TAXPAYER RELIEF ACT OF 1997

Overview
What's New for 2007
The Hope Scholarship Tax Credit
The Lifetime Learning Tax Credit
Tuition and Fees Deduction
Student Loan Interest Deduction
Eligibility
Restrictions

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Overview
Signed on August 5, 1997, the Taxpayer Relief Act (TRA97) may provide you with four (4) different educational tax benefits. This information is designed to provide the reader with a brief overview of the tax law and is not to be used for tax planning purposes. Please consult your tax advisor for such assistance.

What's New
Hope and lifetime learning credits. Beginning in 2007, the amount of your Hope or lifetime learning credit is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $47,000 and $57,000 ($94,000 and $114,000 if you file a joint return). You cannot claim a credit if your MAGI is $57,000 or more ($114,000 or more if you file a joint return). This is an increase from the 2006 limits of $45,000 and $55,000 ($90,000 and $110,000 if filing a joint return). For more information, see chapters 2 and 3 of Publication 970.

The Hope Scholarship Tax Credit
This tax credit can be worth up to a maximum of $1650 based on out-of-pocket tuition and fee expenses paid by the student or student's parents for each of the first two years of higher education. The tax credit may be claimed for those fees paid on or after January 1, 2007, as reported with your tax filing in 2008.

The amount of the credit is 100% of the first $1100 of qualified tuition and related expenses paid by the taxpayer, and 50% of the second $1100 of qualified tuition and related expenses.

Qualified tuition and related expenses include tuition and fees, but excludes books, expenses involving sports, games, or hobbies unless they are part of the student's degree program, nonacademic fees (student activity fees, athletic fees, insurance expenses, other expenses unrelated to the student's academic course of instruction), room and board. Only out-of-pocket expenses count towards the credit.

Gifts, bequests, and inheritances do count as though paid by the taxpayer. Tuition paid with the proceeds of a loan is eligible for the credit, but not any payments on the loan. Scholarships and other financial aid do not count as qualified tuition.

The Lifetime Learning Tax Credit
This tax credit may be claimed for qualified expenses paid on or after that date. The credit is equal to 20% of the first $10,000 of tuition and fee expenses paid by the student or student's parents for college course work at either the undergraduate level beyond the first two years of higher education, or at the graduate level.

Qualified tuition and related expenses include those expended toward any course of instruction at an eligible educational institution to acquire or improve job skills. This means that the credit may be used for part-time study, not just students enrolled half-time. Only out-of-pocket expenses count towards the credit.

Gifts, bequests, and inheritances do count as though paid by the taxpayer. Tuition paid with the proceeds of a loan is eligible for the credit, but not any payments on the loan. Scholarships and other financial aid do not count as qualified tuition.

Tuition and Fees Deduction
The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000.

This deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if you cannot take either the Hope or lifetime learning credit because your income is too high.

Student Loan Interest Deduction
Interest paid on student loans may deductible up to $2500 of qualified educational loan interest paid. For more information, please follow this link to the Office of Student Loans.

Eligibility
The taxpayer, taxpayer's spouse, and the taxpayer's dependents are eligible. If the student is claimed as a dependent on another taxpayer's tax return, then the student may not claim the tax credit on the student's tax return. However, any payments made by the dependent student will be treated as though made by the taxpayer that lists the student as a dependent.

The student must be enrolled at least half time for at least one academic period that begins during the taxable year. If the family has multiple students that meet the requirements, multiple HOPE Scholarship Credits may be claimed. However, the Lifetime Learning Credit is calculated on a per family, rather than a per student, basis.

Married taxpayers must file jointly to be eligible for the credit. In cases of divorce, if one parent claims the child as a dependent on their tax return and the other parent pays the child's educational expenses, neither parent will be eligible for the tax credit.

Restrictions
The amount of either the HOPE and Lifetime Learning credits is proportionally reduced for taxpayers with modified adjusted gross incomes (MAGIs) in excess of $55,000 for single filers and $110,000 for joint returns. Please refer to IRS Publication 970 for detailed explanation of restrictions.

Neither credit may be taken if the taxpayer elects to exclude from gross income any distribution from an education individual retirement account (EIRA). Note that the law does not restrict use of the tax credits if the taxpayer elects to exclude from gross income any distribution from a state prepaid tuition plan.

Although the Hope and Lifetime Learning tax credits may not be used in the same years as the taxpayer elects a tax-free distribution from an EIRA, it appears that the tax credits may be used in the same year as educational distributions from other retirement plans, such as a 401(k) or IRA, or from state prepaid tuition plans. So one can combine the tax credits with the use of a state prepaid tuition plan but not an EIRA in the same year.

The credit will be denied for a student convicted of a felony drug offense.

For more information regarding the Taxpayer Relief Act of 1997, the following link will take you to the U.S. Department of Education website: http://www.ed.gov/offices/OPE/PPI/HOPE/index.html.