Education Tax Credits The following two tax credits are available to persons who payhigher education costs. The Hope credit. The lifetime learning credit. Rules that apply to both credits are explained first, followedby explanations of rules that apply to each credit, choosing whichcredit to claim, and how to claim your credits. The last sectionincludes an illustrated Form 8863. Caution: If a student receives a tax-free withdrawal from an education IRAin a particular tax year, none of that student's expenses can be usedas the basis of a higher education credit for that tax year. However,the student can waive the tax-free treatment. See EducationIRA, later. Rules That Apply to Both Credits The amount of each credit is determined by the amount you pay forqualified tuition and related expenses for students and the amount ofyour modified adjusted gross income. Education credits are subtractedfrom your tax but they are nonrefundable. This means if the creditsare more than your tax, the excess is not refunded to you. Caution: If you are married filing separately, you cannot claim the highereducation credits. What expenses qualify.The credits are based on qualified tuition and related expenses youpay for yourself, your spouse, or a dependent for whom you claim anexemption on your tax return. The credits are allowed for qualifiedtuition and related expenses paid for an academic period beginning inthe same year as the year the payment is made (but see Prepaidexpenses, later). In general, qualified tuition and related expenses are tuition andfees required for enrollment or attendance at an eligible educationalinstitution. Student-activity fees and fees for course-related books,supplies, and equipment are included in qualified tuition and relatedexpenses only if the fees must be paid to theinstitution as a condition of enrollment or attendance. Prepaid expenses. If you pay qualified tuition and related expenses for an academicperiod that begins in the first three months of the following year,you can use the prepaid amount in figuring your credit. For example, if you paid $2,000 in December 1999 for qualifiedtuition for the winter 2000 semester beginning in January 2000, youcan use that $2,000 in figuring your 1999 credit. Payments with borrowed funds.You claim an education credit for the qualified tuition and relatedexpenses paid with the proceeds of a loan. The credit is claimed inthe year in which the expenses are paid, not in the year in which theloan is repaid. What expenses do not qualify.Qualified tuition and related expenses do not include the cost ofinsurance, medical expenses (including student health fees), room andboard, transportation or similar personal, living or family expenses,even if the fee must be paid to the institution as a condition ofenrollment or attendance. Qualified tuition and related expenses generally do not includeexpenses that relate to any course of instruction or other educationthat involves sports, games, or hobbies, or any noncredit course.However, if the course of instruction or other education is part ofthe student's degree program or, in the case of the lifetime learningcredit, is taken by the student to acquire or improve job skills,these expenses can qualify. Dependent for whom you claim an exemption.You claim an exemption for a dependent if you list that person inthe Exemptions section of your tax return. Eligible educational institution.An eligible educational institution is any college, university,vocational school, or other postsecondary educational institutioneligible to participate in a student aid program administered by theDepartment of Education. It includes virtually all accredited, public,nonprofit, and proprietary (privately owned profit-making)postsecondary institutions. The educational institution should be ableto tell you if it is an eligible educational institution. Academic period.An academic period includes a semester, trimester, quarter, orother period of study (such as a summer school session) as reasonablydetermined by an educational institution. No double benefit allowed.If you take a deduction for higher education expenses on your taxreturn, you cannot claim a credit for those same expenses. Adjustments to qualified expenses.If you pay higher education expenses with certain tax-freefunds, you cannot claim a credit for those amounts. You mustreduce the qualified expenses by the amount of any tax-freeeducational assistance. Tax-free educational assistance could includescholarships, Pell grants, employer-provided educational assistance,veterans' educational assistance, and any other nontaxable payments(other than gifts, bequests, or inheritances) received for educationalexpenses. Do not reduce the qualified expenses by amounts paid withthe student's earnings, loans, gifts, inheritances, and personalsavings. Also, do not reduce the qualified expenses by any scholarshipreported as income on the student's return or any scholarship which,by its terms, cannot be applied to qualified tuition and relatedexpenses. Refunds.Qualified tuition and related expenses do not include expenses thatare refunded. If you receive a refund in the same year in which youpaid the expenses, or in the following year, but before you file yourtax return for the year you paid them, simply reduce the amount of theexpenses by the amount of the refund received. If you receive therefund after you file your tax return, see Recapture ofcredit, next. Recapture of credit.If, after you file your tax return, you receive tax-freeeducational assistance for, or a refund of, an expense you used tofigure a higher education credit on that return, you may have torecapture all or part of the credit. You must refigure your educationcredits as if the assistance or refund was received in the year theexpenses were paid. Include the difference, if any, on your return forthe year in which the assistance or refund was received. Include it onthe "total tax" line of your return. Next to the line, enter theamount and "ECR." 