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Publication 970 (2016), Tax Benefits for Education

For use in preparing 2016 Returns


Publication 970 - Introductory Material

Future Developments

For the latest information about developments related to Pub. 970, such as legislation enacted after it was published, go to www.irs.gov/pub970.

What's New

Form 1098-T requirement. For tax years beginning after June 29, 2015, generally tax year 2016 returns for most taxpayers, the law requires a taxpayer (or a dependent) to have received a Form 1098-T from an eligible educational institution in order to claim the tuition and fees deduction, American opportunity credit, or the lifetime learning credit. However, for tax year 2016, a taxpayer may claim one of these education benefits if the student does not receive a Form 1098-T because the student’s educational institution is not required to send a Form 1098-T to the student under existing rules (for example, if the student is a nonresident alien, has qualified education expenses paid entirely with scholarships, or has qualified education expenses paid under a formal billing arrangement). If a student’s educational institution is not required to provide a Form 1098-T to the student, a taxpayer may claim one of these education benefits without a Form 1098-T if the taxpayer otherwise qualifies, can demonstrate that the taxpayer (or a dependent) was enrolled at an eligible educational institution, and can substantiate the payment of qualified tuition and related expenses.

Ban on claiming the American opportunity credit. If you claim the American opportunity credit even though you're not eligible, you may be banned from claiming the credit for up to 10 years. See the Caution statement under Introduction in chapter 2 .

Taxpayer identification number needed by due date of return. If you don’t have a taxpayer identification number (TIN) by the due date of your 2016 return (including extensions), you can’t claim the American opportunity credit on either your original or an amended 2016 return, even if you later get a TIN. Also, the American opportunity credit isn’t allowed on either your original or an amended 2016 return for a student who doesn’t have a TIN by the due date of your return (including extensions), even if that student later gets a TIN.

Lifetime learning credit. For 2016, the amount of your lifetime learning credit is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $55,000 and $65,000 ($111,000 and $131,000 if you file a joint return). You can't claim a credit if your MAGI is $65,000 or more ($131,000 or more if you file a joint return). For more information, see chapter 3 . The American opportunity credit MAGI limits are unchanged (see chapter 2 ).

Student loan interest deduction. For 2016, the amount of your student loan interest deduction is gradually reduced (phased out) if your MAGI is between $65,000 and $80,000 ($130,000 and $160,000 if you file a joint return). You can't claim the deduction if your MAGI is $80,000 or more ($160,000 or more if you file a joint return). See chapter 4 for more information.

Education savings bond program. For 2016, the amount of your education savings bond interest exclusion is gradually reduced (phased out) if your MAGI is between $77,550 and $92,550 ($116,300 and $146,300 if you file a joint return). You can't exclude any of the interest if your MAGI is $92,550 or more ($146,300 or more if you file a joint return). See chapter 10 for more information.

Business deduction for work-related education. For 2016, if you drive your car to and from school and qualify to deduct transportation expenses, the amount you can deduct for miles driven from January 1, 2016, through December 31, 2016, is 54 cents a mile. See chapter 12 for more information.

Reminders

Form 1098-T, Tuition Statement. When figuring an education credit or tuition and fees deduction, use only the amounts you paid and are deemed to have paid during the tax year for qualified education expenses. In most cases, the student should receive Form 1098-T from the eligible educational institution by January 31, 2017. An institution may choose to report either payments received during calendar year 2016 (box 1), or amounts billed during the calendar year 2016 (box 2), for qualified education expenses. However, the amounts on Form 1098-T, boxes 1 and 2, might be different than the amount you actually paid and are deemed to have paid. In addition, the Form 1098-T should give you other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements, or refunds, and whether the student was enrolled at least half-time or was a graduate student. The eligible educational institution may ask for a completed Form W-9S, Request for Student's or Borrower's Taxpayer Identification Number and Certification, or similar statement to obtain the student's name, address, and taxpayer identification number.

Coordination with Pell grants and other scholarships or fellowship grants. It may benefit you to choose to include otherwise tax-free scholarships or fellowship grants in income. This may increase your education credit and lower your total tax or increase your refund. See Coordination with Pell grants and other scholarships or fellowship grants throughout this publication.

Hope scholarship credit. For 2016, the Hope scholarship credit isn't available. However, you may be able to claim an American opportunity or lifetime learning credit. See chapter 2 and chapter 3 for more information.

Achieving a Better Life Experience (ABLE) account. This is a savings account for individuals with disabilities and their families. Distributions are tax free if used to pay the beneficiary's qualified disability expenses, which may include education expenses. For more information, see Pub. 907, Tax Highlights for Persons With Disabilities.

Estimated tax payments. If you have taxable income from any of your education benefits and the payer doesn't withhold enough income tax, you may need to make estimated tax payments. For more information, see Pub. 505, Tax Withholding and Estimated Tax.

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Introduction

This publication explains tax benefits that may be available to you if you are saving for or paying education costs for yourself or, in many cases, another student who is a member of your immediate family. Most benefits apply only to higher education.

What is in this publication.

Chapter 1 explains the tax treatment of various types of educational assistance, including scholarships, fellowship grants, and tuition reductions.

Two tax credits for which you may be eligible are explained in chapter 2 and chapter 3 . These benefits, which reduce the amount of income tax you may have to pay, are:

  • The American opportunity credit, and

  • The lifetime learning credit.

Ten other types of benefits are explained in chapters 4 through 12. These benefits, which reduce the amount of income tax you may have to pay, are:

  • Deduct student loan interest;

  • Receive tax-free treatment of a canceled student loan;

  • Deduct tuition and fees for education;

  • Receive tax-free student loan repayment assistance;

  • Establish and contribute to a Coverdell education savings account (ESA), which features tax-free earnings;

  • Participate in a qualified tuition program (QTP), which features tax-free earnings;

  • Take early distributions from any type of individual retirement arrangement (IRA) for education costs without paying the 10% additional tax on early distributions;

  • Cash in savings bonds for education costs without having to pay tax on the interest;

  • Receive tax-free educational benefits from your employer; and

  • Claim a business deduction for work-related education.

Note.

You generally can't claim more than one of the benefits described in the list above for the same qualifying education expense.



Comparison table.

Some of the features of these benefits are highlighted in Appendix B , later, in this publication. This general comparison table may guide you in determining which benefits you may be eligible for and which chapters you may want to read.



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When you figure your taxes, you may want to compare these tax benefits so you can choose the method(s) that gives you the lowest tax liability. If you qualify, you may find that a combination of credit(s) and deduction(s) gives you the lowest tax.

Analyzing your tax withholding.

After you estimate your education tax benefits for the year, you may be able to reduce the amount of your federal income tax withholding. Also, you may want to recheck your withholding during the year if your personal or financial situation changes. For more information, see Pub. 505, Tax Withholding and Estimated Tax.



Glossary.

In this publication, wherever appropriate, we have tried to use the same or similar terminology when referring to the basic components of each education benefit. Some of the terms used are:

  • Qualified education expenses,

  • Eligible educational institution, and

  • Modified adjusted gross income.

Even though the same term, such as qualified education expenses, is used to label a basic component of many of the education benefits, the same expenses aren't necessarily allowed for each benefit. For example, the cost of room and board is a qualified education expense for the qualified tuition program, but not for the education savings bond program.

Many of the terms used in the publication are defined in the glossary near the end of the publication. The glossary isn't intended to be a substitute for reading the chapter on a particular education benefit, but it will give you an overview of how certain terms are used in discussing the different benefits.



Comments and suggestions.

We welcome your comments about this publication and your suggestions for future editions.

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Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products.



Ordering forms and publications.

Visit irs.gov/formspubs to download forms and publications. Otherwise, you can go to irs.gov/orderforms to order current and prior-year forms and instructions. Your order should arrive within 10 business days.



Tax questions.

If you have a tax question not answered by this publication, check IRS.gov and How To Get Tax Help at the end of this publication.



Useful Items - You may want to see:

Publication

  • 463 Travel, Entertainment, Gift, and Car Expenses

  • 525 Taxable and Nontaxable Income

  • 550 Investment Income and Expenses

  • 590-A Contributions to Individual Retirement Arrangements (IRAs)

  • 590-B Distributions from Individual Retirement Arrangements (IRAs)

Form (and Instructions)

  • 1040 U.S. Individual Income Tax Return

  • 1040A U.S. Individual Income Tax Return

  • 1040EZ Income Tax Return for Single and Joint Filers With No Dependents

  • 1040NR U.S. Nonresident Alien Income Tax Return

  • 1040NR-EZ U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents

  • 2106 Employee Business Expenses

  • 2106-EZ Unreimbursed Employee Business Expenses

  • 5329 Additional Taxes on Qualified Plans and Other Tax-Favored Accounts

  • 8815 Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989

  • 8863 Education Credits

  • 8917 Tuition and Fees Deduction

  • Schedule A (Form 1040) Itemized Deductions


See chapter 13 for information about getting these publications and forms.

1. Scholarships, Fellowship Grants, Grants, and Tuition Reductions

Reminder

Individual retirement arrangements (IRAs). You can set up and make contributions to an IRA if you receive taxable compensation. Under this rule, a taxable scholarship or fellowship grant is compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement. For more information about IRAs, see Pub. 590-A and Pub. 590-B.

Introduction

This chapter discusses the income tax treatment of various types of educational assistance you may receive if you are studying, teaching, or researching in the United States. The educational assistance can be for a primary or secondary school, a college or university, or a vocational school. Included are discussions of:

  • Scholarships;

  • Fellowship grants;

  • Need-based education grants, such as a Pell grant; and

  • Qualified tuition reductions.

