Publication 970 (2009), Tax Benefits for Education

IRS Resources

Publication 970 - Additional Material

Table of Contents

Appendices

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

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 2009.
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 file a joint tax return. For 2009, they claim exemptions for their two dependent children on their tax return. Their modified adjusted gross income is $103,000. Their tax, before credits, is $11,631. Their son, Sean, began graduate school (fifth year of college) in September 2009 and will receive his master's degree in psychology from the state college in May 2010. Their daughter, Corey, enrolled full-time at that same college in August 2008 to begin working on her bachelor's degree in physical education. In July 2009, Dave and Valerie paid $2,400 in tuition costs for each child for the fall 2009 semester. In December 2009, they also paid $2,600 of tuition for each child for the spring 2010 semester that begins in January.

Dave and Valerie, their children, and the college meet all of the requirements for the education credits. Because neither child attends school in a Midwestern disaster area, they do not claim a Hope credit. Because Sean is beyond the fourth (senior) year of his postsecondary education, his expenses do not qualify for the American opportunity credit. However, amounts paid for Sean's expenses in 2009 for academic periods beginning in 2009 and January 2010 do qualify for the lifetime learning credit. Corey is in her first 4 years (freshman through senior) of postsecondary education and expenses paid for her in 2009, for academic periods beginning in 2009 and January 2010, qualify for the American opportunity credit.

Dave and Valerie figure their refundable American opportunity credit, $1,000, as shown in Part IV of the completed Form 8863. They carry the amount from line 16 of Form 8863 to line 66 of Form 1040. Dave and Valerie figure their tentative lifetime learning credit for 2009, $1,000 (line 8c). They cannot claim the full amount because their MAGI is more than $100,000. The reduced amount ($850 on line 24) is added to their nonrefundable American opportunity credit ($1,500 on line 17) for a total nonrefundable credit of $2,350. They carry that amount (line 29) to line 49 of Form 1040 and attach the completed Form 8863 to their return.

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Form 8863 for Dave and Valerie Jones

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Filled-in Form 8863 Jones page 2

Appendix B.Highlights of Education Tax Benefits for Tax Year 2009

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	Hope Credit	Lifetime Learning Credit	Student Loan Interest Deduction	Tuition and Fees Deduction
What is your benefit?	Amounts received may not be taxable	40% of credit may be refundable (limited to $1,000)	Credits can reduce amount of tax you must pay		Can deduct interest paid	Can deduct expenses
What is the annual limit?	None	$2,500	$1,800 credit ($3,600 if a student in a Midwestern disaster area) per student	$2,000 credit ($4,000 if a student in a Midwestern disaster area) per tax return	$2,500 deduction	$4,000 deduction
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	None (but seeStudents in Midwestern disaster areas under Qualified Education Expenses in chapter 3 for an exception)	None (but see Students in Midwestern disaster areas under Qualified Education Expenses in chapter 4 for an exception)	Books Supplies Equipment Room & board Transportation Other necessary expenses	None (but see Students in Midwestern disaster areas under Qualified Education Expenses in chapter 7 for an exception)
What education qualifies?	Undergraduate & graduate K–12	1st 4 years of undergraduate (postsecondary)	1st 2 years of undergraduate (postsecondary)	Undergraduate & graduate Courses to acquire or improve job skills	Undergraduate & graduate	Undergraduate & graduate
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 credit claimed) Must be enrolled at least half-time in degree program No felony drug conviction(s) Cannot claim Hope credit on same return	Can be claimed for only 2 tax years Must be enrolled at least half-time in degree program Must claim the credit for at least one eligible Midwestern disaster area student No felony drug conviction(s) Cannot claim American opportunity credit on same return	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
In what income range do benefits phase out?	No phaseout	$80,000 – $90,000 $160,000 – $180,000 for joint returns	$50,000 – $60,000 $100,000 – $120,000 for joint returns		$60,000 – $75,000 $120,000 – $150,000 for joint returns	$65,000 – $80,000 $130,000 – $160,000 for joint returns

(Continued)

Appendix B.Highlights of Education Tax Benefits for Tax Year 2009 (Continued)

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.

