Tax Payer Reduction Act of 1997

The Taxpayer Relief Act of 1997 (TRA ’97) created several new tax credits for families with higher education tuition expenses. In addition, the TRA ’97 permits early IRA withdrawals without penalty for certain education expenses. These programs took effect in 1998.

Hope Scholarship Credit

The HOPE Scholarship Credit is available to taxpayers with financially dependent students who are enrolled in a degree or certificate program at least half-time and who are in their first two years of postsecondary education. Qualified taxpayers may claim a tax credit of up to 100 percent off the first $1000 of the taxpayer’s qualified education expenses and up to fifty percent off the next $1000 of these expenses. The maximum annual HOPE Scholarship Credit is $1500 and is available for each qualified student in the family.

Lifetime Learning Credit

The Lifetime Learning Credit allows a tax credit equal to 20% of a taxpayers qualified education expenses. The maximum annual credit is $2,000, based on qualified education expenses up to $10,000. The Lifetime Learning Credit is not limited to families with students in their first two years of postsecondary education. This program began July 1, 1998.

Certain income limits apply to both of these programs.

Early IRA Withdrawals

Beginning January 1, 1998, withdrawals from an Individual Retirement Account (IRA) to pay certain higher education expenses can be made without early withdrawal tax penalty.

As always when dealing with new or complicated tax programs, you should consult with you regular tax advisor for specific information and advice. The Internal Revenue Service also offers information about these new programs in its Publication 970. This notice may also be viewed and printed in PDF format.