Publication 970 - Additional Material


Appendices

The following appendices are provided to help you claim the education benefits that will give you the lowest tax.

  1. Appendix A—An illustrated example of education credits, including a filled-in Form 8863 showing how to claim both the American opportunity credit and lifetime learning credit for 2013.

  2. Appendix B—A chart summarizing some of the major differences between the education tax benefits discussed in this publication. It is intended only as a guide. Look in this publication for more complete information. 

Appendix A. Illustrated Example of Education Credits

Dave and Valerie Jones are married and on their 2013 joint tax return they claim exemptions for their two dependent children, Sean (age 21, social security number: 000-00-0001) and Carey (age 18, social security number: 000–00–0002). Their modified adjusted gross income (MAGI) on Form 1040, line 38 is $110,000. Because Dave and Valerie have unusually high itemized deductions, their taxable income is $10,000 and their tax before credits is $1,000.

Sean enrolled as a full-time graduate student in August 2013 at California State College. He graduated with his bachelor's degree in 2012 and did not attend school from January 2013 through July 2013. His parents claimed the Hope Scholarship Credit for Sean for 2008 and the American opportunity credit for Sean for 2010, 2011, and 2012.

Carey enrolled full time as a freshman at the same college in January 2013 to begin working on her bachelor's degree.

In 2013, Dave and Valerie paid $7,000 in tuition for Sean and $8,500 in tuition for Carey. California State College issued two Forms 1098-T, one for Sean and one for Carey, and sent them to the Joneses' residence. California State College reports amounts billed in 2013 instead of amounts paid during 2013. In completing Form 8863, the Joneses use the amounts they paid. Neither Sean nor Carey has been convicted of a felony for possession or distribution of a controlled substance before the end of 2013.

Dave and Valerie figure their education credits by completing Form 8863. They begin Form 8863 on page 2 before completing Part I on page 1. Because the Joneses have two eligible students, they will complete page 2 twice, once for their son, Sean, and once for their daughter, Carey.

The Joneses decide to complete Part III for Carey first, as shown later. They carry over the amount of $2,500 entered on Part III, line 30, to Part I, line 1.

The Joneses complete a separate Part III for their son Sean. They check the “Yes” box on line 23, determine that Sean is not eligible for the American opportunity credit, and go to line 31 as instructed. They figure their line 31 adjusted qualified education expenses for Sean to be $7,000.

Once they have completed Part III for each student, they figure their credits. The Joneses figure their refundable American opportunity credit of $1,000 by completing Form 8863, Part I, lines 1 through 8. They enter the amount from line 8, $1,000, on line 66 of their Form 1040.

The Joneses enter $7,000 on Part II, line 10, of Form 8863 and figure their tentative lifetime learning credit for 2013 to be $1,400 (line 12). They cannot claim the full amount because their MAGI of $110,000 is greater than $107,000. They enter the reduced amount of $1,190 (figured on Part II, line 18) on the Credit Limit Worksheet, line 1. The $1,190 is added to their nonrefundable American opportunity credit ($1,500 on line 2 of the Credit Limit Worksheet) for a total nonrefundable credit of $2,690. The Joneses enter $1,000 on line 7 of the Credit Limit Worksheet, which is the smaller of their tax from line 46 of their Form 1040 (which is $1,000) or the $2,690 on line 3 of the Credit Limit Worksheet. They enter $1,000 on line 19, Part II of Form 8863 and on line 49 of Form 1040.

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Form 1098-T

Adjusted Qualified Education Expenses Worksheet (Form 8863 instructions)
1. Total qualified education expenses paid for or on behalf of the student in 2013 for the academic period 8,500
2. Less adjustments:  
  a. Tax-free educational assistance received in 2013 allocable to the academic period   0  
  b. Tax-free educational assistance received in 2014 (and before you file your 2013 tax return) allocable to the academic period   0  
  c. Refunds of qualified education expenses paid in 2013 if the refund is received in 2013 or in 2014 before you file your 2013 tax return   0  
3. Total adjustments (add lines 2a, 2b, and 2c) 0
4. Adjusted qualified education expenses. Subtract line 3 from line 1. If zero or less, enter -0- 8,500

