Education Tax Credits Introduction

Education Credits Introduction

Hope Credit - permits a reduction in taxes up to $1,500 per student for first- or second-year college expenses. {§25A(b)(1)(A)}

Lifetime Learning Credit - provides a tax reduction of up to $1,000 per qualifying family per year for college costs beyond the second year. {§25A(c)(1).}

CAUTION: No education credit is allowed if, during the taxable year, a distribution is made to, or on behalf of, the student from an education IRA and any portion of the distribution is excluded from gross income. Code Section 25A(e)(2).

TIP: If the student waives the tax-free treatment of the IRA distributions, the taxpayer who pays the qualified expenses may claim the credit.

Introduction & Summary

Question or Item of Information	Answers & Solutions
Who?	Taxpayer, Spouse or any dependent on the return
Who must pay the costs to qualify?	It does not matter!
What is a qualified institution?	The institution must be: Accredited Must be eligible to participate in a student aid program administered by the Department of Education.
What year level of education is included?	Only the first two years of post-secondary education are included.
What are the general requirements?	Cannot be Married Filing Separate Cannot be a dependent of someone else Cannot be a nonresident alien for any part of the year Cannot exceed certain income levels: Married Filing Joint must be less than $100,000 Single, Head-of-household, or qualifying widower must be less than $50,000
Which expenses can I use to claim the credit?	Must be paid during the year If prepaid - it must be for an academic period that begins in the first 3 months of the following year, if all other requirements are met. It must be for tuition or required fees for enrollment or attendance Examples of expenses that cannot be used: Room and board Insurance Medical expenses - for example student health fees Transportation Personal, living or family expenses Books Supplies Equipment Nonacademic activities (unless required foe enrollment) Amounts paid for any course or education involving sports, games or hobbies unless it is part of the degree or to acquire or improve a job skill. Expenses that are deducted as itemized deductions or self-employment expenses Expenses paid by or reimbursed by tax-free educational assistance such as Pell Grants or employer provided or tax-free scholarships. Warning: If the student receives a tax-free distribution from an education IRA, none of the expenses qualify for any education credits. What expenses qualify: The credits are based on qualified tuition and related expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. The credits are allowed for qualified tuition and related expenses paid for an academic period beginning in the same year as the year the payment is made (but see Prepaid expenses, later). In general, qualified tuition and related expenses are tuition and fees required for enrollment or attendance at an eligible educational institution. Student-activity fees and fees for course-related books, supplies, and equipment are included in qualified tuition and related expenses *only if* the fees must be paid *to the institution* as a condition of enrollment or attendance. What expenses do not qualify: Qualified tuition and related expenses do not include the cost of insurance, medical expenses (including student health fees), room and board, transportation or similar personal, living or family expenses, even if the fee must be paid to the institution as a condition of enrollment or attendance. Qualified tuition and related expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games, or hobbies, or any noncredit course. However, if the course of instruction or other education is part of the student's degree program or, in the case of the lifetime learning credit, is taken by the student to acquire or improve job skills, these expenses can qualify.
What are the Hope Credit qualifications?	All 4 of the following MUST be present: As of the beginning of the year, the student had not completed the first 2 years of post-secondary education The student must be enrolled in a program leading to a degree, a certificate or other recognized educational credential. The student must be enrolled at least as a one-half time of study load. The cannot cannot be a convicted felon or convicted of possessing or distributing a controlled substance. This credit can be claimed for two years only.
What are the Lifetime Learning Credit qualifications?	The maximum expenses are $1,000 The student cannot use the same expenses for both the credits, nor use both credits simultaneously

Qualifications/Limitations

LIMITATIONS APPLICABLE TO BOTH CREDITS

Both the Hope scholarship and lifetime learning credits are available only if several requirements are met. Many of the requirements are the same for both credits.

CAUTION: No education credit is allowed if, during the taxable year, a distribution is made to, or on behalf of, the student from an education IRA and any portion of the distribution is excluded from gross income. Code Section 25A(e)(2).

TIP: If the student waives the tax-free treatment of the IRA distributions, the taxpayer who pays the qualified expenses may claim the credit.

The following are topics of the qualifications:

PHASEOUT

ELECTION

QUALIFIED EXPENSES

ELIGIBLE INSTITUTION; ACADEMIC PERIOD

CLAIMING CREDIT FOR A DEPENDENT; THIRD-PARTY PAYMENTS

JOINT RETURN REQUIRED OF MARRIED TAXPAYERS

UNAVAILABLE TO NON-RESIDENT ALIENS

There are two credits available for 1999, the Hope Scholarship Credit and the Lifetime Learning Credit. The credit is allowed for you, your
spouse, or your dependents. You can claim only one of the credits for each student.

The amount of the credit is determined by the amount you pay for qualified tuition and related expenses for each student and the amount
of your modified adjusted gross income (AGI).

Expenses that qualify are tuition and fees required for enrollment or attendance at an accredited college, vocational school, or other
post-secondary educational institution that is eligible to participate in the student aid programs administered by the Department of Education.

Qualified expenses do not include room and board, insurance, transportation, or other similar personal, living, or family expenses. Qualified expenses may include fees for books, supplies, and equipment only if the fee must be paid to the school for the student's enrollment or attendance. In addition, qualified expenses may include student activity fees if the fee must be paid to the school for the student's enrollment or attendance.

You can claim a Hope Scholarship Credit for only an eligible student. An eligible student is a student who is:

Enrolled in one of the first two years of post-secondary education (generally freshman or sophomore years of college).