Many types of educational assistance are tax free if they meet the requirements discussed here.

Special rules apply to U.S. citizens and resident aliens who have received scholarships or fellowship grants for studying, teaching, or researching abroad. For information about these rules, see Pub. 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Scholarships and Fellowship Grants

A scholarship is generally an amount paid or allowed to, or for the benefit of, a student (whether an undergraduate or a graduate) at an educational institution to aid in the pursuit of his or her studies.

A fellowship grant is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research.

Amount of scholarship or fellowship grant.

The amount of a scholarship or fellowship grant includes the following.

  • The value of contributed services and accommodations. This includes such services and accommodations as room (lodging), board (meals), laundry service, and similar services or accommodations that are received by an individual as a part of a scholarship or fellowship grant.

  • The amount of tuition, matriculation, and other fees that are paid for or remitted to the student to aid the student in pursuing study or research.

  • Any amount received in the nature of a family allowance as a part of a scholarship or fellowship grant.



Tax-Free Scholarships and Fellowship Grants

A scholarship or fellowship grant is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution.

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You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. See examples in Coordination with Pell grants and other scholarships, in chapter 2 and chapter 3.

A scholarship or fellowship grant is tax free only to the extent:

  • It doesn't exceed your qualified education expenses;

  • It isn't designated or earmarked for other purposes (such as room and board), and doesn't require (by its terms) that it can't be used for qualified education expenses; and

  • It doesn't represent payment for teaching, research, or other services required as a condition for receiving the scholarship. For exceptions, see Payment for services, later.

Use Worksheet 1-1 to figure the amount of a scholarship or fellowship grant you can exclude from gross income.

Candidate for a degree.

You are a candidate for a degree if you:

  1. Attend a primary or secondary school or are pursuing a degree at a college or university, or

  2. Attend an educational institution that:

    1. Provides a program that is acceptable for full credit toward a bachelor's or higher degree, or offers a program of training to prepare students for gainful employment in a recognized occupation; and

    2. Is authorized under federal or state law to provide such a program and is accredited by a nationally recognized accreditation agency.



Eligible educational institution.

An eligible educational institution is one whose primary function is the presentation of formal instruction and that normally 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.



Qualified education expenses.

For purposes of tax-free scholarships and fellowship grants, these are 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. These items must be required of all students in your course of instruction.



Expenses that don't qualify.

Qualified education expenses don't include the cost of:

  • Room and board,

  • Travel,

  • Research,

  • Clerical help, or

  • Equipment and other expenses that aren't required for enrollment in or attendance at an eligible educational institution.



Payment for services.

Generally, you can't exclude from your gross income the part of any scholarship or fellowship grant that represents payment for teaching, research, or other services required as a condition for receiving the scholarship. This applies even if all candidates for a degree must perform the services to receive the degree. (See exceptions next.)



Exceptions.

You don't have to treat as payment for services the part of any scholarship or fellowship grant that represents payment for teaching, research, or other services if you receive the amount under:

  • The National Health Service Corps Scholarship Program,

  • The Armed Forces Health Professions Scholarship and Financial Assistance Program, or

  • A comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college (as defined in that section).

Example 1.

You received a scholarship of $2,500. The scholarship wasn't received under any of the exceptions mentioned above. As a condition for receiving the scholarship, you must serve as a part-time teaching assistant. Of the $2,500 scholarship, $1,000 represents payment for teaching. The provider of your scholarship gives you a Form W-2 showing $1,000 as income. Your qualified education expenses were at least $1,500. Assuming that all other conditions are met, $1,500 of your scholarship is tax free. The $1,000 you received for teaching is taxable.

Example 2.

You are a candidate for a degree at a medical school. You receive a scholarship (not under any of the exceptions mentioned above) for your medical education and training. The terms of your scholarship require you to perform future services. A substantial penalty applies if you don't comply. The entire amount of your grant is taxable as payment for services in the year it is received.



Athletic Scholarships

An athletic scholarship is tax free only if and to the extent it meets the requirements discussed earlier.

Worksheet 1-1.

You can use Worksheet 1-1 to figure the tax-free and taxable parts of your athletic scholarship.

Worksheet 1-1. Taxable Scholarship and Fellowship Grant Income

1. Enter the total amount of any scholarship or fellowship grant for 2016. See Amount of scholarship or fellowship grant, earlier. 1.
  • If you are a degree candidate at an eligible educational institution, go to line 2.

  • If you aren't a degree candidate at an eligible educational institution, stop here. The entire amount is taxable. For information on how to report this amount on your tax return, see Reporting Scholarships and Fellowship Grants , in this chapter.

2. Enter the amount from line 1 that was for teaching, research, or any other services required as a condition for receiving the scholarship. Don't include amounts received for these items under the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, or a comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college (as defined in that section). 2.
3. Subtract line 2 from line 1 3.
4. Enter the amount from line 3 that your scholarship or fellowship grant required you to use for other than qualified education expenses 4.
5. Subtract line 4 from line 3 5.
6. Enter the amount of your qualified education expenses 6.
7. Enter the smaller of line 5 or line 6. This amount is the most you can exclude from your gross income (the tax-free part of the scholarship or fellowship grant) 7.
8. Subtract line 7 from line 5 8.
9. Taxable part. Add lines 2, 4, and 8. See Reporting Scholarships and Fellowship Grants , earlier, for how to report this amount on your tax return 9.



Taxable Scholarships and Fellowship Grants

If and to the extent your scholarship or fellowship grant doesn't meet the requirements described earlier, it is taxable and must be included in gross income. You can use Worksheet 1-1 to figure the tax-free and taxable parts of your scholarship or fellowship grant.

Reporting Scholarships and Fellowship Grants

Whether you must report your scholarship or fellowship grant depends on whether you must file a return and whether any part of your scholarship or fellowship grant is taxable.

If your only income is a completely tax-free scholarship or fellowship grant, you don't have to file a tax return and no reporting is necessary. If all or part of your scholarship or fellowship grant is taxable and you are required to file a tax return, report the taxable amount as explained below. You must report the taxable amount whether or not you received a Form W-2. If you receive an incorrect Form W-2, ask the payer for a corrected one.

For information on whether you must file a return, see Pub. 501, Exemptions, Standard Deduction, and Filing Information, or your income tax form instructions.

How To Report

How you report any taxable scholarship or fellowship grant income depends on which return you file.

Form 1040EZ.

If you file Form 1040EZ, include the taxable amount in the total on line 1. If the taxable amount was not reported on Form W-2, also enter "SCH" and the taxable amount in the space to the left of line 1.



Form 1040A.

If you file Form 1040A, include the taxable amount in the total on line 7. If the taxable amount was not reported on Form W-2, also enter "SCH" and the taxable amount in the space to the left of line 7.



Form 1040.

If you file Form 1040, include the taxable amount in the total on line 7. If the taxable amount was not reported on Form W-2, also enter "SCH" and the taxable amount on the dotted line next to line 7.



Form 1040NR.

If you file Form 1040NR, report the taxable amount on line 12. Generally, you must report the amount shown on Form(s) 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, box 2. See the Instructions for Form 1040NR for more information.



Form 1040NR-EZ.

If you file Form 1040NR-EZ, report the taxable amount on line 5. Generally, you must report the amount shown on Form(s) 1042-S, box 2. See the Instructions for Form 1040NR-EZ for more information.



Other Types of Educational Assistance

The following discussions deal with other common types of educational assistance.

Fulbright Grants

A Fulbright grant is generally treated as a scholarship or fellowship grant in figuring how much of the grant is tax free.

Pell Grants and Other Title IV Need-Based Education Grants

These need-based grants are treated as scholarships for purposes of determining their tax treatment. They are tax free to the extent used for qualified education expenses during the period for which a grant is awarded.

Payment to Service Academy Cadets

An appointment to a United States military academy isn't a scholarship or fellowship grant. Payment you receive as a cadet or midshipman at an armed services academy is pay for personal services and will be reported to you on Form W-2, box 1. Include this pay in your income in the year you receive it unless one of the exceptions, discussed earlier under Payment for services , applies.

Veterans' Benefits

Payments you receive for education, training, or subsistence under any law administered by the Department of Veterans Affairs (VA) are tax free. Don't include these payments as income on your federal tax return.

If you qualify for one or more of the education tax benefits discussed in chapters 2 through 12, you may have to reduce the amount of education expenses qualifying for a specific tax benefit by part or all of your VA payments. This applies only to the part of your VA payments that is required to be used for education expenses.

You may want to visit the Veterans Administration website at www.gibill.va.gov for specific information about the various VA benefits for education.

Example.

You have returned to college and are receiving two education benefits under the latest GI Bill: (1) a $1,534 monthly basic housing allowance (BHA) that is directly deposited to your checking account, and (2) $3,840 paid directly to your college for tuition. Neither of these benefits is taxable and you don't report them on your tax return. You also want to claim an American opportunity credit on your return. Your total tuition charges are $5,000. To figure the amount of credit, you must first subtract the $3,840 from your qualified education expenses because this payment under the GI Bill was required to be used for education expenses. You don't subtract any amount of the BHA because it was paid to you and its use wasn't restricted.

Qualified Tuition Reduction

If you are allowed to study tuition free or for a reduced rate of tuition, you may not have to pay tax on this benefit. This is called a "tuition reduction." You don't have to include a qualified tuition reduction in your income.

A tuition reduction is qualified only if you receive it from, and use it at, an eligible educational institution. You don't have to use the tuition reduction at the eligible educational institution from which you received it. In other words, if you work for an eligible educational institution and the institution arranges for you to take courses at another eligible educational institution without paying any tuition, you may not have to include the value of the free courses in your income.