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Form 1098-T

Adjusted Qualified Education Expenses Worksheet (Form 8863 instructions)
1. Total qualified education expenses paid for or on behalf of the student in 2013 for the academic period 7,000
2. Less adjustments:  
  a. Tax-free educational assistance received in 2013 allocable to the academic period   0  
  b. Tax-free educational assistance received in 2014 (and before you file your 2013 tax return) allocable to the academic period   0  
  c. Refunds of qualified education expenses paid in 2013 if the refund is received in 2013 or in 2014 before you file your 2013 tax return   0  
3. Total adjustments (add lines 2a, 2b, and 2c) 0
4. Adjusted qualified education expenses. Subtract line 3 from line 1. If zero or less, enter -0- 7,000

Credit Limit Worksheet (Form 8863 instructions)

Nonrefundable Credit Worksheet
1. Enter the amount from Form 8863, line 18 1. 1,190
2. Enter the amount from Form 8863, line 9 2. 1,500
3. Add lines 1 and 2 3. 2,690
4. Enter the amount from:

Form 1040, line 46; or

Form 1040A, line 28

4. 1,000
5. Enter the amount from either:

Form 1040, lines 47 and 48, and the amount from Schedule R included on Form 1040, line 53; or

Form 1040A, lines 29 and 30

5. 0
6. Subtract line 5 from line 4 6. 1,000
7.   Enter the smaller of line 3 or line 6 here and on Form 8863, line 19 7. 1,000

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Form 8863 for Dave and Valerie Jones

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Carey Jones page 2

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Filled-in Form 8863 Jones page 2

Appendix B.Highlights of Education Tax Benefits for Tax Year 2013

This chart highlights some differences among the benefits discussed in this publication. See the text for definitions and details.Do not rely on this chart alone.  
 
Caution:You generally cannot claim more than one benefit for the same education expense.

  Scholarships,  
Fellowships, 
Grants, and  
Tuition  
Reductions
American Opportunity Credit Lifetime Learning Credit Student Loan Interest Deduction Tuition and Fees Deduction Coverdell ESA Qualified Tuition Program (QTP) Education Exception to Additional Tax on Early IRA Distributions Education Savings Bond Program Employer- 
Provided Educational Assistance
Business Deduction for Work-Related Education
What is your  
benefit?
Amounts received may not be taxable 
 
Credits can reduce the amount of tax you have to pay. 
 
40% of the credit may be refundable 
(limited to $1,000 per student).
Credits can reduce amount of tax you must pay Can deduct interest paid Can deduct expenses Earnings not  
taxed
Earnings not taxed No 10%  
additional tax on early distribution
Interest not taxed Employer benefits not taxed Can deduct expenses
What is the annual limit? None $2,500 credit per student $2,000 credit per tax return 
 
 
 
$2,500 deduction $4,000 deduction $2,000 contribution per beneficiary None Amount of qualified  
education expenses
Amount of qualified  
education expenses
$5,250 exclusion Amount of qualifying work-related education expenses
What expenses  
qualify besides  
tuition and required enrollment fees?
Course-related expenses such as fees, books, supplies, and equipment Course-related books, supplies, and equipment Amounts paid for required books, etc., that must be paid to the educational institution, etc., are required fees Books 
Supplies 
Equipment 
 
Room & board 
 
Transportation 
 
Other necessary expenses 
None Books 
Supplies 
Equipment 
 
Expenses for special needs services 
 
Payments to QTP 
 
Higher education: 
Room & board if  
at least half-time  
student 
 
Elem/sec (K–12) education: 
Tutoring 
Room & board 
Uniforms 
Transportation 
Computer  
access 
Supplementary 
expenses
Books 
Supplies 
Equipment 
 
Room & board if  
at least half-time student 
 
Expenses for special needs services
Books 
Supplies 
Equipment 
 
Room & board if  
at least half-time student 
 
Expenses for special needs services
Payments to Coverdell ESA 
 
Payments to QTP
Books 
Supplies 
Equipment
Transportation 
 
Travel 
 
Other necessary expenses

  Scholarships,  
Fellowships, 
Grants, and  
Tuition  
Reductions
American Opportunity Credit Lifetime Learning Credit Student Loan Interest Deduction Tuition and Fees Deduction Coverdell ESA Qualified Tuition Program (QTP) Education Exception to Additional Tax on Early IRA Distributions Education Savings Bond Program Employer- 
Provided Educational Assistance
Business Deduction for Work-Related Education
What education qualifies? Undergraduate & graduate 
 
