35.   Education Credits

Introduction

For 2014, there are two tax credits available to persons who pay expenses for higher (postsecondary) education. They are:

  • The American opportunity 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 either of the credits, and for examples illustrating that information, see chapters 2 and 3 of Publication 970.

Can you claim more than one education credit for 2014?   For 2014, you can claim one education credit per eligible student. For example, if you choose to take the American opportunity credit for a child on your 2014 tax return, you cannot, for that same child, also claim the lifetime learning credit for 2014.

  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.

  
The American opportunity credit will always be greater than or equal to the lifetime learning credit for any student who is eligible for both credits. However, if any of the conditions for the American opportunity credit, listed in Table 35-1 later, are not met for any student, you cannot take the American opportunity credit for that student. You may be able to take the lifetime learning credit for part or all of that student's qualified education expenses instead. See Pub. 970 for information on other education benefits.

Table 35-1.Comparison of Education Credits for 2014

Caution. You can claim both the American opportunity credit and the lifetime learning credit on the same return—but not for the same student.

  American Opportunity Credit Lifetime Learning Credit
Maximum credit Up to $2,500 credit per eligible student Up to $2,000 credit per return
Limit on modified adjusted gross income (MAGI) $180,000 if married filing jointly;  
$90,000 if single, head of household, or qualifying widow(er)
$128,000 if married filing jointly;  
$64,000 if single, head of household, or qualifying widow(er)
Refundable or nonrefundable 40% of credit may be refundable Nonrefundable – credit limited to the amount of tax you must pay on your taxable income
Number of years of postsecondary education Available ONLY if the student had not completed the first 4 years of postsecondary education before 2014 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 (including any year(s) the Hope scholarship credit was claimed) Available for an unlimited number of tax years
Type of program required Student must be pursuing a program leading to a degree or other recognized education credential Student does not need to be pursuing a program leading to 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 2014 (or the first 3 months of 2015 if the qualified expenses were paid in 2014) Available for one or more courses
Felony drug conviction At the end of 2014, the student had not been convicted of a felony for possessing or distributing a controlled substance Felony drug convictions do not make the student ineligible
Qualified expenses Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance Tuition and required enrollment fees (including amounts required to be paid to the institution for course-related books, supplies, and equipment)
Payments for academic periods Payments made in 2014 for academic periods beginning in 2014 or beginning in the first 3 months of 2015

Differences between the American opportunity and lifetime learning credits.   There are several differences between these two 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 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. For 2014, the credits are based on the amount of qualified education expenses paid for the student in 2014 for academic periods beginning in 2014 and in the first 3 months of 2015.

For example, if you paid $1,500 in December 2014 for qualified tuition for the spring 2015 semester beginning in January 2015, you may be able to use that $1,500 in figuring your 2014 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 an exemption is allowed as a deduction for any person who claims the student as a dependent, all qualified education expenses of the student are treated as having been paid by that person. Therefore, only that person can claim an education credit for the student. If a student is not claimed as a dependent on another person's tax return, only the student can claim a credit.

Expenses paid by a third party.   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 by the third party. For more information and an example, see Who Can Claim a Dependent's Expenses in Pub. 970, chapter 2 or 3.

Who cannot claim a credit.   You cannot take an education credit if any of the following apply.
  1. You are claimed as a dependent on another person's tax return, such as your parent's return.

  2. Your filing status is married filing separately.

  3. You (or your spouse) were a nonresident alien for any part of 2014 and did not elect to be treated as a resident alien for tax purposes.

  4. 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. Lifetime learning credit: $128,000 or more if married filing jointly, or $64,000 or more if single, head of household, or qualifying widow(er).

  Generally, your MAGI is the amount on your Form 1040, line 38, or Form 1040A, line 22. However, if you are filing Form 2555, Form 2555-EZ, or Form 4563, or are excluding income from Puerto RIco, add to the amount on your Form 1040, line 38, or Form 1040A, line 22, the amount of income you excluded. For details, see Pub. 970.

   Figure 35-A may be helpful in determining if you can claim an education credit on your tax return.

Qualified Education Expenses

Generally, qualified education expenses are amounts paid in 2014 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 or debit card, or with borrowed funds.

For course-related books, supplies, and equipment, only certain expenses 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.

  • Lifetime learning credit: Qualified education expenses include amounts for books, supplies, and equipment only if required to be paid to the institution as a condition of enrollment or attendance.

Qualified education expenses include nonacademic fees, such as student activity fees, athletic fees, or other expenses unrelated to the academic course of instruction, only if the fee must be paid to the institution as a condition of enrollment or attendance. However, fees for personal expenses (described below) are never qualified education expenses.

Qualified education expenses for either credit do not include amounts paid for the following.