The rules for determining if a tuition reduction is qualified, and therefore tax free, are different if the education provided is below the graduate level or is graduate education.

You must include in your income any tuition reduction you receive that is payment for your services.

Eligible educational institution.

An eligible educational institution is one 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.



Officers, owners, and highly compensated employees.

Qualified tuition reductions apply to officers, owners, or highly compensated employees only if benefits are available to employees on a nondiscriminatory basis. This means that the tuition reduction benefits must be available on substantially the same basis to each member of a group of employees. The group must be defined under a reasonable classification set up by the employer. The classification must not discriminate in favor of owners, officers, or highly compensated employees.



Payment for services.

Generally, you must include in income the part of any qualified tuition reduction that represents payment for teaching, research, or other services by the student required as a condition of receiving the qualified tuition reduction. This applies even if all candidates for a degree must perform the services to receive the degree. (See below for exceptions.)



Exceptions.

You don't have to include in income the part of any scholarship or fellowship grant that represents payment for teaching, research, or other services if you receive the amount under:

  • The National Health Service Corps Scholarship Program,

  • The Armed Forces Health Professions Scholarship and Financial Assistance Program, or

  • A comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college (as defined in that section).



Education Below the Graduate Level

If you receive a tuition reduction for education below the graduate level (including primary, secondary, or high school), it is a qualified tuition reduction, and therefore tax free, only if your relationship to the educational institution providing the benefit is described below.

  1. You are an employee of the eligible educational institution.

  2. You were an employee of the eligible educational institution, but you retired or left on disability.

  3. You are a widow or widower of an individual who died while an employee of the eligible educational institution or who retired or left on disability.

  4. You are the dependent child or spouse of an individual described in (1) through (3) above.

Child of deceased parents.

For purposes of the qualified tuition reduction, a child is a dependent child if the child is under age 25 and both parents have died.



Child of divorced parents.

For purposes of the qualified tuition reduction, a dependent child of divorced parents is treated as the dependent of both parents.



Graduate Education

A tuition reduction you receive for graduate education is qualified, and therefore tax free, if both of the following requirements are met.

  • It is provided by an eligible educational institution.

  • You are a graduate student who performs teaching or research activities for the educational institution.

You must include in income any other tuition reductions for graduate education that you receive.

How To Report

Any tuition reduction that is taxable should be included as wages on your Form W-2, box 1. Report the amount from Form W-2, box 1, on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ).

2. American Opportunity Credit

Introduction

For 2016, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. They are the American opportunity credit (this chapter) and the lifetime learning credit (chapter 3).

This chapter explains:

  • Who can claim the American opportunity credit,

  • What expenses qualify for the credit,

  • Who is an eligible student,

  • Who can claim a dependent's expenses,

  • How to figure the credit,

  • How to claim the credit, and

  • When the credit must be repaid.

What is the tax benefit of the American opportunity credit?

For 2016, you may be able to claim a credit of up to $2,500 for adjusted qualified education expenses paid for each student who qualifies for the American opportunity credit.

A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Forty percent of the American opportunity credit may be refundable. This means that if the refundable portion of your credit is more than your tax, the excess will be refunded to you.

Your allowable American opportunity credit may be limited by the amount of your income. Also, the nonrefundable part of the credit may be limited by the amount of your tax.



Overview of the American opportunity credit for 2016.

See Table 2-1 for the basics of this credit. The details are discussed in this chapter.



Can you claim more than one education credit this year?

For each student, you can elect for any year only one of the credits. For example, if you elect to claim the American opportunity credit for a child on your 2016 tax return, you can't use that same child's qualified education expenses to figure the lifetime learning credit for 2016.

If you pay qualified education expenses for more than one student in the same year, you can choose to claim the American opportunity credit on a per-student, per-year basis. If you pay qualified education expenses for a student (or students) for whom you don't claim the American opportunity credit, you can use the adjusted qualified education expenses of that student (or those students) in figuring your lifetime learning credit. 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.



Differences between the American opportunity and lifetime learning credits.

There are several differences between these two credits. For example, you can claim the American opportunity credit based on the same student's expenses for no more than 4 tax years, which includes any tax years you claimed the Hope scholarship credit for that student. However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. The differences between these credits are shown in Appendix B near the end of this publication.



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If you claim the American opportunity credit for any student, you can choose between using that student's adjusted qualified education expenses for the American opportunity credit or the lifetime learning credit. If you have the choice, the American opportunity credit will always be greater than the lifetime learning credit.

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If you claim this credit even though you're not eligible and it's determined that your error is due to reckless or intentional disregard of the rules, but not fraud, you won't be allowed to claim the credit for 2 years. If it's determined that your error is due to fraud, you won't be allowed to claim the credit for 10 years.

Table 2-1. Overview of the American Opportunity Credit for 2016

Maximum credit Up to $2,500 credit per eligible student
Limit on modified adjusted gross income (MAGI) $180,000 if married filing jointly; $90,000 if single, head of household, or qualifying widow(er)
Refundable or nonrefundable 40% of credit may be refundable; the rest is nonrefundable
Number of years of postsecondary education Available ONLY if the student had not completed the first 4 years of postsecondary education before 2016 (generally, the freshman through senior years, determined by the eligible educational institution, not including academic credit awarded solely because of the student's performance on proficiency examinations)
Number of tax years credit available Available ONLY for 4 tax years per eligible student (including any year(s) Hope scholarship credit was claimed)
Type of program required Student must 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 that begins during 2016 (or the first 3 months of 2017 if the qualified expenses were paid in 2016)
Felony drug conviction As of the end of 2016, the student had not been convicted of a felony for possessing or distributing a controlled substance
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
Payments for academic periods Payments made in 2016 for academic periods beginning in 2016 or beginning in the first 3 months of 2017


Can You Claim the Credit?

The following rules will help you determine if you are eligible to claim the American opportunity credit on your tax return.

Who Can Claim the Credit?

Generally, you can claim the American opportunity credit if all three of the following requirements are met.

  • You pay qualified education expenses of higher education.

  • You pay the education expenses for an eligible student.

  • The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.

Note.

Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you.

Student qualifications.

Generally, you can claim the American opportunity credit for a student only if all of the following four requirements are met.

  1. As of the beginning of 2016, the student had not completed the first 4 years of postsecondary education (generally, the freshman through senior years of college), as determined by the eligible educational institution. For this purpose, don't include academic credit awarded solely because of the student's performance on proficiency examinations.

  2. Neither the American opportunity credit nor the Hope scholarship credit has been claimed by you or anyone else (see below) for this student for any 4 tax years before 2016. If the American opportunity credit (and Hope scholarship credit) has been claimed for this student for any 3 or fewer tax years before 2016, this requirement is met.

  3. For at least one academic period beginning (or treated as beginning) in 2016, the student both:

    1. Was enrolled in a program that leads to a degree, certificate, or other recognized educational credential; and

    2. Carried at least one-half the normal full-time workload for his or her course of study.

      The standard for what is half of the normal full-time work load is determined by each eligible educational institution. However, the standard may not be lower than any of those established by the U.S. Department of Education under the Higher Education Act of 1965.

      For 2016, treat an academic period beginning in the first 3 months of 2017 as if it began in 2016 if qualified education expenses for the student were paid in 2016 for that academic period. See Prepaid expenses, later.

  4. As of the end of 2016, the student had not been convicted of a federal or state felony for possessing or distributing a controlled substance.

Example 1.

Sharon was never eligible for the Hope scholarship credit (available before 2009) but was eligible for the American opportunity credit for 2010, 2011, 2013, and 2015. Her parents claimed the American opportunity credit for Sharon on their 2010, 2011, and 2013 tax returns. Sharon claimed the American opportunity credit on her 2015 tax return. The American opportunity credit and Hope scholarship credit have been claimed for Sharon for 4 tax years before 2016. Therefore, the American opportunity credit can't be claimed for Sharon for 2016. If Sharon were to file Form 8863 for 2016, she would check "Yes" for Part III, line 23, and would be eligible to claim only the lifetime learning credit.

Example 2.

Wilbert was eligible for the American opportunity credit for 2012, 2013, 2014, and 2016. His parents claimed the American opportunity credit for Wilbert on their tax returns for 2012, 2013, and 2014. No one claimed an American opportunity credit or Hope scholarship credit for Wilbert for any other tax year. The American opportunity credit and Hope scholarship credit have been claimed for Wilbert for only 3 tax years before 2016. Therefore, Wilbert meets the second requirement to be eligible for the American opportunity credit. If Wilbert were to file Form 8863 for 2016, he would check "No" for Part III, line 23. If Wilbert meets all of the other requirements, he is eligible for the American opportunity credit.

Example 3.

Glenda enrolls on a full-time basis in a degree program for the 2017 spring semester, which begins in January 2017. Glenda pays her tuition for the 2017 spring semester in December 2016. Because the tuition Glenda paid in 2016 relates to an academic period that begins in the first 3 months of 2017, her eligibility to claim an American opportunity credit in 2016 is determined as if the 2017 spring semester began in 2016. Therefore, Glenda satisfies this third requirement.



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If the requirements above aren't met for any student, you can't claim the American opportunity credit for that student. You may be able to claim the lifetime learning credit for part or all of that student's qualified education expenses instead.

"Qualified education expenses" are defined later under Qualified Education Expenses . "Eligible students" are defined later under Who Is an Eligible Student . A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses .

You may find Figure 2-1 helpful in determining if you can claim an American opportunity credit on your tax return.

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Figure 2-1 Can you claim the American opportunity credit for 2015?

Please click here for the text description of the image.

Who Can't Claim the Credit?

You can't claim the American opportunity credit for 2016 if any of the following apply.