K–12
Undergraduate & graduate Undergraduate & graduate 
 
Courses to acquire or improve job skills 
 
 
Undergraduate & graduate Undergraduate & graduate Undergraduate & graduate 
 
K–12
Undergraduate & graduate Undergraduate & graduate Undergraduate & graduate Undergraduate & graduate Required by employer or law to keep present job, salary, status 
 
Maintain or improve job skills
What are some of the other  
conditions that  
apply?
Must be in degree or vocational program 
 
Payment of tuition and required fees must be allowed under the grant
Can be claimed for only 4 tax years (which includes years Hope Scholarship Credit claimed) 
 
Must be enrolled at least half-time in degree program 
 
No felony drug conviction(s) 
 
Must not have completed first 4 years of postsecondary education before end of preceding tax year. 
No other conditions Must have been at least half-time  
student in degree program
Cannot claim both deduction & education credit for same student in same year Assets must be distributed at age 30 unless special  
needs beneficiary
No other conditions No other conditions Applies only to qualified series  
EE bonds issued after 1989 or series I bonds
No other conditions Cannot be to  
meet minimum educational requirements of present trade/business 
 
Cannot qualify  
you for new trade/business 
 
In what income  
range do benefits  
phase out?
No phaseout $80,000 – $90,000 
 
$160,000 – $180,000 for joint returns
$53,000 – $63,000 
 
$107,000 – $127,000 for joint returns
$60,000 – $75,000 
 
$125,000 –  
$155,000 for  
joint returns 
$60,000 – $80,000 
 
$130,000 –  
$160,000 for  
joint returns 
$95,000 – $110,000 
 
$190,000 – $220,000 for  
joint returns
No phaseout No phaseout   No phaseout No phaseout
Any nontaxable distribution is limited to the amount that does not exceed qualified education expenses.

Glossary

The education benefits included in this publication were enacted over many years, leading to a number of common terms being defined differently from one benefit to the next. For example, an eligible educational institution means one thing when determining if earnings from a Coverdell education savings account are not taxable and something else when determining if a scholarship or fellowship is not taxable.

For each term listed below that has more than one definition, the definition for each education benefit is listed.

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

Adjusted qualified education expenses (AQEE):    Qualified education expenses (defined later) reduced by any tax-free educational assistance, such as a tax-free scholarship or employer-provided educational assistance. They must also be reduced by any qualified education expenses deducted elsewhere on your return, used to determine an education credit or other benefit, or used to determine a tax-free distribution. For information on a specific benefit, see the appropriate chapter in this publication.

Candidate for a degree:   A student who meets either of the following requirements.
  1. Attends a primary or secondary school or pursues a degree at a college or university, or

  2. Attends an accredited educational institution that is authorized to provide:

    1. A program that is acceptable for full credit toward a bachelor's or higher degree, or

    2. A program of training to prepare students for gainful employment in a recognized occupation.

Designated beneficiary:   The individual named in the document creating the account/plan who is to receive the benefit of the funds in the account/plan.

Eligible educational institution:   
  1. American opportunity credit. Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.

  2. Coverdell education savings account (ESA). Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Also included is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law.

  3. Education savings bond program. Same as American opportunity credit in this category.

  4. IRA, early distributions from. Same as American opportunity credit in this category.

  5. Lifetime learning credit. Same as American opportunity credit in this category.

  6. Qualified tuition program (QTP). Same as American opportunity credit in this category.

  7. Scholarships and fellowships. An institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.

  8. Student loan, cancellation of. Same as Scholarships and fellowships in this category.

  9. Student loan interest deduction. Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Also included is an institution that conducts an internship or residency program leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training.

  10. Tuition and fees deduction. Same as American opportunity credit in this category.

Eligible student:   
  1. American opportunity credit. A student who meets all of the following requirements for the tax year for which the credit is being determined.

    • Did not have expenses that were used to figure an American opportunity or Hope Scholarship Credit in any 4 earlier tax years.

    • Had not completed the first 4 years of postsecondary education (generally the freshman through senior years).

    • For at least one academic period beginning in the tax year, was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential at an eligible educational institution.

    • Was free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year.

  2. Lifetime learning credit. A student who is enrolled in one or more courses at an eligible educational institution.

  3. Student loan interest deduction. A student who was enrolled at least half-time in a program leading to a postsecondary degree, certificate, or other recognized educational credential at an eligible educational institution.

  4. Tuition and fees deduction. A student who is enrolled in one or more courses at an eligible educational institution.

Half-time student:   A student who is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled.

