Overview
The Taxpayer Relief Act of 1997 (TRA97) introduced several tax incentives on qualifying student loans.
The Hope and Lifetime Learning credits provide the ability to take a tax credit for qualifying educational expense.
TRA also provides a deduction for the interest paid on qualifying student loans.
The Student Loan Interest Deduction is reported on an IRS Form 1098-E (PDF). The Hope and Lifetime Learning Credits are reported on an IRS Form 1098-T (PDF).
This document deals with both the 1098-E Student Loan Interest Deduction and the 1098-T Education Tax Credit.
Interest Deductions (1098-E)
ECSI provides borrowers with an IRS Form 1098-E to report the amount of interest which may be deductible.
This interest may be declared on either IRS Form 1040 (line 24) or Form 1040A (line 16). You are not required
to itemize to receive the deduction.
The maximum amount of a deduction in one year is: $1,500 in 1999, $2,000 in 2000 and $2,500 in 2001 and beyond. Deductions are limited to only the first 60 months of repayment, but need not be consecutive. There are also limits to your adjusted gross income which may influence the amount of a deduction you may take.
Hope Scholarship Credit (1098-T)
Beginning January 1, 1998, taxpayers may be eligible to claim a non-refundable Hope Scholarship Credit against federal income taxes. The Hope Scholarship Credit may be claimed for the qualified tuition and related expenses of each student
in the taxpayer's family (i.e., the taxpayer, the taxpayer's spouse, or an eligible dependent) who is enrolled at least half-time in one of the first two years of post-secondary education and who is enrolled in a program leading to a degree,
certificate, or other recognized educational credential. The amount that may be claimed as a credit is generally equal to: (1) 100 percent of the first $1,000 of the taxpayer's out-of-pocket expenses for each student's qualified tuition and related
expenses, plus (2) 50 percent of the next $1,000 of the taxpayer's out-of-pocket expenses for each student's qualified tuition and related expenses. Thus, the maximum credit a taxpayer may claim for a taxable year is $1,500 multiplied by the number
of students in the family who meet the enrollment criteria described above.
The amount a taxpayer may claim as a Hope Scholarship Credit is gradually reduced for taxpayers who have modified adjusted gross income between $40,000 ($80,000 for married taxpayers filing jointly) and $50,000 ($100,000 for married taxpayers filing jointly). Taxpayers with modified adjusted gross income over $50,000 ($100,000 for married taxpayers filing jointly) may not claim the Hope Scholarship Credit. Both the dollar limitation on the expenses for which the credit may be claimed and the modified adjusted gross income limitation will be indexed for inflation in 2002 and years thereafter.
The Hope Scholarship Credit may be claimed for payments of qualified tuition and related expenses made on or after January 1, 1998 for academic periods beginning on or after January 1, 1998. Therefore, the first time taxpayers will be able to claim the credit is when they file their 1998 tax returns in 1999. The Hope Scholarship Credit is not available for any amount paid in 1997.
Lifetime Learning Credit (1098-T)
Beginning on July 1, 1998, taxpayers may be eligible to claim a non-refundable Lifetime Learning Credit against their federal income taxes. The Lifetime Learning Credit may be claimed for the qualified tuition and related expenses of the students in the taxpayer's family (i.e., the taxpayer, the taxpayer's spouse, or an eligible dependent) who are enrolled in eligible educational institutions. Through 2002, the amount that may be claimed as a credit is equal to 20 percent of the taxpayer's first $5,000 of out-of-pocket qualified tuition and related expenses for all the students in the family. After 2002, the credit amount is equal to 20 percent of the taxpayer's first $10,000 of out-of-pocket qualified tuition and related expenses. Thus, the maximum credit a taxpayer may claim for a taxable year is $1,000 through 2002 and $2,000 thereafter. These amounts are not indexed for inflation.
If the taxpayer is claiming a Hope Scholarship Credit for a particular student, none of that student's expenses for that year may be applied toward the Lifetime Learning Credit. The amount a taxpayer may claim as a Lifetime Learning Credit is gradually reduced for taxpayers who have modified adjusted gross income between $40,000 ($80,000 for married taxpayers filing jointly) and $50,000 ($100,000 for married taxpayers filing jointly). Taxpayers with modified adjusted gross income over $50,000 ($100,000 for married taxpayers filing jointly) may not claim a Lifetime Learning Credit. The modified adjusted gross income limitation will be indexed for inflation in 2002 and, years thereafter. The definition of modified adjusted gross income is the same as it is for the purposes of the Hope Scholarship Credit.
The Lifetime Learning Credit may be claimed for payments of qualified tuition and related expenses made on or after July 1, 1998, for academic periods beginning on or after July 1, 1998. Therefore, the first time taxpayers will be able to claim the credit will be when they file their 1998 tax returns in 1999. The Lifetime Learning Credit is not available for any amount paid in 1997.
Compliance
Your educational institution is required to send an IRS Form 1098-E if you pay more than $600 in interest for any tax year. ECSI provides a 1098-E regardless of the
amount of interest while you are in the 60-month repayment window allowed for the deduction. All tax information is submitted electronically to the IRS.
If we need to confirm that we have the correct Taxpayer Identification Number (Social Security Number) on file, we may ask that you complete an IRS Form W9-S (PDF) "Request for Student's or Borrower's Social Security Number and Certification".
Tax Advise
ECSI can provide replacement forms or information on the method used to compute eligible interest payments, but we cannot provide tax advise.
If you have any questions about if or how much interest you can deduct, you should consult with a qualified tax professional or contact the IRS Taxpayer
Assistance line at 1-800-829-1040.
The IRS web site has many documents concerning TRA-97, including some self-help topics for tax filers. See the list of links below for a more comprehensive list.
Additional Resources
Below are several resources that provide additional information concerning the student loan interest deduction, and the Taxpayer Relief Act of 1997.
These documents or sites are not maintained by ECSI and we cannot be responsible for their content.