  • Your filing status is married filing separately.

  • You are claimed as a dependent on another person's tax return, such as your parent's return. See Who Can Claim a Dependent's Expenses , later.

  • Your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more if married filing jointly). MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit .

  • You (or your spouse) were a nonresident alien for any part of 2016 and the nonresident alien didn't elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Pub. 519, U.S. Tax Guide for Aliens.

  • You didn't have an SSN (or ITIN) by the due date of your 2016 return (including extensions), you can't claim the American opportunity credit on either your original or an amended 2016 return, even if you later get an SSN (or ITIN). Also, you can't claim this credit on your original or an amended 2016 return for a student who didn't have an SSN, ATIN, or ITIN by the due date of your return (including extensions), even if the student later gets one of those numbers.

What Expenses Qualify?

The American opportunity credit is based on adjusted qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Generally, the credit is allowed for adjusted qualified education expenses paid in 2016 for an academic period beginning in 2016 or beginning in the first 3 months of 2017.

For example, if you paid $1,500 in December 2016 for qualified tuition for the spring 2017 semester beginning January 2017, you can use that $1,500 in figuring your 2016 credit.

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. If an educational institution uses credit hours or clock hours and doesn't have academic terms, each payment period can be treated as an academic period.



Paid with borrowed funds.

You can claim an American opportunity credit for qualified education expenses paid with the proceeds of a loan. Use the expenses to figure the American opportunity 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 American opportunity credit for qualified education expenses not refunded when a student withdraws.



Qualified Education Expenses

For purposes of the American opportunity credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.

Eligible educational institution.

An eligible educational institution is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, university, vocational school, or other postsecondary educational institution. Also, the institution must be eligible to participate in a student aid program administered by the U.S. Department of Education. Virtually all accredited postsecondary institutions meet this definition.

An eligible educational institution also includes certain educational institutions located outside the United States that are eligible to participate in a student aid program administered by the U.S. Department of Education.

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The educational institution should be able to tell you if it is an eligible educational institution.



Related expenses.

Student activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance.

However, expenses for books, supplies, and equipment needed for a course of study are included in qualified education expenses whether or not the materials are purchased from the educational institution.



Prepaid expenses.

Qualified education expenses paid in 2016 for an academic period that begins in the first 3 months of 2017 can be used in figuring an education credit for 2016 only. See Academic period, earlier. For example, if you pay $2,000 in December 2016 for qualified tuition for the 2017 winter quarter that begins in January 2017, you can use that $2,000 in figuring an education credit for 2016 only (if you meet all the other requirements).

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You can't use any amount you paid in 2015 or 2017 to figure the qualified education expenses you use to figure your 2016 education credit(s).

In the following examples, assume that each student is an eligible student at an eligible educational institution.



Example 1.

Jefferson is a sophomore in University V's degree program in dentistry. This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Because the equipment rental is needed for his course of study, Jefferson's equipment rental fee is a qualified expense.

Example 2.

Grace and William, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. William bought his books from a friend; Grace bought hers at College W's bookstore. Both are qualified education expenses for the American opportunity credit.

Example 3.

When Kelly enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and the student government. No portion of the fee covers personal expenses. Although labeled as a student activity fee, the fee is required for Kelly's enrollment and attendance at College X and is a qualified expense.

No Double Benefit Allowed

You can't do any of the following.

  • Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an American opportunity credit based on those same expenses.

  • Claim an American opportunity credit in the same year that you are claiming a tuition and fees deduction for the same student.

  • Claim an American opportunity credit for any student and use any of that student's expenses in figuring your lifetime learning credit.

  • Figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP) using the same expenses you used to figure the American opportunity credit. See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7 and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8.

  • Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. See Adjustments to Qualified Education Expenses next.

Adjustments to Qualified Education Expenses

For each student, reduce the qualified education expenses paid 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 2016, 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.

Some tax-free educational assistance received after 2016 may be treated as a refund of qualified education expenses paid in 2016. This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2016 for qualified education expenses paid on behalf of a student in 2016 (or attributable to enrollment at an eligible educational institution during 2016).

If this tax-free educational assistance is received after 2016 but before you file your 2016 income tax return, see Refunds received after 2016 but before your income tax return is filed, later. If this tax-free educational assistance is received after 2016 and after you file your 2016 income tax return, see Refunds received after 2016 and after your income tax return is filed, later.

Tax-free educational assistance includes:



Generally, any scholarship or fellowship grant is treated as tax free. However, a scholarship or fellowship grant isn't treated as tax free to the extent the student includes it in gross income (the student may or may not be required to file a tax return for the year the scholarship or fellowship grant is received) and either of the following is true.

  • 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 chapter 1.

  • 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 chapter 1.

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A student can't choose to include in income a scholarship or fellowship grant provided by an Indian tribal government that is excluded from income under the Tribal General Welfare Exclusion Act of 2014 or benefits provided by an educational program described in section 5.02(2)(b)(ii) of Revenue Procedure 2014-35, available at www.irs.gov/irb/2014-26_IRB/ar10.html.

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You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. For examples, see Coordination with Pell grants and other scholarships, later.

Refunds.

A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Some tax-free educational assistance received after 2016 may be treated as a refund. See Tax-free educational assistance, earlier.



Refunds received in 2016.

For each student, figure the adjusted qualified education expenses for 2016 by adding all the qualified education expenses for 2016 and subtracting any refunds of those expenses received from the eligible educational institution during 2016.



Refunds received after 2016 but before your income tax return is filed.

If anyone receives a refund after 2016 of qualified education expenses paid on behalf of a student in 2016 and the refund is paid before you file an income tax return for 2016, the amount of qualified education expenses for 2016 is reduced by the amount of the refund.



Refunds received after 2016 and after your income tax return is filed.

If anyone receives a refund after 2016 of qualified education expenses paid on behalf of a student in 2016 and the refund is paid after you file an income tax return for 2016, you may need to repay some or all of the credit. See Credit recapture next.



Credit recapture.

If any tax-free educational assistance for the qualified education expenses paid in 2016, or any refund of your qualified education expenses paid in 2016, is received after you file your 2016 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2016 by reducing the expenses by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2016 and figure the amount by which your 2016 tax liability would have increased if you 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 $7,000 tuition and fees in August 2016, and your child began college in September 2016. You filed your 2016 tax return on February 17, 2017, and claimed an American opportunity credit of $2,500. After you filed your return, you received a refund of $4,000. You must refigure your 2016 American opportunity credit using $3,000 of qualified education expenses instead of $7,000. The refigured credit is $2,250. The increase to your tax liability is $250. Include the difference of $250 as additional tax on your 2017 tax return. See the instructions for your 2017 income tax return to determine where to include this tax.



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If you pay qualified education expenses in both 2016 and 2017 for an academic period that begins in the first 3 months of 2017 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2017 instead of reducing your expenses for 2016.

Amounts that don't reduce qualified education expenses.

Don't 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.

Don't 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 Qualified education expenses in chapter 1.

  • The use of the money isn't restricted.



Example 1.

Joan paid $3,000 for tuition and $5,000 for room and board at University X. The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. The terms of the scholarship state that it can be used to pay any of Joan's college expenses.

University X applies the $2,000 scholarship against Joan's $8,000 total bill, and Joan pays the $6,000 balance of her bill from University X with a combination of her student loan and her savings. Joan doesn't report any portion of the scholarship as income on her tax return.

In figuring the amount of either education credit (American opportunity or lifetime learning), Joan must reduce her qualified education expenses by the amount of the scholarship ($2,000) because she excluded the entire scholarship from her income. The student loan isn't tax-free educational assistance, so she doesn't need to reduce her qualified expenses by any part of the loan proceeds. Joan is treated as having paid $1,000 in qualified education expenses ($3,000 tuition - $2,000 scholarship).

Example 2.

The facts are the same as in Example 1, except that Joan reports her entire scholarship as income on her tax return. Because Joan reported the entire $2,000 scholarship in her income, she doesn't need to reduce her qualified education expenses. Joan is treated as having paid $3,000 in qualified education expenses.

Coordination with Pell grants and other scholarships.

You may be able to increase your American opportunity credit when the student (you, your spouse, or your dependent) includes certain scholarships or fellowship grants in the student's gross income. Your credit may increase only if the amount of the student's qualified education expenses minus the total amount of scholarships and fellowship grants is less than $4,000. If this situation applies, consider including some or all of the scholarship or fellowship grant in the student's income in order to treat the included amount as paying nonqualified expenses instead of qualified education expenses. Nonqualified expenses are expenses such as room and board that aren't qualified education expenses such as tuition and related fees.

Scholarships and fellowship grants that the student includes in income don't reduce the student's qualified education expenses available to figure your American opportunity credit. Thus, including enough scholarship or fellowship grant in the student's income to report up to $4,000 in qualified education expenses for your American opportunity credit may increase the credit by enough to increase your tax refund or reduce the amount of tax you owe even considering any increased tax liability from the additional income. However, the increase in tax liability as well as the loss of other tax credits may be greater than the additional American opportunity credit and may cause your tax refund to decrease or the amount of tax you owe to increase. Your specific circumstances will determine what amount, if any, of scholarship or fellowship grant to include in income to maximize your tax refund or minimize the amount of tax you owe.

The scholarship or fellowship grant must be one that may qualify as a tax-free scholarship under the rules discussed in chapter 1. Also, the scholarship or fellowship grant must be one that may (by its terms) be used for nonqualified expenses. Finally, the amount of the scholarship or fellowship grant that is applied to nonqualified expenses can't exceed the amount of the student's actual nonqualified expenses that are paid in the tax year. This amount may differ from the student's living expenses estimated by the student's school in figuring the official cost of attendance under student aid rules.

