Publication 17 (2009), Your Federal Income Tax

What's New

American opportunity credit. This new education tax credit (a modification of the Hope credit) is available for 2009 and 2010. The maximum credit per student is $2,500 (100% of the first $2,000 and 25% of the next $2,000 of qualified education expenses). The credit is available for the first 4 years of postsecondary education, and 40% of the credit is refundable for most taxpayers. The threshold at which this credit is reduced is higher than that for the Hope and lifetime learning credits. For 2009, the amount of your credit is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). You cannot claim a credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return).

Eligibility for the Hope credit. For 2009, you can claim a Hope credit only if at least one eligible student is attending an eligible educational institution in a Midwestern disaster area and you do not claim an American opportunity credit for any other student in the same year.

Hope and lifetime learning credit income limits increased. For 2009, the amount of your Hope or lifetime learning credit is gradually reduced (phased out) if your MAGI is between $50,000 and $60,000 ($100,000 and $120,000 if you file a joint return). You cannot claim a credit if your MAGI is $60,000 or more ($120,000 or more if you file a joint return). This is an increase from the 2008 limits of $48,000 and $58,000 ($96,000 and $116,000 if filing a joint return). For more information, see Effect of the Amount of Your Income on the Amount of Your Credit in Publication 970, chapters 3 and 4.

Reminder

Students in Midwestern disaster areas. Special rules apply only to students attending an eligible educational institution in a Midwestern disaster area in the states of Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, and Wisconsin. See Special Rules for Students in Midwestern Disaster Areas , later.

Introduction

For 2009, there are three tax credits available to persons who pay expenses for higher (postsecondary) education. They are:

The American opportunity credit,
The Hope credit, and
The lifetime learning credit.

The chapter will present an overview of these education credits. To get the detailed information you will need to claim any of the credits, and for examples illustrating that information, see chapters 2, 3, and 4 of Publication 970.

Can you claim more than one education credit this year? For each student, you can choose for any year only one of the credits. For example, if you choose to take the American opportunity credit for a child on your 2009 tax return, you cannot, for that same child, also claim the lifetime learning credit for 2009.

If you are eligible to claim the American opportunity credit and you are also eligible to claim the lifetime learning credit for the same student in the same year, you can choose to claim either credit, but not both.

If you pay qualified education expenses for more than one student in the same year, you can choose to take the American opportunity and the lifetime learning credits on a per-student, per-year basis. This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year.

However, you cannot claim the American opportunity credit for one student and the Hope credit for another student in the same year. If you want to claim either of these credits for 2009, you must use the same credit (American opportunity or Hope) for all eligible students. And, in order to claim the Hope credit for any student, at least one of the students must qualify under the rules for the Midwestern disaster areas. None of the requirements in this paragraph will prevent any eligible student from claiming the lifetime learning credit.

Table 35-1.Comparison of Education Credits

Caution. If you have more than one student eligible for the American opportunity credit or the Hope credit, you must claim the same credit for all eligible students. You cannot claim both the American opportunity credit and the Hope credit on the same tax return. However, you can claim both the American opportunity credit and the lifetime learning credit, or the Hope credit and the lifetime learning credit on the same return—but not for the same student.

	American Opportunity Credit – NEW	Hope Credit*	Lifetime Learning Credit
Maximum credit	Up to $2,500 credit per eligible student	Up to $1,800 ($3,600 if a student in a Midwestern disaster area) credit per eligible student	Up to $2,000 ($4,000 if a student in a Midwestern disaster area) credit per return
Limit on modified adjusted gross income (MAGI)	$180,000 if married filling jointly; $90,000 if single, head of household, or qualifying widow(er)	$120,000 if married filling jointly; $60,000 if single, head of household, or qualifying widow(er)
Refundable or nonrefundable	40% of credit may be refundable	Credit limited to the amount of tax you must pay on your taxable income
Number of years of postsecondary education	Available ONLY for the first 4 years of postsecondary education	Available ONLY for the first 2 years of postsecondary education	Available for all years of postsecondary education and for courses to acquire or improve job skills
Number of tax years credit available	Available ONLY for 4 tax years per eligible student	Available ONLY for 2 tax years per eligible student	Available for an unlimited number of years
Type of degree required	Student must be pursuing an undergraduate degree or other recognized education credential		Student does not need to be pursuing a degree or other recognized education credential
Number of courses	Student must be enrolled at least half time for at least one academic period beginning during the tax year		Available for one or more courses
Felony drug conviction	No felony drug convictions on student's records		Felony drug convictions are permitted
Qualified expenses	Tuition and required enrollment fees. Course-related books, supplies, and equipment do not need to be purchased from the institution in order to qualify.	Tuition and required enrollment fees, including amounts required to be paid to the institution for course-related books, supplies, and equipment. Additional expenses allowed for students in Midwestern disaster areas.
Payments for academic periods	Payments made in 2009 for academic periods beginning in 2009 and in the first 3 months of 2010