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 fora particular year. If you claim an exemption for your child on yourtax return, only you can claim a credit. If you do not claim anexemption for your child on your tax return, only your child can claima credit. Expenses paid by others.If someone other than you, your spouse, or your dependent (such asa relative or former spouse) makes a payment directly to an eligibleeducational institution to pay for a student's qualified tuition andrelated expenses, the student is treated as receiving the payment fromthe other person. The student is treated as paying the qualifiedtuition and related expenses to the institution. Example.Ms. Allen makes a payment directly to an eligible educationalinstitution in 1999 for her grandson's qualified tuition and relatedexpenses. For purposes of claiming an education credit, the grandsonis treated as receiving the money from Ms. Allen and, in turn, payinghis qualified tuition and related expenses. Expenses paid by dependent.If you claim an exemption for your child on your tax return, treatany expenses paid by your child as if you had paid them. Include theseexpenses when figuring the amount of your Hope or lifetime learningcredit. TaxTip: Qualified tuition and related expenses paid directly to an eligibleeducational institution for your dependent under a court-approveddivorce decree are treated as paid by your dependent. Income Phaseout Your education credits are phased out (gradually reduced) if yourmodified adjusted gross income is between $40,000 and $50,000 ($80,000and $100,000 in the case of a joint return). Caution: You cannot claim any higher education credits if yourmodified adjusted gross income is $50,000 or more ($100,000 or more inthe case of a joint return). Modified adjusted gross income.For most taxpayers, modified adjusted gross income will be theiradjusted gross income (AGI) as figured on their federal income taxreturn. However, you must make adjustments to your AGI if you excludedincome earned abroad or from certain U.S. territories or possessions.If this applies to you, increase your AGI by the following amounts youexcluded from your income. Foreign earned income of U.S. citizens or residents livingabroad. Housing costs of U.S. citizens or residents livingabroad. Income from sources within Puerto Rico, Guam, AmericanSamoa, or the Northern Mariana Islands. How the phaseout works.The phaseout (reduction) works on a sliding scale. The higher yourmodified adjusted gross income, the more your credits are reduced. Youfigure the reduction, if any, in Part III of Form 8863. Hope Credit You may be able to claim a Hope credit of up to $1,500 forqualified tuition and related expenses paid for eacheligible student. You can take into account expenses paid in 1999 foracademic periods beginning after December 31, 1998, and before April1, 2000. The credit can be claimed for only 2 years foreach eligible student. Eligible student for the Hope credit.For purposes of the Hope credit, an eligible student is a studentwho meets all of the following requirements. Has not completed the first 2 years ofpostsecondary education (generally, the freshman and sophomore yearsof college) as of the beginning of the year. Is enrolled in a program that leads to a degree,certificate, or other recognized educational credential for at leastone academic period beginning during the year. Is taking at least half of the normal full-time workload for his or her course of study for at least one academicperiod beginning during the calendar year. Is free of any federal or state felony conviction forpossessing or distributing a controlled substance as of the end of theyear. Completion of first 2 years.A student awarded 2 years of academic credit for postsecondary workcompleted prior to the beginning of the year has completed the first 2years of postsecondary education. Any academic credit awarded solely on the basis of the student'sperformance on proficiency examinations is disregarded in determiningwhether the student has completed 2 years of postsecondary education. Half of normal full-time workload.The standard for what is half of the normal full-time work load isdetermined by each eligible educational institution. However, thestandard may not be lower than standards for half-time established bythe Department of Education under the Higher Education Act of 1965. Amount of credit.The amount of the Hope credit is 100% of the first $1,000 plus50% of the next $1,000 of qualified tuition and related expensesyou pay for each eligible student. The maximum amount of Hope credityou can claim in 1999 is $1,500 times the number of eligible students.You can claim the full $1,500 for each eligible student for whom youpay at least $2,000 for qualified expenses. However, the credit may bereduced based on your modified adjusted gross income. See IncomePhaseout, earlier. Example. Jon and Karen are married and file a joint tax return. For 1999,they claim an exemption for their dependent daughter on their taxreturn and their modified adjusted gross income is $70,000. Theirdaughter is in her sophomore (second) year of studies at the localuniversity and Jon and Karen pay $4,300 in 1999 for her tuition costs. Jon and Karen, their daughter, and the local university meet all ofthe requirements for the Hope credit. Jon and Karen can claim a $1,500Hope credit in 1999. This is the maximum amount allowed for 1999. How to figure the Hope credit.The Hope credit is figured in Parts I and III of Form 8863. Anillustrated example using Form 8863 appears later. Lifetime Learning Credit You may be able to claim a lifetime learning credit of up to $1,000for qualified tuition and related expenses paid for allstudents enrolled in eligible educational institutions. You can takeinto account expenses paid in 1999 for academic