Hope Credit. For the first two years of a postsecondary school degree program, qualifying taxpayers are entitled to a nonrefundable Hope tax credit of 100 percent for the first $1,000 of qualified tuition and related expenses and a 50 percent credit for the next $1,000 of eligible expenses, for a total credit of up to $1,500 a year. (Section 25A(b)) Beginning in 2001, the maximum credit is indexed for inflation. (Section 25A(h) The credit, which is available on a per student basis, covers tuition payments for the taxpayer as well as the taxpayer's spouse and dependents. (Section 25A(f)(1))

To be eligible for the credit, the student must be enrolled on at least a half-time basis. If a parent claims a child as a dependent, only the parent can claim the credit and any qualified expenses paid by the child are deemed paid by the parent. The benefit is phased out for single taxpayers with a modified AGI between $40,000 and $50,000 and for joint filers with a modified AGI between $80,000 and $100,000 (the income limits also are indexed for inflation after 2001). In each tax year, taxpayers can elect with respect to an eligible student either to take the Hope tax credit or the lifetime learning credit or tax-free distributions from an education IRA. (Section 25A(e))

Lifetime Learning Credit. A nonrefundable 20 percent tax credit is available for up to $5,000 ($10,000 for expenses paid after December 31, 2002) in qualified tuition and related expenses for graduate and undergraduate courses at an eligible educational institution. (Section 25A(c)) The credit is available if a student is enrolled on at least a half-time basis in a degree or certificate program. However, the student need not be enrolled on a half-time basis to qualify for the credit so long as the classes are to acquire or improve job skills.

The credit, which is available on a per taxpayer basis, covers tuition payments for the taxpayer as well as the taxpayer's spouse and dependents, for expenses paid after June 30, 1998, for education beginning after that date. The credit may be claimed for an unlimited number of tax years. Like the Hope credit, if a parent claims a child as a dependent, only the parent can claim the credit. Similarly, the benefit is phased out for single taxpayers with a modified AGI between $40,000 and $50,000 and for joint filers with a modified AGI between $80,000 and $100,000 (adjusted for inflation after 2001). (Section 25A(d))

In each tax year, taxpayers can opt either to take the lifetime learning credit or the Hope tax credit or tax-free distributions from an education IRA. (Section 25A(e))

Education Individual Retirement Accounts.  An education individual retirement account is a trust created or organized to pay the qualified higher education expenses (tuition, fees, books, supplies, and equipment) of the trust’s designated beneficiary. All contributions to the account must be in cash, must be made before the beneficiary’s 18th birthday, and must not exceed $500 for a taxable year (except in the case of rollover contributions). (Section 530(b))

The $500 annual contribution limit for education IRAs is phased out ratably for contributors with modified adjusted gross income between $95,000 and $110,000 ($150,000 and $160,000 for joint returns). Individuals with modified AGI above the phase-out range may not contribute to an education IRA established for any other individual. (Section 530(c))

Amounts distributed from educational IRAs are excludable from gross income to the extent such amounts do not exceed qualified higher education expenses of an eligible student incurred during the year the distribution is made. However, distributions from an education IRA that exceed qualified higher education expenses of the designated beneficiary during the year of the distribution are includible in the distributee’s gross income. A 10 percent additional tax is imposed on any distribution from an educational IRA to the extent the distribution exceeds qualified higher education expenses of the designated beneficiary (unless the distribution or payment is made on account of the death or disability of, or scholarship received by, the designated beneficiary). (Section 530(d))

Tax-free and penalty-free transfers or rollovers of account balances of one beneficiary to another IRA benefiting another beneficiary (as well as redesignations of the named beneficiary) are allowed, provided the new beneficiary is a member of the family of the old beneficiary. (Section 530(d)