  • Personal expenses. This means room and board, insurance, medical expenses (including student health fees), transportation, and 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.

You should receive Form 1098-T, Tuition Statement, from the institution reporting either payments received in 2014 (box 1) or amounts billed in 2014 (box 2). However, the amount on your Form 1098-T, box 1 or 2, may be different from the amount you paid (or are treated as having paid). In completing Form 8863, use only the amounts you actually paid (plus any amounts you are treated as having paid) in 2014, reduced as necessary, as described in Adjustments to Qualified Education Expenses , later. See chapters 2 and 3 of Pub. 970 for more information on Form 1098-T.

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. 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.

If you or the student takes a deduction for higher education expenses, such as on Schedule A or C (Form 1040), you cannot use those expenses in your qualified education expenses when figuring your education credits.

Qualified education expenses for any academic period must be reduced by any tax-free educational assistance allocable to that academic period. See Adjustments to Qualified Education Expenses, later.

Prepaid Expenses.   Qualified education expenses paid in 2014 for an academic period that begins in the first 3 months of 2015 can be used in figuring an education credit for 2014 only. See Academic period , earlier. For example, if you pay $2,000 in December 2014 for qualified tuition for the 2015 winter quarter that begins in January 2015, you can use that $2,000 in figuring an education credit for 2014 only (if you meet all the other requirements).

  
You cannot use any amount you paid in 2013 or 2015 to figure the qualified education expenses you use to figure your 2014 education credit(s).

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 more than one 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

For each student, reduce the qualified education expenses paid in 2014 by or on behalf of that student under the following rules. The result is the amount of adjusted qualified education expenses for each student.

Tax-free educational assistance.   For tax-free educational assistance received in 2014, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. See Academic period , earlier.

  Tax-free educational assistance includes:

  
  • Tax-free parts of scholarships and fellowship grants (including Pell grants). See chapter 12 of this publication and chapter 1 of Pub. 970, for more information),

  • The tax-free part of employer-provided educational assistance (see Pub. 970),

  • Veterans' educational assistance (see chapter 1 of Pub. 970), and

  • Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

You may be able to increase the combined value of an education credit and certain educational assistance to living expenses and include the assistance in income in the year it is received. See Coordination with Pell grants and other scholarships of fellowship grants, later. Also, for more information, see examples in Coordination with Pell grants, and other scholarships or fellowship grants, in chapter 2 of Pub. 970 and Coordination with Pell grants, and other scholarships, in chapter 3 of Pub. 970.

Generally, any scholarship or fellowship grant is treated as tax-free educational assistance. However, a scholarship or fellowship grant is not treated as tax-free educational assistance to the extent the student includes it in gross income (if the student is required to file a tax return) for the year the scholarship or fellowship grant is received and either:

  • The scholarship or fellowship grant (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. 970, chapter 1; or

  • The scholarship or fellowship grant (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. 970, chapter 1.

Coordination with Pell grants and other scholarships or fellowship grants.   You may be able to increase an education credit and reduce your total tax or increase your tax refund if the student (you, your spouse, or your dependent) chooses to include all or part of certain scholarships or fellowship grants in income. The scholarship or fellowship grant must be one that may qualify as a tax-free scholarship under the rules discussed in chapter 1 of Pub. 970. Also, the scholarship or fellowship grant must be one that may (by its terms) be used for expenses other than qualified education expenses (such as room and board).

  The fact that the educational institution applies the scholarship or fellowship grant to qualified education expenses (such as tuition and related fees) does not prevent the student from choosing to apply certain scholarships or fellowship grants to other expenses (such as room and board). By choosing to do so, the student will include the part applied to other expenses (such as room and board) in gross income and may be required to file a tax return. But, this allows payments made in cash, by check, by credit or debit card, or with borrowed funds such as a student loan to be applied to qualified education expenses. These payments, unlike certain scholarships or fellowship grants, will not reduce the qualified education expenses available to figure an education credit. The result is generally a larger education credit that reduces your total tax or increases your tax refund.

Example 1.

Last year, your child graduated from high school and enrolled in college for the fall semester. You and your child meet all other requirements to claim the American opportunity credit, and you need to determine adjusted qualified education expenses to figure the credit.

Your child has $5,000 of qualified education expenses and $4,000 of room and board. Your child received a $5,000 Pell grant and took out a $2,750 student loan to pay these expenses. You paid the remaining $1,250. The Pell grant by its terms may be used for any of these expenses.

If you and your child choose to apply the Pell grant to the qualified education expenses, it will qualify as a tax-free scholarship under the rules discussed in chapter 1 of Pub. 970. Your child will not include any part of the Pell grant in gross income. After reducing qualified education expenses by the tax-free scholarship you will have $0 ($5,000 - $5,000) of adjusted qualified education expenses available to figure your credit. Your credit will be $0.