* You can claim the Hope credit only if at least one eligible student is attending an eligible educational institution in a Midwestern disaster area (see Table 4-2 in chapter 4 of Publication 970 for a list of qualifying disaster areas).

Differences between the American opportunity, Hope, and lifetime learning credits. There are several differences between these three credits. These differences are summarized in Table 35-1, later.

Useful Items - You may want to see:

Publication

970 Tax Benefits for Education

Form (and Instructions)

8863 Education Credits (American Opportunity, Hope, and Lifetime Learning Credits)

Who Can Claim an Education Credit

You may be able to claim an education credit if you, your spouse, or a dependent you claim on your tax return was a student enrolled at or attending an eligible educational institution. The credits are based on the amount of qualified education expenses paid for the student in 2009 for academic periods beginning in 2009 and in the first 3 months of 2010.

For example, if you paid $1,500 in December 2009 for qualified tuition for the spring 2010 semester beginning in January 2010, you may be able to use that $1,500 in figuring your 2009 education credit(s).

You cannot use any amount paid in 2008 or 2010 to figure your 2009 education credit(s).

Academic period. An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period.

Eligible educational institution. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.

Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.

Who can claim a dependent's expenses. If a student is claimed as a dependent on another person's tax return, only the person who claims the student as a dependent can claim a credit for the student's qualified education expenses. If a student is not claimed as a dependent on another person's tax return, only the student can claim a credit.

Generally, qualified education expenses paid on behalf of the student by someone other than the student (such as a relative) are treated as paid by the student. However, qualified education expenses paid (or treated as paid) by a student who is claimed as a dependent on your tax return are treated as paid by you. Therefore, you are treated as having paid expenses that were paid from your dependent student's earnings, gifts, inheritances, savings, etc.

Who cannot claim a credit. You cannot take an education credit if any of the following apply.

You are claimed as a dependent on another person's tax return, such as your parent's return.
Your filing status is married filing separately.
You (or your spouse) were a nonresident alien for any part of 2009 and did not elect to be treated as a resident alien for tax purposes.
Your MAGI is one of the following.
1. American opportunity credit: $180,000 or more if married filing jointly, or $90,000 or more if single, head of household, or qualifying widow(er).
2. Hope and lifetime learning credits: $120,000 or more if married filing jointly, or $60,000 or more if single, head of household, or qualifying widow(er).

Figure 35-A, at the end of this chapter, may be helpful in determining if you can claim an education credit on your tax return.

There are a number of factors, such as your filing status, your MAGI, and whether you are subject to the alternative minimum tax, that will affect the amount of any education credit you are eligible to claim. When you figure your taxes, you may want to compare the different education credits in order to choose the method(s) that gives you the lowest tax liability. If you qualify, you may find that a combination of credit(s) and other education benefit(s) gives you the lowest tax. See Publication 970 for information on other benefits.

Qualified Education Expenses

Generally, qualified education expenses are amounts paid in 2009 for tuition and fees required for the student's enrollment or attendance at an eligible educational institution. It does not matter whether the expenses were paid in cash, by check, by credit card, or with borrowed funds.

Only certain expenses for course-related books, supplies, and equipment qualify.

American opportunity credit: Qualified education expenses include amounts spent on books, supplies, and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance.
Hope and lifetime learning credits: Qualified education expenses include only amounts for books, supplies, and equipment required to be paid to the institution as a condition of enrollment or attendance.