The fact that the educational institution applies the scholarship or fellowship grant to qualified education expenses, such as tuition and related fees, doesn't prevent the student from choosing to apply certain scholarships or fellowship grants to the student’s actual nonqualified expenses. By making this choice (that is, by including the part of the scholarship or fellowship grant applied to the student’s nonqualified expenses in income), the student may increase taxable 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.

Example 1—No scholarship.

Bill Pass, age 28 and unmarried, enrolled full-time in 2016 as a first-year student at a local college to earn a degree in law enforcement. This was his first year of postsecondary education. During 2016, he paid $5,600 for his qualified education expenses and $4,400 for his room and board for the fall 2016 semester. He and the college meet all the requirements for the American opportunity credit. Bill's adjusted gross income (AGI) and his MAGI, for purposes of figuring his credit, are $30,400. Bill claims the standard deduction of $6,300 and personal exemption of $4,050, resulting in taxable income of $20,050 and an income tax liability before credits of $2,548. Bill claims no credits other than the American opportunity credit. He figures his American opportunity credit based on qualified education expenses of $4,000, which results in a credit of $2,500 and a tax liability after credits of $48 ($2,548 - $2,500).

Example 2—Scholarship excluded from income.

The facts are the same as in Example 1—No scholarship, except that Bill was awarded a $5,600 scholarship. Under the terms of his scholarship, it may be used to pay any educational expenses, including room and board. If Bill excludes the scholarship from income, he will be deemed (for purposes of figuring his education credit) to have applied the scholarship to pay his tuition, required fees, and course materials. His adjusted qualified education expenses would be zero and he wouldn't have an education credit. Therefore, Bill's tax liability after credits would be $2,548.

Example 3—Scholarship partially included in income.

The facts are the same as in Example 2—Scholarship excluded from income. If, unlike Example 2, Bill includes $4,000 of the scholarship in income, he will be deemed to have applied that amount to pay for room and board. The remaining $1,600 of the $5,600 scholarship would reduce his qualified education expenses and his adjusted qualified education expenses would be $4,000. Bill's AGI and MAGI would increase to $34,400, his taxable income would increase to $24,050, and his tax liability before credits would increase to $3,148. Based on his adjusted qualified education expenses of $4,000, Bill would be able to claim an American opportunity credit of $2,500 and his tax liability after credits would be $648.

Example 4—Scholarship applied by the postsecondary school to tuition.

The facts are the same as in Example 3—Scholarship partially included in income, except the $5,600 scholarship is paid directly to the local college. The fact that the local college applies the scholarship to Bill's tuition and related fees doesn't prevent Bill from including $4,000 of the scholarship in income. As in Example 3, by doing so, he will be deemed to have applied $4,000 to pay for room and board. Bill would be able to claim the American opportunity credit of $2,500 and his tax liability after credits would be $648.

Example 5—Student with a dependent child.

Jane Doe, age 28 and unmarried, enrolled full-time as a first-year student at a local technical college to get a certificate as a computer technician. This was her first year of postsecondary education. During 2016, she paid $6,000 for qualified education expenses. She and the college meet all the requirements for the American opportunity credit. Jane has a dependent child, age 10, who is a qualifying child for purposes of receiving the earned income credit (EIC) and the child tax credit. Jane's wages are $20,000. Jane withheld no income taxes on these wages and has no other income or adjustments. Jane was awarded a $5,500 scholarship. Under the terms of her scholarship, it may be used to pay tuition and any living expense, including rent. Jane paid $10,000 in living expenses in 2016.

If Jane excludes the entire scholarship from income, she will be deemed to have applied the entire scholarship to pay qualified education expenses. Her AGI and MAGI would be $20,000. Her tax liability before any credits would be $261. Her qualified education expenses would be reduced to $500. She would be able to receive a $461 American opportunity credit ($200 refundable and $261 nonrefundable), a $1,000 additional child tax credit, and a $3,080 earned income credit. In total, she would be able to receive a tax refund of $4,280.

If Jane includes the entire scholarship in income, she will be deemed to have applied the entire scholarship to pay living expenses. Her qualified education expenses would be $6,000, and her AGI and MAGI would be $25,500. Her tax liability before any credits would be $813. She would be able to receive a $1,813 American opportunity credit ($1,000 refundable and $813 nonrefundable), a $1,000 additional child tax credit, and a $2,201 earned income credit. In total, she would be able to receive a tax refund of $4,201.

If Jane includes $3,500 of the scholarship in income, she will be deemed to have applied $3,500 of the scholarship to pay living expenses, and $2,000 to pay qualified education expenses. Her qualified education expenses would be $4,000, and her AGI and MAGI would be $23,500. Her tax liability before any credits would be $613. She would be able to receive a $1,613 American opportunity credit ($1,000 refundable and $613 nonrefundable), a $1,000 additional child tax credit, and a $2,520 earned income credit. In total, she would be able to receive a tax refund of $4,520.

If Jane includes $1,500 of the scholarship in income, she will be deemed to have applied $1,500 of the scholarship to pay living expenses, and $4,000 to pay qualified education expenses. Her qualified education expenses would be $2,000, and her AGI and MAGI would be $21,500. Her tax liability before any credits would be $413. She would be able to receive a $1,213 American opportunity credit ($800 refundable and $413 nonrefundable), a $1,000 additional child tax credit, and a $2,840 earned income credit. In total, she would be able to receive a tax refund of $4,640. This is the highest tax refund among these scenarios.

Note.

Whether you will benefit from applying a scholarship or fellowship grant to nonqualified expenses will depend on the amount of the student's qualified education expenses, the amount of the scholarship or fellowship grant, and whether the scholarship or fellowship grant may (by its terms) be used for nonqualified expenses. Any benefit will also depend on the student’s federal and state marginal tax rates as well as any federal and state tax credits the student claims. Before deciding, look at the total amount of your federal and state tax refunds or taxes owed and, if the student is your dependent, the student’s tax refunds or taxes owed. For example, if you are the student and you also claim the earned income credit, choosing to apply a scholarship or fellowship grant to nonqualified expenses by including the amount in your income may benefit you if the increase to your American opportunity credit is more than the decrease to your earned income credit. Many students who have no children and who are eligible to claim the earned income credit will maximize the benefit of claiming both the American opportunity credit and the earned income credit if they have $4,000 in qualified tuition and related expenses, even if this means income from the scholarship or fellowship grant reduces the amount of the earned income credit they are eligible to claim. In the case of students who have a qualifying child and who claim the earned income credit with respect to that child, many can maximize the benefit of claiming both the American opportunity credit and the earned income credit if they have at least $2,000 in qualified tuition and related expenses, even if this means income from the scholarship or fellowship grant reduces the amount of the earned income credit they are eligible to claim.



Expenses That Don't Qualify

Qualified education expenses don't include amounts paid for:

  • Insurance;

  • Medical expenses (including student health fees);

  • Room and board;

  • Transportation; or

  • Similar personal, living, or family expenses.

This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.

Sports, games, hobbies, and noncredit courses.

Qualified education expenses generally don't include expenses that relate to any course of instruction or other education that involves sports, games, or hobbies, or any noncredit course. However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify.



Comprehensive or bundled fees.

Some eligible educational institutions combine all of their fees for an academic period into one amount. If you don't receive or don't have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed earlier, contact the institution. The institution is generally required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T, Tuition Statement. See Figuring the Credit , later, for more information about Form 1098-T.



Who Is an Eligible Student?

To claim the American opportunity credit, the student for whom you pay qualified education expenses must be an eligible student. This is a student who meets all of the following requirements.

  • The student didn't have expenses that were used to figure an American opportunity credit in any 4 earlier tax years. This includes any tax year(s) in which you claimed the Hope scholarship credit for the same student.

  • The student hadn't completed the first 4 years of postsecondary education (generally, the freshman, sophomore, junior, and senior years of college) before 2016.

  • For at least one academic period beginning in 2016 (or the first 3 months of 2017 if the qualified expenses were paid in 2016), the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.

  • The student hasn't been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of 2016.

These requirements are also shown in Figure 2-2 .

Completion of first 4 years.

A student has completed the first 4 years of postsecondary education if the institution at which the student is enrolled awards the student 4 years of academic credit at that institution for coursework completed by the student before 2016. This student generally wouldn't be an eligible student for purposes of the American opportunity credit.



Exception.

Any academic credit awarded solely on the basis of the student's performance on proficiency examinations is disregarded in determining whether the student has completed 4 years of postsecondary education.



Enrolled at least half-time.

A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study.

The standard for what is half of the normal full-time work load is determined by each eligible educational institution. However, the standard may not be lower than any of those established by the U.S. Department of Education under the Higher Education Act of 1965.



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Figure 2-2

Please click here for the text description of the image.

Example 1.

Mack graduated from high school in June 2015. In September, he enrolled in an undergraduate degree program at College U, and attended full-time for both the 2015 fall and 2016 spring semesters. For the 2016 fall semester, Mack was enrolled less than half-time. Because Mack was enrolled in an undergraduate degree program on at least a half-time basis for at least one academic period that began during 2015 and at least one academic period that began during 2016, he is an eligible student for tax years 2015 and 2016 (including the 2016 fall semester when he enrolled at College U on less than a half-time basis).

Example 2.

After taking classes at College V on a part-time basis for a few years, Shelly became a full-time student for the 2016 spring semester. College V classified Shelly as a second-semester senior (fourth year) for the 2016 spring semester and as a first-semester graduate student (fifth year) for the 2016 fall semester. Because College V didn't classify Shelly as having completed the first 4 years of postsecondary education as of the beginning of 2016, Shelly is an eligible student for tax year 2016. Therefore, the qualified education expenses paid for the 2016 spring semester and the 2016 fall semester are taken into account in figuring the American opportunity credit for 2016.