Enrolled in a program that leads to a degree, certificate, or other recognized educational credential.

Is taking at least one-half of the normal full-time workload for the course of study for at least one academic period beginning during the calendar year.

Is free of any felony conviction for possessing or distributing a controlled substance (drugs).

You can claim a Hope Scholarship Credit for only two tax years for each eligible student.

An eligible student can be you, your spouse, or your eligible dependent. The maximum Hope Scholarship Credit is $1,500 for each eligible student (100% of the first $1,000 of qualified tuition and related expenses, plus 50% of the next $1,000 of such expenses).

The Hope Scholarship Credit is gradually reduced if your modified adjusted gross income is between $40,000 and $50,000 ($80,000 and
$100,000 in the case of a joint return). The credit cannot be claimed if your modified AGI is above these limits. The credit cannot be claimed if
the individual is married filing a separate return.

You are allowed a Lifetime Learning Credit of 20% of the first $5,000 you paid for qualified tuition and related expenses for all students in
the family. The maximum amount of credit you can claim for 1999 is $1,000 (20% of $5,000).

The Lifetime Learning Credit is not based on the student's workload. It is allowed for one or more courses that the student takes as part of a
degree program or to acquire or improve job skills. The credit is not limited to students in the first two years of post-secondary education.

Expenses for graduate level degree work are eligible. There is no limit on the number of tax years for which the credit can be claimed for each
student. The amount you can claim as a credit does not vary (increase) based on the number of students for whom you pay qualified expenses.
However, that amount may be reduced based on your modified AGI. The credit is gradually reduced if your modified AGI is between $40,000 and $50,000 ($80,000 and $100,000 in the case of a joint return). The credit cannot be claimed if you are married filing a separate return.

No double benefit allowed. You cannot:

Deduct higher education expenses on your income tax return and also claim a Hope credit based on those same expenses,
Claim a Hope credit and a lifetime learning credit based on the same qualified education expenses, or
Claim a credit based on expenses paid with tax-free scholarship, grant, or employer-provided educational assistance. See Adjustments to qualified expenses, next.

Adjustments to qualified expenses. If you pay higher education expenses with certain tax-free funds, you cannot claim a credit for those amounts. You must reduce the qualified expenses by the amount of any tax-free educational assistance you received. Tax-free educational assistance could include:

Scholarships,
Pell grants,
Employer-provided educational assistance,
Veterans' educational assistance, and
Any other nontaxable payments (other than gifts, bequests, or inheritances) received for educational expenses.

Do not reduce the qualified expenses by amounts paid with the student's:

Earnings,
Loans,
Gifts,
Inheritances, and
Personal savings.

Also, do not reduce the qualified expenses by any scholarship reported as income on the student's return or any scholarship which, by its terms, cannot be applied to qualified tuition and related expenses.

Waiver of tax-free treatment. The designated beneficiary of an education IRA can waive the tax-free treatment of the withdrawal and elect to pay any tax that would otherwise be owed on the withdrawal. The beneficiary or the beneficiary's parents may then be eligible to claim a Hope credit or lifetime learning credit for qualified higher education expenses paid in that tax year. See Education IRAs in Publication 970.

Refunds. Qualified tuition and related expenses do not include expenses for which you receive a refund. If you paid expenses in 2000, and you received a refund of those expenses in 2000 or 2001, but before you file your tax return for 2000, simply reduce the amount of the expenses by the amount of the refund received. If you receive the refund after you file your tax return, see Recapture of credit, next.

Recapture of credit. If, after you file your 2000 tax return, you receive tax-free educational assistance for, or a refund of, an expense you used to figure a higher education credit, you may have to recapture all or part of the credit. You must refigure your education credits as if the assistance or refund was received in 2000. Subtract the amount of the refigured credit from the amount of the credit you claimed. See the instructions for the 2000 tax return for information about how and where to report the recapture.

Who can claim the credit. If there are higher education costs for your dependent child, either you or your child, but not both of you, can claim a credit for a particular year. If you claim an exemption for your child on your tax return, only you can claim a credit. If you do not claim an exemption for your child on your tax return, only your child can claim a credit.

Expenses paid by others. If someone other than you, your spouse, or your dependent (such as a relative or former spouse) makes a payment directly to an eligible educational institution to pay for a student's qualified tuition and related expenses, the student is treated as receiving the payment from the other person. The student is treated as paying the qualified tuition and related expenses to the institution. If the student is your dependent, you are considered to have paid the expenses.

Example. Ms. Allen makes a payment directly to an eligible educational institution in 2000 for her grandson Todd's qualified tuition and related expenses. For purposes of claiming an education credit, Todd is treated as receiving the money from Ms. Allen and, in turn, paying his qualified tuition and related expenses himself.

If Todd is not listed as a dependent on anyone's return, he can use the payment to claim an education credit.

If anyone, such as his parents, lists him as a dependent on their tax return, whoever lists him as a dependent may be able to use the expenses to claim an education credit.

Expenses paid by dependent. If you claim an exemption for the student on your tax return, treat any expenses paid by the student as if you had paid them. Include these expenses when figuring the amount of your Hope or lifetime learning credit.

TaxTip:

Qualified tuition and related expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent.

Nonresident alien. You cannot claim an education credit if you (or your spouse) were a nonresident alien for any part of 2000, and the nonresident alien did not elect to be treated as a resident alien.

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