Qualified education expenses do not include amounts paid for:

Room and board, insurance, medical expenses (including student health fees), transportation, or other similar personal, living, or family expenses.
Any course or other education involving sports, games, or hobbies, or any noncredit course, unless such course or other education is part of the student's degree program or (for the lifetime learning credit only) helps the student acquire or improve job skills.
Nonacademic fees, such as student activity fees, athletic fees, insurance expenses, or other expenses unrelated to the academic course of instruction.

But see Special Rules for Students in Midwestern Disaster Areas , later, for certain exceptions.

Paid with borrowed funds. You can claim an education credit for qualified education expenses paid with the proceeds of a loan. Use the expenses to figure the credit for the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account.

Student withdraws from class(es). You can claim an education credit for qualified education expenses not refunded when a student withdraws.

No Double Benefit Allowed

You cannot do any of the following.

Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an education credit based on those same expenses.
Claim an education credit in the same year you are claiming a tuition and fees deduction for the same student.
Claim more than 1 education credit based on the same qualified education expenses.
Claim an education credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP).
Claim an education credit based on qualified education expenses paid with educational assistance, such as a tax-free scholarship, grant, or employer-provided educational assistance. See Adjustments to Qualified Education Expenses, next.

Adjustments to Qualified Education Expenses

If you pay qualified education expenses with certain tax-free funds, you cannot claim an education credit for those amounts. You must reduce the qualified education expenses by the amount of any tax-free educational assistance and refund(s) you received.

Tax-free educational assistance. This includes:

Tax-free parts of scholarships and fellowships (see chapter 12 of this publication and chapter 1 of Publication 970),
Pell grants (see chapter 1 of Publication 970),
Employer-provided educational assistance (see chapter 12 of Publication 970),
Veterans' educational assistance (see chapter 1 of Publication 970), and
Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

Refunds. Qualified education expenses do not include expenses for which you, or someone else who paid qualified education expenses on behalf of a student, receive a refund. For more information, see Refunds in chapters 2, 3, and 4 of Publication 970.

Amounts that do not reduce qualified education expenses. Do not reduce qualified education expenses by amounts paid with funds the student receives as:

Payment for services, such as wages,
A loan,
A gift,
An inheritance, or
A withdrawal from the student's personal savings.

Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations.

The use of the money is restricted to costs of attendance (such as room and board) other than qualified education expenses.
The use of the money is not restricted and is used to pay education expenses that are not qualified (such as room and board).

For examples, see chapter 2 in Publication 970.

When Must the Credit Be Repaid (Recaptured)

If, after you file your 2009 tax return, you or someone else receives tax-free educational assistance for, or a refund of, an expense you used to figure an education credit on that return, you may have to repay all or part of the credit. You must refigure your education credit(s) for 2009 as if the assistance or refund was received in 2009. Subtract the amount of the refigured credit from the amount of the credit you claimed. The result is the amount you must repay. Add the repayment (recapture) to your tax liability for the year in which you receive the assistance or refund. See the instructions for your tax return for that year to find out how to report the recapture amount. Your original 2009 tax return does not change.

Special Rules for Students in Midwestern Disaster Areas

The following rules apply only to students attending an eligible educational institution in a Midwestern disaster area in the states of Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, and Wisconsin. For a list of the eligible counties, see Table 4-2 in Publication 970, chapter 4.

All of the other rules for claiming a Hope or lifetime learning credit (as modified by these rules) must still be met.

The Hope credit for students in Midwestern disaster areas is 100% of the first $2,400 of qualified education expenses and 50% of the next $2,400 of qualified education expenses for a maximum credit of $3,600 per student. The maximum lifetime learning credit for students in Midwestern disaster areas is $4,000 per return. There are no increases for the American opportunity credit when claimed for students in Midwestern disaster areas.

The definition of qualified education expenses is expanded for students in Midwestern disaster areas. In addition to tuition and fees required for enrollment or attendance at an eligible educational institution, qualified education expenses for students in Midwestern disaster areas include the following.

Books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.
For a special needs student, expenses that are necessary for that person's enrollment or attendance at an eligible educational institution.
For a student who is at least a half-time student, the reasonable costs of room and board, but only to the extent that the costs are not more than the greater of the following two amounts.
1. The allowance for room and board, as determined by the eligible educational institution, included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
2. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

You will need to contact the eligible educational institution for qualified room and board costs.

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Figure 35-A. Can You Claim an Education Credit for 2008?

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35. Education Credits