Example 3.

During the 2016 fall semester, Larry was a high school student who took classes on a half-time basis at College X. Larry wasn't enrolled as part of a degree program at College X because College X only admits students to a degree program if they have a high school diploma or equivalent. Because Larry wasn't enrolled in a degree program at College X during 2016, Larry wasn't an eligible student for tax year 2016.

Example 4.

The facts are the same as in Example 3. During the 2016 spring semester, Larry again attended College X but not as part of a degree program. Larry graduated from high school in June 2016. For the 2016 fall semester, Larry enrolled as a full-time student in College X as part of a degree program, and College X awarded Larry credit for his prior coursework at College X. Because Larry was enrolled in a degree program at College X for the 2016 fall term on at least a half-time basis, Larry is an eligible student for all of tax year 2016. Therefore, the qualified education expenses paid for classes taken at College X during both the 2016 spring semester (during which Larry wasn't enrolled in a degree program) and the 2016 fall semester are taken into account in figuring any American opportunity credit.

Example 5.

Dee graduated from high school in June 2015. In January 2016, Dee enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a travel agent. Dee completed the program in December 2016, and was awarded a certificate. In January 2017, she enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a computer programmer. Dee is an eligible student for both tax years 2016 and 2017 because she meets the degree requirement, the work load requirement, and the year of study requirement for those years.

Who Can Claim a Dependent's Expenses?

If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim an American opportunity credit for your dependent's expenses for that year.

For you to claim an American opportunity credit for your dependent's expenses, you must also claim an exemption for your dependent. You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c.

IF you... THEN only...
claim an exemption on
your tax return for a
dependent who is an
eligible student
you can claim the American opportunity credit based on that dependent's expenses. The dependent can't claim the credit.
don't claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the American opportunity credit. You can't claim the credit based on this dependent's expenses.

Expenses paid by dependent.

If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Include these expenses when figuring the amount of your American opportunity credit.

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Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent.



Expenses paid by you.

If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the American opportunity credit. If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the American opportunity credit.



Expenses paid by others.

Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. If you claim an exemption on your tax return for the student, you are considered to have paid the expenses.



Example.

In 2016, Ms. Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. For purposes of claiming an American opportunity credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself.

Unless an exemption for Todd is claimed on someone else's 2016 tax return, only Todd can use the payment to claim an American opportunity credit.

If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2016 tax return, whoever claims the exemption may be able to use the expenses to claim an American opportunity credit. If anyone else claims an exemption for Todd, Todd can't claim an American opportunity credit.

Tuition reduction.

When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1.



Figuring the Credit

The amount of the American opportunity credit (per eligible student) is the sum of:

  1. 100% of the first $2,000 of qualified education expenses you paid for the eligible student, and

  2. 25% of the next $2,000 of qualified education expenses you paid for that student.

The maximum amount of American opportunity credit you can claim in 2016 is $2,500 multiplied by the number of eligible students. You can claim the full $2,500 for each eligible student for whom you paid at least $4,000 of adjusted qualified education expenses. However, the credit may be reduced based on your MAGI. See Effect of the Amount of Your Income on the Amount of Your Credit , later.

Example.

Jack and Kay Ford are married and file a joint tax return. For 2016, they claim an exemption for their dependent daughter on their tax return. Their MAGI is $70,000. Their daughter is in her junior (third) year of studies at the local university. Jack and Kay paid qualified education expenses of $4,300 in 2016.

Jack and Kay, their daughter, and the local university meet all of the requirements for the American opportunity credit. Jack and Kay can claim a $2,500 American opportunity credit in 2016. This is 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000.

Form 1098-T.

To help you figure your American opportunity credit, the student may receive Form 1098-T, Tuition Statement. Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2017. An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. However, the amounts on Form 1098-T, boxes 1 and 2, might be different than what you paid. When figuring the credit, use only the amounts you paid or are deemed to have paid in 2016 for qualified education expenses.

In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student.

The eligible educational institution may ask for a completed Form W-9S, Request for Student's or Borrower's Taxpayer Identification Number and Certification, or similar statement to obtain the student's name, address, and taxpayer identification number.



Effect of the Amount of Your Income on the Amount of Your Credit

The amount of your American opportunity credit is phased out (gradually reduced) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). You can't claim an American opportunity credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return).

Modified adjusted gross income (MAGI).

For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return.



MAGI when using Form 1040A.

If you file Form 1040A, your MAGI is the AGI on line 22 of that form.



MAGI when using Form 1040.

If you file Form 1040, your MAGI is the AGI on line 38 of that form, 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.

You can use Worksheet 2-1 to figure your MAGI.

Worksheet 2-1. MAGI for the American Opportunity Credit

1. Enter your adjusted gross income
(Form 1040, line 38)
1.
2. Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18) 2.
3. Enter your foreign housing deduction (Form 2555, line 50) 3.
4. Enter the amount of income from Puerto Rico you are excluding 4.
5. Enter the amount of income from American Samoa you are excluding (Form 4563, line 15) 5.
6. Add the amounts on
lines 2, 3, 4, and 5
6.
7. Add the amounts on lines 1 and 6.
This is your modified adjusted
gross income
. Enter here and
on Form 8863, line 3
7.




Phaseout.

If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 2–7, of Form 8863, Part I. The same method is shown in the following example.

Example.

You are filing a joint return and your MAGI is $165,000. In 2016, you paid $5,000 of qualified education expenses.

You figure a tentative American opportunity credit of $2,500 (100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000 of qualified education expenses).

Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($2,500) by a fraction. The numerator (top part) of the fraction is $180,000 (the upper limit for those filing a joint return) minus your MAGI. The denominator (bottom part) is $20,000, the range of incomes for the phaseout ($160,000 to $180,000). The result is the amount of your phased out (reduced) American opportunity credit ($1,875).

$2,500 × $180,000 − $165,000 = $1,875
$20,000



Refundable Part of Credit

Forty percent of the American opportunity credit is refundable for most taxpayers. However, if you were under age 24 at the end of 2016 and the conditions listed below apply to you, you can't claim any part of the American opportunity credit as a refundable credit on your tax return. Instead, your allowed credit (figured on Form 8863, Part II) will be used to reduce your tax as a nonrefundable credit only.

You don't qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you.

  1. You were:

    1. Under age 18 at the end of 2016, or

    2. Age 18 at the end of 2016 and your earned income (defined below) was less than one-half of your support (defined below), or

    3. Over age 18 and under age 24 at the end of 2016 and a full-time student (defined below) and your earned income (defined below) was less than one-half of your support (defined below).

  2. At least one of your parents was alive at the end of 2016.

  3. You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2016.

Earned income.

Earned income includes wages, salaries, professional fees, and other payments received for personal services actually performed. Earned income includes the part of any scholarship or fellowship grant that represents payment for teaching, research, or other services performed by the student that are required as a condition for receiving the scholarship or fellowship grant. Earned income doesn't include that part of the compensation for personal services rendered to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered.

If you are a sole proprietor or a partner in a trade or business in which both personal services and capital are material income-producing factors, earned income also includes a reasonable allowance for compensation for personal services, but not more than 30% of your share of the net profits from that trade or business (after subtracting the deduction for one-half of self-employment tax). However, if capital isn't an income-producing factor and your personal services produced the business income, the 30% limit doesn't apply.



Support.

Your support includes food, shelter, clothing, medical and dental care, education, and the like. Generally, the amount of the item of support will be the amount of expenses incurred by the one furnishing such item. If the item of support is in the form of property or lodging, measure the amount of such item of support by its fair market value. However, a scholarship received by you isn't considered support if you are a full-time student. See Pub. 501 for details.



Full-time student.

You are a full-time student for 2016 if during any part of any 5 calendar months during the year you were enrolled as a full-time student at an eligible educational institution (defined earlier), or took a full-time, on-farm training course given by such an institution or by a state, county, or local government agency.



Claiming the Credit

You claim the American opportunity credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. Enter the nonrefundable part of the credit on Form 1040, line 50, or on Form 1040A, line 33. Enter the refundable part of the credit on Form 1040, line 68, or on Form 1040A, line 44. A filled-in Form 8863 is shown at the end of this publication.

Note.

In Appendix A at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return.

3. Lifetime Learning Credit

Introduction

For 2016, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. They are the American opportunity credit and the lifetime learning credit. This chapter discusses the lifetime learning credit. The American opportunity credit is discussed in chapter 2 .

This chapter explains:

  • Who can claim the lifetime learning credit,

  • What expenses qualify for the credit,

  • Who is an eligible student,

  • Who can claim a dependent's expenses,

  • How to figure the credit,

  • How to claim the credit, and

  • When the credit must be repaid.

What is the tax benefit of the lifetime learning credit?

For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all eligible students. There is no limit on the number of years the lifetime learning credit can be claimed for each student.

A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. The lifetime learning credit is a nonrefundable credit. This means that it can reduce your tax to zero, but if the credit is more than your tax the excess won't be refunded to you.

Your allowable lifetime learning credit may be limited by the amount of your income and the amount of your tax.



Can you claim more than one education credit this year?

For each student, you can elect for any year only one of the credits. For example, if you elect to claim the lifetime learning credit for a child on your 2016 tax return, you can't, for that same child, also claim the American opportunity credit for 2016.

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

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If you claim the American opportunity credit for any student, you can choose between using that student's adjusted qualified education expenses for the American opportunity credit or the lifetime learning credit. If you have the choice, the American opportunity credit will always be greater than the lifetime learning credit.

