II and III of Form 8863. An illustrated example using Form 8863 appears at the end of this chapter.

Choosing Which Credit To Claim

For each student, you can elect for any tax year only one of the credits. For example, if you elect to take the Hope credit for a child on your 2002 tax return, you cannot, for that same child, also claim the lifetime learning credit for 2002.

Tax credit for one student.   You can claim the Hope credit for a student only if that student has not completed the first 2 years of postsecondary education. In the case where it takes the student longer than 2 calendar years to complete these first 2 years, you can claim the Hope credit based on the tuition and expenses of the same student only twice during that longer period. If the student qualifies, you can claim the lifetime learning credit for years you do not claim the Hope credit.

Tax credits for more than one student.   If you pay qualified expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. This means that, for example, you can claim the Hope credit for one student and the lifetime learning credit for another student in the same tax year.

How Is the Credit Claimed?

You claim education credits by completing Form 8863 and submitting it with your Form 1040 or 1040A. Enter the credit on Form 1040, line 48, or Form 1040A, line 31. A filled-in Form 8863 is shown in the Illustrated Example at the end of this chapter.

An eligible educational institution (such as a college or university) that received payment of qualified tuition and related expenses in 2002, generally must issue Form 1098-T, Tuition Payments Statement, to each student by January 31, 2003. The information on Form 1098-T will help you determine whether you can claim an education tax credit for 2002. The eligible educational institution 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 student's name, address, and taxpayer identification number.

When Must the Credit Be Repaid (Recaptured)?

If, after you file your 2002 tax return, you receive tax-free educational assistance for, or a refund of, an expense you used to figure an education credit on that return, you may have to repay all or part of the credit. You must refigure your education credit(s) as if the assistance or refund was received in 2002. Subtract the amount of the refigured credit from the amount of the credit you claimed. The result is the amount you must repay. You add the repayment (recapture) to your tax liability for the year you receive the assistance or refund (see the instructions for your tax return for that year). Your original 2002 tax return does not change.

Illustrated Example

Dave and Valerie Jones are married and file a joint tax return. For 2002, they claim exemptions for their two dependent children on their tax return. Their modified adjusted gross income is $84,000. Their tax before credits is $10,625. Their son, Sean, will receive his bachelor's degree in psychology from the state college in May 2003. Their daughter, Corey, enrolled full-time at that same college in August 2001 to begin working on her bachelor's degree in physical education. In December 2001, Dave and Valerie paid $2,000 for each child's tuition for the winter 2002 semester. In July 2002, they paid $2,200 in tuition costs for each of them for the fall 2002 semester.

Form 8863 for Dave and Valerie

Dave and Valerie, their children, and the college meet all of the requirements for the higher education credits. Because Sean is beyond the second (sophomore) year of his postsecondary education, his expenses do not qualify for the Hope credit. But, amounts paid for Sean's expenses in 2002 for academic periods beginning after 2001 and before April 1, 2003, qualify for the lifetime learning credit. Corey is in her first (freshman) year of postsecondary education and expenses paid for her in 2002 for academic periods beginning after 2001 and before April 1, 2003, qualify for the Hope credit.

Dave and Valerie figure their tentative education credits for 2002, $1,940, as shown on line 8 of the completed Form 8863. They cannot claim the full amount because their modified adjusted gross income is more than $82,000. They carry the amount from line 18 of Form 8863 to line 48 of Form 1040, and they attach the Form 8863 to their return.

Earned Income Credit

Important Changes for 2002

New definition of earned income.   Earned income no longer includes nontaxable employee compensation. See Rule 6 and Rule 14.

Elimination of modified adjusted gross income (AGI).   You no longer need to figure modified AGI. Your EIC is figured using your AGI, not modified AGI. See Rule 15.

New rules for persons with same qualifying child.   New rules determine which person can claim the EIC on the basis of a qualifying child when two or more persons have the same qualifying child and both claim the credit using that child. See Rule 8.

New definition of eligible foster child.   There is a new definition of an eligible foster child in Rule 7. The child has to live with you only for more than half of the year, instead of the whole year.