Example 2

The facts are the same as in Example 1. If, unlike in Example 1, you and your child choose to apply only $1,000 of the Pell grant to the qualified education expenses and to apply the remaining $4,000 to room and board, only $1,000 will qualify as a tax-free scholarship.

Your child will include the $4,000 applied to room and board in gross income, and it will be treated as earned income for purposes of determining whether your child is required to file a tax return. If the $4,000 is your child’s only income, your child will not be required to file a tax return.

After reducing qualified education expenses by the tax-free scholarship you will have $4,000 ($5,000 - $1,000) of adjusted qualified education expenses available to figure your credit. Your refundable American opportunity credit will be $1,000. Your nonrefundable credit may be as much as $1,500 but depends on your tax liability.

If you are not otherwise required to file a tax return, you should file to get a refund of your $1,000 refundable credit but your tax liability and nonrefundable credit will be $0.

Note.

The result may be different if your child has other income or if you are the student. If you are the student and you claim the earned income credit, choosing not to apply a Pell grant to qualified education expenses may decrease your earned income credit at certain income levels by raising your adjusted gross income. However, you generally need at least $2,000 of adjusted qualified education expenses to receive the maximum benefit of claiming both credits. For more information, see Coordination with Pell grants, and other scholarships or fellowship grants, in chapters 2 and 3 of Pub. 970.

  

Tax-free educational assistance treated as a refund.   Some tax-free educational assistance received after 2014 may be treated as a refund of qualified education expenses paid in 2014. This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2014 for qualified education expenses paid on behalf of a student in 2014 (or attributable to enrollment at an eligible educational institution during 2014).

  If this tax-free educational assistance is received after 2014 but before you file your 2014 income tax return, see Refunds received after 2014 but before your income tax return is filed, later. If this tax-free educational assistance is received after 2014 and after you file your 2014 income tax return, see Refunds received after 2014 and after your income tax return is filed, later.

Refunds.   A refund of qualified education expenses may reduce qualified education expenses for the tax year or may require you to repay (recapture) the credit that you claimed in an earlier year. Some tax-free educational assistance received after 2014 may be treated as a refund. See Tax-free educational assistance, earlier.

Refunds received in 2014.   For each student, figure the adjusted qualified education expenses for 2014 by adding all the qualified education expenses paid in 2014 and subtracting any refunds of those expenses received from the eligible educational institution during 2014.

Refunds received after 2014 but before your income tax return is filed.   If anyone receives a refund after 2014 of qualified education expenses paid on behalf of a student in 2014 and the refund is received before you file your 2014 income tax return, reduce the amount of qualified education expenses for 2014 by the amount of the refund.

Refunds received after 2014 and after your income tax return is filed.   If anyone receives a refund after 2014 of qualified education expenses paid on behalf of a student in 2014 and the refund is received after you file your 2014 income tax return, you may need to repay some or all of the credit that you claimed. See Credit recapture next.

Credit recapture.    If any tax-free educational assistance for the qualified education expenses paid in 2014, or any refund of your qualified education expenses paid in 2014, is received after you file your 2014 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2014 by reducing the expenses by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2014 and figure the amount by which your 2014 tax liability would have increased if you had claimed the refigured credit(s). Include that amount as an additional tax for the year the refund or tax-free assistance was received.

Example.    You paid $8,000 tuition and fees in December 2014 for your child's Spring semester beginning in January 2015. You filed your 2014 tax return on February 3, 2015, and claimed a lifetime learning credit of $1,600 ($8,000 qualified education expense paid x .20). You claimed no other tax credits. After you filed your return, your child withdrew from two courses and you received a refund of $1,400. You must refigure your 2014 lifetime learning credit using $6,600 ($8,000 qualified education expenses − $1,400 refund). The refigured credit is $1,320 and your tax liability increased by $280. You must include the difference of $280 ($1,600 credit originally claimed − $1,320 refigured credit) as additional tax on your 2015 income tax return. See the instructions for your 2015 income tax return to determine where to include this tax.

If you also pay qualified education expenses in 2015 for an academic period that begins in the first 3 months of 2015 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2015 instead of reducing your expenses for 2014.

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 grant reported as income on the student's tax return in the following situations.
  • The use of the money is restricted, by the terms of the scholarship or fellowship grant, to costs of attendance (such as room and board) other than qualified education expenses, as defined in chapter 1 of Pub. 970.

  • The use of the money is not restricted.

  For examples, see chapter 2 in Pub. 970.

Figure 35-A. Can You Claim an Education Credit for 2014?

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Figure 35-A. Can You Claim an Education Credit for 2014?


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