If you pay qualified education expenses for more than one student in the same year, you can choose to claim certain 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.



Differences between the American opportunity and lifetime learning credits.

There are several differences between these two credits. For example, you can claim the American opportunity credit for the same student for no more than 4 tax years, but any year in which the Hope scholarship credit was claimed counts toward the 4 years. However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. The differences between these credits are shown in Appendix B near the end of this publication.



Overview of the lifetime learning credit for 2016.

See Table 3-1 for the basics of the credit. The details are discussed in this chapter.



Can You Claim the Credit?

The following rules will help you determine if you are eligible to claim the lifetime learning credit on your tax return.

Who Can Claim the Credit?

Generally, you can claim the lifetime learning credit if all three of the following requirements are met.

  • You pay qualified education expenses of higher education.

  • You pay the education expenses for an eligible student.

  • The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.

Table 3-1. Overview of the Lifetime Learning Credit for 2016
Maximum credit Up to $2,000 credit per return
Limit on modified adjusted gross income (MAGI) $131,000 if married filling jointly;
$65,000 if single, head of household, or qualifying widow(er)
Refundable or nonrefundable Nonrefundable—credit limited to the amount of tax you must pay on your taxable income
Number of 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 for an unlimited number of tax years
Type of program required Student doesn't need to be pursuing a program leading to a degree or other recognized education credential
Number of courses Available for one or more courses
Felony drug conviction Felony drug convictions don't make the student ineligible
Qualified expenses Tuition and fees required for enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment)
Payments for academic periods Payments made in 2016 for academic periods beginning in 2016 or beginning in the first 3 months of 2017

Note.

Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you.

"Qualified education expenses" are defined later under Qualified Education Expenses . "Eligible students" are defined later under Who Is an Eligible Student . A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses .

You may find Figure 3-1 helpful in determining if you can claim a lifetime learning credit on your tax return.

Who Can't Claim the Credit?

You can't claim the lifetime learning credit for 2016 if any of the following apply.

What Expenses Qualify?

The lifetime learning credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Generally, the credit is allowed for qualified education expenses paid in 2016 for an academic period beginning in 2016 or in the first 3 months of 2017.

For example, if you paid $1,500 in December 2016 for qualified tuition for the spring 2017 semester beginning in January 2017, you may be able to use that $1,500 in figuring your 2016 credit.

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. If an educational institution uses credit hours or clock hours and doesn't have academic terms, each payment period can be treated as an academic period.



Paid with borrowed funds.

You can claim a lifetime learning credit for qualified education expenses paid with the proceeds of a loan. You use the expenses to figure the lifetime learning credit for the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan disbursements 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 a lifetime learning credit for qualified education expenses not refunded when a student withdraws.



Qualified Education Expenses

For purposes of the lifetime learning credit, qualified education expenses are tuition and certain related expenses required for enrollment in a course at an eligible educational institution. The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills.

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.



Related expenses.

Student activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution for enrollment or attendance.



Prepaid expenses.

Qualified education expenses paid in 2016 for an academic period that begins in the first 3 months of 2017 can be used in figuring an education credit for 2016 only. See Academic period , earlier. For example, if you pay $2,000 in December 2016 for qualified tuition for the 2017 winter quarter that begins in January 2017, you can use that $2,000 in figuring an education credit for 2016 only (if you meet all the other requirements).



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You can't use any amount you paid in 2015 or 2017 to figure the qualified education expenses you use to figure your 2016 education credit(s).

In the following examples, assume that each student is an eligible student at an eligible educational institution.

Example 1.

Jackson is a sophomore in University V's degree program in dentistry. This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Because the equipment rental fee must be paid to University V for enrollment and attendance, Jackson's equipment rental fee is a qualified expense.



Example 2.

Donna and Charles, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. Charles bought his books from a friend, so what he paid for them isn't a qualified education expense. Donna bought hers at College W's bookstore. Although Donna paid College W directly for her first-year books and materials, her payment isn't a qualified expense because the books and materials aren't required to be purchased from College W for enrollment or attendance at the institution.



Example 3.

When Marci enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and student government. No portion of the fee covers personal expenses. Although labeled as a student activity fee, the fee is required for Marci's enrollment and attendance at College X. Therefore, it is a qualified expense.



No Double Benefit Allowed

You can't do any of the following.

  • Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim a lifetime learning credit based on those same expenses.

  • Claim a lifetime learning credit in the same year that you are claiming a tuition and fees deduction for the same student.

  • Claim a lifetime learning credit for any student and use any of that student's expenses in figuring your American opportunity credit.

  • Claim a lifetime learning 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). See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7 and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8.

  • Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. See Adjustments to Qualified Education Expenses below.

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Figure 3-1

Please click here for the text description of the image.

Adjustments to Qualified Education Expenses

For each student, reduce the qualified education expenses paid 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 2016, 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.

Some tax-free educational assistance received after 2016 may be treated as a refund of qualified education expenses paid in 2016. This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2016 for qualified education expenses paid on behalf of a student in 2016 (or attributable to enrollment at an eligible educational institution during 2016).

If this tax-free educational assistance is received after 2016 but before you file your 2016 income tax return, see Refunds received after 2016 but before your income tax return is filed , later. If this tax-free educational assistance is received after 2016 and after you file your 2016 income tax return, see Refunds received after 2016 and after your income tax return is filed , later.

Tax-free educational assistance includes:



Generally, any scholarship or fellowship grant is treated as tax free. However, a scholarship or fellowship grant isn't treated as tax free to the extent the student includes it in gross income (the student may or may not be required to file a tax return for the year the scholarship or fellowship grant is received) and either of the following is true.

  • 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 chapter 1.

  • 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 chapter 1.

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A student can't choose to include in income a scholarship or fellowship grant provided by an Indian tribal government that is excluded from income under the Tribal General Welfare Exclusion Act of 2014 or benefits provided by an educational program described in section 5.02(2)(b)(ii) of Revenue Procedure 2014-35, available at www.irs.gov/irb/2014-26_IRB/ar10.html.

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You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. For examples, see Coordination with Pell grants and other scholarships, later.

Refunds.

A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Some tax-free educational assistance received after 2016 may be treated as a refund. See Tax-free educational assistance , earlier.



Refunds received in 2016.

For each student, figure the adjusted qualified education expenses for 2016 by adding all the qualified education expenses for 2016 and subtracting any refunds of those expenses received from the eligible educational institution during 2016.



Refunds received after 2016 but before your income tax return is filed.

If anyone receives a refund after 2016 of qualified education expenses paid on behalf of a student in 2016 and the refund is paid before you file an income tax return for 2016, the amount of qualified education expenses for 2016 is reduced by the amount of the refund.



Refunds received after 2016 and after your income tax return is filed.

If anyone receives a refund after 2016 of qualified education expenses paid on behalf of a student in 2016 and the refund is paid after you file an income tax return for 2016, you may need to repay some or all of the credit. See Credit recapture next.



Credit recapture.

If any tax-free educational assistance for the qualified education expenses paid in 2016 or any refund of your qualified education expenses paid in 2016 is received after you file your 2016 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2016 by reducing the expenses by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2016 and figure the amount by which your 2016 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 pay $9,300 in tuition and fees in December 2016, and your child began college in January 2017. You filed your 2016 tax return on February 14, 2017, and claimed a lifetime learning credit of $1,860. You claimed no other tax credits. After you filed your return, your child withdrew from two courses and you received a refund of $2,900. You must refigure your 2016 lifetime learning credit using $6,400 of qualified education expenses instead of $9,300. The refigured credit is $1,280 and your tax liability increased by $580. See the instructions for your 2017 income tax return to determine where to include this tax.



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If you pay qualified education expenses in both 2016 and 2017 for an academic period that begins in the first 3 months of 2017 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2017 instead of reducing your expenses for 2016.

Amounts that don't reduce qualified education expenses.

Don't 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.

Don't 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 Qualified education expenses in chapter 1.

  • The use of the money isn't restricted.

For examples, see Adjustments to Qualified Education Expenses in chapter 2.



Coordination with Pell grants and other scholarships.

You may be able to increase your lifetime learning credit when the student (you, your spouse, or your dependent) includes certain scholarships or fellowship grants in the student’s gross income. Your credit may increase only if the amount of the student's qualified education expenses minus the total amount of scholarships and fellowship grants is less than $10,000. If this situation applies, consider including some or all of the scholarship or fellowship grant in the student's income in order to treat the included amount as paying nonqualified expenses instead of qualified education expenses. Nonqualified expenses are expenses such as room and board that aren't qualified education expenses such as tuition and related fees.

Scholarships and fellowship grants that the student includes in income don't reduce the student's qualified education expenses available to figure your lifetime learning credit. Thus, including enough of the scholarship or fellowship grant in the student's income to report up to $10,000 in qualified education expenses for your lifetime learning credit may increase the credit by enough to increase your tax refund or reduce the amount of tax you owe even considering any increased tax liability from the additional income. However, the increase in tax liability as well as the loss of other tax credits may be greater than the additional lifetime learning credit and may cause your tax refund to decrease or the amount of tax you owe to increase. Your specific circumstances will determine what amount, if any, of the scholarship or fellowship grant to include in income to maximize your tax refund or minimize the amount of tax you owe.

The scholarship or fellowship grant must be one that may qualify as a tax-free scholarship under the rules discussed in chapter 1. Also, the scholarship or fellowship grant must be one that may (by its terms) be used for nonqualified expenses. Finally, the amount of the scholarship or fellowship grant that is applied to nonqualified expenses can't exceed the amount of the student's actual nonqualified expenses that are paid in the tax year. This amount may differ from the student's living expenses estimated by the student's school in figuring the official cost of attendance under student aid rules.