periods beginningafter December 31, 1998, and before April 1, 2000. The lifetime learning credit is different than the Hope credit inthe following ways. The lifetime learning credit is not based on the student'swork load. It is allowed for one or more courses. The lifetime learning credit is not limited to students inthe first 2 years of postsecondary education. Expenses for graduate-level degree work are eligible. Expenses related to a course of instruction or othereducation that involves sports, games, hobbies, or other noncreditcourses are eligible if they are part of a course ofinstruction to acquire or improve job skills. There is no limit on the number of years for which thelifetime learning credit can be claimed for each student. The amount you can claim as a lifetime learning credit doesnot vary (increase) based on the number of students for whom you payqualified expenses. Amount of credit.The amount of the lifetime learning credit is 20% of the first$5,000 of qualified tuition and related expenses you pay for allstudents in the family. The maximum amount of lifetime learning credityou can claim for 1999 is $1,000 (20% $5,000). However, thatamount may be reduced based on your modified adjusted gross income.See Income Phaseout, earlier. Example. Bruce and Toni are married and file a joint tax return. For 1999,their modified adjusted gross income is $50,000. Toni is attending thecommunity college (an eligible educational institution) to earncredits towards an associate's degree in nursing; she already has abachelor's degree in history and wants to become a nurse. In August1999, Toni paid $2,000 for her fall 1999 semester. Bruce and Toni canclaim a $400 (20% $2,000) lifetime learning credit on their1999 joint tax return. How to figure the lifetime learning credit.The lifetime learning credit is figured in Parts II and III of Form8863. An illustrated example using Form 8863 appears later. Choosing Which Credit To Claim For each student, you can elect for any tax year only oneof the credits or a tax-free withdrawal from aneducation IRA. (See Education IRA, later, for moreinformation.) For example, if you elect to take the Hope credit for achild on your 1999 tax return, you cannot, for that same child, alsoclaim the lifetime learning credit for 1999 or take a tax-freewithdrawal from an education IRA for 1999. Lifetime learning credit after Hope credit.You can claim the Hope credit for the first 2 years of a student'spostsecondary education and claim the lifetime learning credit forthat same student in later tax years. More than one student.If you pay qualified expenses for more than one student in the sameyear, you can choose to take credits on a per-student, per-year basis.This means that, for example, you can claim the Hope credit for onestudent and the lifetime learning credit for another student in thesame tax year. How To Claim the Credits You elect to claim education credits and you figure their amount bycompleting Form 8863.Use Part I for the Hope credit and PartII for the lifetime learning credit. In both parts, you enter thestudent's name and taxpayer identification number (usually a socialsecurity number) and the amount of qualified expenses paid in 1999.You then complete Part III to compute the amount to enter on line 44of Form 1040 or line 29 of Form 1040A. Attach the completed Form 8863to your return. An eligible educational institution (such as a college oruniversity) that receives payment of qualified tuition and relatedexpenses generally must issue Form 1098-T,Tuition PaymentsStatement, to each student by February 1, 2000. The informationon Form 1098-T will help you determine whether you can claim aneducation tax credit for 1999. The following information should beincluded on the 1999 form. The name, address, and taxpayer identification number of theeducational institution. The name, address, and taxpayer identification number of thestudent. Whether the student was enrolled for at least half of thefull-time academic workload. Whether the student was enrolled exclusively in agraduate-level program. The eligible educational institution may ask for a completedForm W-9S, Request for Student's orBorrower's Social Security Number and Certification, or similarstatement, to obtain the information needed to complete (2) above. Illustrated Example Dave and Valerie are married and file a joint tax return. For 1999,they claim exemptions for their two dependent children on their taxreturn, and their modified adjusted gross income is $72,000. Theirson, Sean, will receive his bachelor's degree in psychology from thestate college in May 2000. Their daughter, Corey, enrolled full-timeat that same college in August 1998 to begin working on her bachelor'sdegree in physical education. In December 1998, Dave and Valerie paid$2,000 for each child's tuition for the winter 1999 semester. In July1999, they paid $2,200 in tuition costs for each of them for the fall1999 semester. Form 8863 for Dave and Valerie Dave and Valerie, their children, and the college meet all of therequirements for the higher education credits. Because Sean is beyondthe second (sophomore) year of his postsecondary education, hisexpenses do not qualify for the Hope credit. But, amounts paid forSean's expenses in 1999 for academic periods beginning after 1998 andbefore April 1, 2000, qualify for the lifetime learning credit. Coreyis in her first two (freshman and sophomore) years of postsecondaryeducation and expenses paid for her in 1999 for academic periodsbeginning after 1998 and before April 1, 2000, qualify for the Hopecredit. Dave and Valerie figure their total higher education credits for1999, $1,940, as shown in the completed Form 8863. They can claim thefull amount because their modified adjusted gross income is not morethan $80,000. They carry the amount from line 18 of Form 8863 to line44 of Form 1040, and they attach the Form 8863 to their return.