	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?	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?	$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?	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 Computer technology, equipment, and Internet access (2009 and 2010)	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
What education qualifies?	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?	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?	$95,000 – $110,000 $190,000 – $220,000 for joint returns	No phaseout	No phaseout	$69,950 – $84,950 $104,900 – $134,900 for joint and qualifying widow(er) returns	No phaseout	May be subject to limit on itemized deductions

^† 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.

Attends a primary or secondary school or pursues a degree at a college or university, or
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:

	•	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.
	•	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.
	•	Education savings bond program. Same as American opportunity credit in this category.
	•	Hope credit. Same as American opportunity credit in this category.
	•	IRA, early distributions from. Same as American opportunity credit in this category.
	•	Lifetime learning credit. Same as American opportunity credit in this category.
	•	Qualified tuition program (QTP). Same as American opportunity credit in this category.
	•	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.
	•	Student loan, cancellation of. Same as Scholarships and fellowships in this category.

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

Eligible student:

•	American opportunity credit. A student who meets all of the following requirements for the tax year for which the credit is being determined.
	1.	Did not have expenses that were used to figure an American opportunity or Hope credit in any 4 earlier tax years.
	2.	Had not completed the first 4 years of postsecondary education (generally the freshman through senior years).
	3.	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.
	4.	Was free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year.
•	Hope credit. A student who meets all of the following requirements for the tax year for which the credit is being determined.
	1.	Did not have expenses that were used to figure a Hope credit in any 2 earlier tax years.
	2.	Had not completed the first 2 years of postsecondary education (generally freshman and sophomore years).
	3.	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.
	4.	Was free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year.
•	Lifetime learning credit. A student who is enrolled in one or more courses at an eligible educational institution.
•	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.
•	Tuition and fees deduction. A student who has either a high school diploma or a General Educational Development (GED) credential, and 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):

•	American opportunity credit. Adjusted gross income (AGI) as figured on the federal income tax return, modified by adding back any:
	1.	Foreign earned income exclusion,
	2.	Foreign housing exclusion,
	3.	Foreign housing deduction,
	4.	Exclusion of income by bona fide residents of American Samoa, and
	5.	Exclusion of income by bona fide residents of Puerto Rico.
•	Coverdell education savings account (ESA). Same as American opportunity credit in this category.
•	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:
	1.	Foreign earned income exclusion,
	2.	Foreign housing exclusion,
	3.	Foreign housing deduction,
	4.	Exclusion of income by bona fide residents of American Samoa,
	5.	Exclusion of income by bona fide residents of Puerto Rico,
	6.	Exclusion for adoption benefits received under an employer's adoption assistance program,
	7.	Deduction for student loan interest,
	8.	Deduction for tuition and fees, and
	9.	Deduction for domestic production activities.
•	Hope credit. Same as American opportunity credit in this category.
•	Lifetime learning credit. Same as American opportunity credit in this category.

•	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:
	1.	Foreign earned income exclusion,
	2.	Foreign housing exclusion,
	3.	Foreign housing deduction,
	4.	Exclusion of income by bona fide residents of American Samoa, and
	5.	Exclusion of income by bona fide residents of Puerto Rico.
•	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:
	1.	Foreign earned income exclusion,
	2.	Foreign housing exclusion,
	3.	Foreign housing deduction,
	4.	Exclusion of income by bona fide residents of American Samoa, and
	5.	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.

	•	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.
	•	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).
	•	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.

	•	Hope 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 (but see Students in Midwestern disaster areas under Qualified Education Expenses in chapter 3 for an exception). 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.
	•	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.
	•	Lifetime learning credit. Same as Hope credit in this category, except that courses may be taken either as part of a postsecondary degree program or taken by the student to acquire or improve job skills.
	•	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.
	•	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.
	•	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).
	•	Tuition and fees deduction. Same as Hope credit in this category.

Recapture: To include as income on your current year's return an amount allowed as a credit or deduction 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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