Modified adjusted gross income (MAGI):   
  1. American opportunity credit. Adjusted gross income (AGI) as figured on the federal income tax return, modified by adding back any:

    • Foreign earned income exclusion,

    • Foreign housing exclusion,

    • Foreign housing deduction,

    • Exclusion of income by bona fide residents of American Samoa, and

    • Exclusion of income by bona fide residents of Puerto Rico.

  2. Coverdell education savings account (ESA). Same as American opportunity credit in this category.

  3. Education savings bond program. Adjusted gross income (AGI) as figured on the federal income tax return without taking into account any savings bond interest exclusion and modified by adding back any:

    • Foreign earned income exclusion,

    • Foreign housing exclusion,

    • Foreign housing deduction,

    • Exclusion of income by bona fide residents of American Samoa,

    • Exclusion of income by bona fide residents of Puerto Rico,

    • Exclusion for adoption benefits received under an employer's adoption assistance program,

    • Deduction for student loan interest,

    • Deduction for tuition and fees, and

    • Deduction for domestic production activities.

  4. Lifetime learning credit. Same as American opportunity credit in this category.

  5. Student loan interest deduction. Adjusted gross income (AGI) as figured on the federal income tax return without taking into account any student loan interest deduction, tuition and fees deduction, or domestic production activities deduction, and modified by adding back any:

    • Foreign earned income exclusion,

    • Foreign housing exclusion,

    • Foreign housing deduction,

    • Exclusion of income by bona fide residents of American Samoa, and

    • Exclusion of income by bona fide residents of Puerto Rico.

  6. Tuition and fees deduction. Adjusted gross income (AGI) as figured on the federal income tax return without taking into account any tuition and fees deduction, or domestic production activities deduction, and modified by adding back any:

    • Foreign earned income exclusion,

    • Foreign housing exclusion,

    • Foreign housing deduction,

    • Exclusion of income by bona fide residents of American Samoa, and

    • Exclusion of income by bona fide residents of Puerto Rico.

Phaseout:   The amount of credit or deduction allowed is reduced when modified adjusted gross income (MAGI) is greater than a specified amount of income.

Qualified education expenses:   See pertinent chapter for specific items.

  
  1. American opportunity credit. Tuition and certain related expenses (including student activity fees) required for enrollment or attendance at an eligible educational institution. Books, supplies, and equipment needed for a course of study are included even if not purchased from the educational institution. Does not include expenses for room and board. Does not include expenses for courses involving sports, games, or hobbies (including noncredit courses) that are not part of the student's postsecondary degree program.

  2. Coverdell education savings account (ESA). Expenses related to or required for enrollment or attendance of the designated beneficiary at an eligible elementary, secondary, or postsecondary school. Many specialized expenses included for K–12. Also includes expenses for special needs services and contribution to qualified tuition program (QTP).

  3. Education savings bond program. Tuition and fees required to enroll at or attend an eligible educational institution. Also includes contributions to a qualified tuition program (QTP) or Coverdell education savings account (ESA). Does not include expenses for room and board. Does not include expenses for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program.

  4. IRA, early distributions from. Tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution, plus certain limited costs of room and board for students who are enrolled at least half-time. Also includes expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance.

  5. Lifetime learning credit. Tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Student-activity fees and expenses for course-related books, supplies, and equipment are included only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance. Does not include expenses for room and board. Does not include expenses for courses involving sports, games, or hobbies (including noncredit courses) that are not part of the student's postsecondary degree program, unless taken by the student to acquire or improve job skills.

  6. Qualified tuition program (QTP). Tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution, plus certain limited costs of room and board for students who are enrolled at least half-time. Includes expenses for special needs services and computer access.

  7. Scholarships and fellowships. Expenses for tuition and fees required to enroll at or attend an eligible educational institution, and course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. Course-related items must be required of all students in the course of instruction.

  8. Student loan interest deduction. Total costs of attending an eligible educational institution, including graduate school (however, limitations may apply to the cost of room and board allowed).

  9. Tuition and fees deduction. Tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Student-activity fees and expenses for course-related books, supplies, and equipment are included only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.

Recapture:   To include as income on your current year's return an amount allowed as a deduction in a prior year. To include as tax on your current year's return an amount allowed as a credit in a prior year.

Rollover:   A tax-free distribution to you of cash or other assets from a tax-favored plan that you contribute to another tax-favored plan.

Transfer:   A movement of funds in a tax-favored plan from one trustee directly to another, either at your request or at the trustee's request.


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