Reduction of EIC by alternative minimum tax eliminated.   Your EIC is no longer reduced by the amount of alternative minimum tax shown on your return.

Earned income amount is more.   The amount you can earn and still get the credit has increased for 2002. The amount you earn must be less than:

• $29,201 ($30,201 for married filing jointly) with one qualifying child,
• $33,178 ($34,178 for married filing jointly) with more than one qualifying child, or
• $11,060 ($12,060 for married filing jointly) if you do not have a qualifying child.

Investment income amount is more.   The maximum amount of investment income you can have and still get the credit has increased for 2002. You can have investment income up to $2,550. For most people, investment income is taxable interest and dividends, tax-exempt interest, and capital gain net income. To get more detailed information, see Rule 5.

Important Reminders

Certain people must use Publication 596.   Certain people must use Publication 596 to see if they meet the rules to take the EIC. You must use Publication 596 if any of the following situations applies to you.

• The amount on Form 1040, line 21, includes an amount from Form 8814, Parent's Election To Report Child's Interest and Dividends.
• Your investment income (Rule 5) is $2,550 or more and you are filing Form 4797, Sales of Business Property.
• You are filing Schedule E, Supplemental Income and Loss (Form 1040).
• You are reporting income or a loss from the rental of personal property not used in a trade or business.

For information on how you can get Publication 596, Earned Income Credit, or other free IRS publications, see How To Get Tax Help in the back of this publication.

Advance payment of the earned income credit in your paycheck.   If you qualify for the earned income credit in 2003, you can receive part of it in each paycheck throughout the year. See Advance Earned Income Credit, later, for more information.

Earned income credit has no effect on certain welfare benefits.   Any refund you receive because of the EIC and any advance EIC payments you receive generally will not be used to determine whether you are eligible for the following benefit programs, or how much you can receive from these programs.

• Medicaid and supplemental security income (SSI).
• Food stamps.
• Low-income housing.

Temporary assistance for needy families (TANF) benefits may be affected. Please check with your state.

Social security numbers.   To claim the EIC, you must have a valid social security number (SSN) for you and your spouse (if filing a joint return) and any qualifying children. If an SSN is missing or incorrect, you may not get the credit. See Rule 1, later.

Form 8862 to claim EIC after disallowance.   If your EIC for any year after 1996 was denied or reduced for any reason other than a mathematical or clerical error, you must attach a completed Form 8862, Information To Claim Earned Income Credit After Disallowance, to your next return if you wish to claim the EIC. The date on which your EIC was denied and the date on which you file your 2002 return affect whether you need to attach Form 8862 to your 2002 return or to a later return. See chapter 5 in Publication 596 for more information.

Introduction

The earned income credit (EIC) is a tax credit for certain people who work and have earned income under $34,178. A tax credit usually means more money in your pocket. It reduces the amount of tax you owe. The EIC may also give you a refund.

How do you get the earned income credit?   To claim the EIC, you must:

1. Qualify by meeting certain rules, and
2. File a tax return, even if you:
   1. Do not owe any tax,
   2. Did not earn enough money to file a return, or
   3. Did not have income taxes withheld from your pay.

When you complete your return, you can figure your EIC by using a worksheet in the instructions for Form 1040, Form 1040A, or Form 1040EZ. Or, if you prefer, you can let the IRS figure the credit for you.

How will this chapter help you?   This chapter will explain the following:

• What rules you must meet to qualify for the EIC,
• How to figure the EIC, and
• How to get advance payment of the EIC in your paycheck.

To learn about the rules you must meet, first read Do You Qualify for the Credit, later.

Useful Items You may want to see:

Publication

• 533   Self-Employment Tax
• 596   Earned Income Credit

Form (and Instructions)

• Schedule EIC   Earned Income Credit (Qualifying Child Information)
• Schedule SE (Form 1040)   Self-Employment Tax
• W-5   Earned Income Credit Advance Payment Certificate
• 8862   Information To Claim Earned Income Credit After Disallowance

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