The fact that the educational institution applies the scholarship or fellowship grant to qualified education expenses, such as tuition and related fees, doesn't prevent the student from choosing to apply certain scholarships or fellowship grants to the student's actual nonqualified expenses. By making this choice (that is, by including the part of the scholarship or fellowship grant applied to the student's nonqualified expenses in income), the student may increase taxable 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.

Example 1—No scholarship.

Judy Green, who is unmarried, is taking courses at a public community college to be recertified to teach in public schools. Her adjusted gross income (AGI) and her MAGI, for purposes of the credit, are $27,400. Judy claims the standard deduction of $6,300 and personal exemption of $4,050, resulting in taxable income of $17,050 and a tax liability before credits of $2,098. Judy claims no credits other than the lifetime learning credit. In July 2016, she paid $700 for the summer 2016 semester; in August 2016, she paid $1,900 for the fall 2016 semester; and in December 2016, she paid another $1,900 for the spring semester beginning in January 2017. Judy and the college meet all requirements for the lifetime learning credit. She can use all of the $4,500 tuition she paid in 2016 when figuring her 2016 lifetime learning credit. She claims a $900 lifetime learning credit and her tax liability after credits is $1,198.

Example 2—Scholarship excluded from income.

The facts are the same as in Example 1—No scholarship, except that Judy was awarded a $1,500 scholarship. Under the terms of her scholarship, it may be used to pay any educational expenses, including room and board. If Judy excludes the scholarship from income, she will be deemed (for purposes of figuring her education credit) to have applied the scholarship to pay for tuition, required fees, and course materials. Only $3,000 of the $4,500 tuition she paid in 2016 could be used when figuring her 2016 lifetime learning credit. Her lifetime learning credit would be reduced to $600 and her tax liability after credits would be $1,498.

Example 3—Scholarship included in income.

The facts are the same as in Example 2—Scholarship excluded from income. If, unlike Example 2, Judy includes the $1,500 scholarship in income, she will be deemed to have applied the entire scholarship to pay for room and board. Judy's AGI and MAGI would increase to $28,900, her taxable income would be $18,550, and her tax liability before credits would be $2,323. She would be able to use the $4,500 of adjusted qualified education expenses to figure her credit. Judy could claim a $900 lifetime learning credit and her tax liability after credits would be $1,423.

Example 4—Scholarship applied by the postsecondary school to tuition.

The facts are the same as in Example 3—Scholarship included in income, except the $1,500 scholarship is paid directly to the public community college. The fact that the public community college applies the scholarship to Judy's tuition and related fees doesn't prevent Judy from including the $1,500 scholarship in income. As in Example 3, by doing so, she will be deemed to have applied the entire scholarship to pay for room and board. Judy could claim the $900 lifetime learning credit and her tax liability after credits would be $1,423.

Note.

Whether you will benefit from applying a scholarship or fellowship grant to nonqualified expenses will depend on the amount of the student's qualified education expenses, the amount of the scholarship or fellowship grant, and whether the scholarship or fellowship grant may (by its terms) be used for nonqualified expenses. Any benefit will also depend on the student's federal and state marginal tax rates as well as any federal and state tax credits the student claims. Before deciding, look at the total amount of your federal and state tax refunds or taxes owed and, if the student is your dependent, the student's tax refunds or taxes owed. For example, if you are the student and you also claim the earned income credit, choosing to apply a scholarship or fellowship grant to nonqualified expenses by including the amount in your income may not benefit you if the decrease to your earned income credit as a result of including the scholarship or fellowship grant in income is more than the increase to your lifetime learning credit as a result of including this amount in income.



Expenses That Don't Qualify

Qualified education expenses don't include amounts paid for:

  • Insurance;

  • Medical expenses (including student health fees);

  • Room and board;

  • Transportation; or

  • Similar personal, living, or family expenses.

This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.

Sports, games, hobbies, and noncredit courses.

Qualified education expenses generally don't include expenses that relate to any course of instruction or other education that involves sports, games, or hobbies, or any noncredit course. However, if the course of instruction or other education is part of the student's degree program or is taken by the student to acquire or improve job skills, these expenses can qualify.



Comprehensive or bundled fees.

Some eligible educational institutions combine all of their fees for an academic period into one amount. If you don't receive or don't have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. The institution is generally required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T. See Figuring the Credit , later, for more information about Form 1098-T.



Who Is an Eligible Student?

For purposes of the lifetime learning credit, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (as defined under Qualified Education Expenses , earlier).

Who Can Claim a Dependent's Expenses?

If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim a lifetime learning credit for your dependent's expenses for that year.

For you to claim a lifetime learning credit for your dependent's expenses, you must also claim an exemption for your dependent. You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c.

IF you... THEN only...
claim an exemption on your tax return for a dependent who is an eligible student you can claim the lifetime learning credit based on that dependent's expenses. The dependent can't claim the credit.
don't claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the lifetime learning credit. You can't claim the credit based on this dependent's expenses.

Expenses paid by dependent.

If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Include these expenses when figuring the amount of your lifetime learning credit.

This is an Image: taxtip.gif

Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent.



Expenses paid by you.

If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the lifetime learning credit. If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the lifetime learning credit.



Expenses paid by others.

Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. If you claim an exemption on your tax return for the student, you are considered to have paid the expenses.

Example.

In 2016, Ms. Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. For purposes of claiming a lifetime learning credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself.

Unless an exemption for Todd is claimed on someone else's 2016 tax return, only Todd can use the payment to claim a lifetime learning credit.

If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2016 tax return, whoever claims the exemption may be able to use the expenses to claim a lifetime learning credit. If anyone else claims an exemption for Todd, Todd can't claim a lifetime learning credit.



Tuition reduction.

When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1.



Figuring the Credit

The amount of the lifetime learning credit is 20% of the first $10,000 of qualified education expenses you paid for all eligible students. The maximum amount of lifetime learning credit you can claim for 2016 is $2,000 (20% × $10,000). However, that amount may be reduced based on your MAGI. See Effect of the Amount of Your Income on the Amount of Your Credit , later.

Example.

Bruce and Toni Harper are married and file a joint tax return. For 2016, their MAGI is $75,000. Toni is attending a local college (an eligible educational institution) to earn credits toward a degree in nursing. She already has a bachelor's degree in history and wants to become a nurse. In August 2016, Toni paid $5,000 of qualified education expenses for her fall 2016 semester. Bruce and Toni can claim a $1,000 (20% × $5,000) lifetime learning credit on their 2016 joint tax return.

Form 1098-T.

To help you figure your lifetime learning credit, the student may receive Form 1098-T. Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2017. An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. However, the amounts on Form 1098-T, boxes 1 and 2, might be different from what you paid. When figuring the credit, use only the amounts you paid or are deemed to have paid in 2016 for qualified education expenses.

In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student.

The eligible educational institution may ask for a completed Form W-9S or similar statement to obtain the student's name, address, and taxpayer identification number.



Effect of the Amount of Your Income on the Amount of Your Credit

The amount of your lifetime learning credit is phased out (gradually reduced) if your MAGI is between $55,000 and $65,000 ($111,000 and $131,000 if you file a joint return). You can't claim a lifetime learning credit if your MAGI is $65,000 or more ($131,000 or more if you file a joint return).

Modified adjusted gross income (MAGI).

For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return.



MAGI when using Form 1040A.

If you file Form 1040A, your MAGI is the AGI on line 22 of that form.



MAGI when using Form 1040.

If you file Form 1040, your MAGI is the AGI on line 38 of that form, 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.

You can use Worksheet 3-1 to figure your MAGI.



Worksheet 3-1. MAGI for the Lifetime Learning Credit

1. Enter your adjusted gross income
(Form 1040, line 38)
1.
2. Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18) 2.
3. Enter your foreign housing deduction (Form 2555, line 50) 3.
4. Enter the amount of income from Puerto Rico you are excluding 4.
5. Enter the amount of income from American Samoa you are excluding (Form 4563, line 15) 5.
6. Add the amounts on
lines 2, 3, 4, and 5
6.
7. Add the amounts on lines 1 and 6.
This is your modified adjusted
gross income
. Enter this amount
on Form 8863, line 14
7.

Phaseout.

If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 10–18 of Form 8863. The same method is shown in the following example.



Example.

You are filing a joint return with a MAGI of $112,000. In 2016, you paid $6,600 of qualified education expenses.

You figure the tentative lifetime learning credit (20% of the first $10,000 of qualified education expenses you paid for all eligible students). The result is a $1,320 (20% x $6,600) tentative credit.

Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($1,320) by a fraction. The numerator (top part) of the fraction is $131,000 (the upper limit for those filing a joint return) minus your MAGI. The denominator (bottom part) is $20,000, the range of incomes for the phaseout ($111,000 to $131,000). The result is the amount of your phased out (reduced) lifetime learning credit ($1,254).

$1,320 × $131,000 − $112,000 = $1,254
$20,000

Claiming the Credit

You claim the lifetime learning credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. Enter the credit on Form 1040, line 50, or Form 1040A, line 33.

Note.

In Appendix A at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return.

4. Student Loan Interest Deduction

Introduction

Generally, personal interest you pay, other than certain mortgage interest, isn't deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $80,000 ($160,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500.

The student loan interest deduction is claimed as an adjustment to income. This means you can claim this deduction even if you don't itemize deductions on Schedule A (Form 1040).

This chapter explains:

  • What type of loan interest you can deduct,

  • Whether you can claim the deduction,

  • What expenses you must have paid with the student loan,

  • Who is an eligible student,

  • How to figure the deduction, and

  • How to claim the deduction.

Table 4-1. Student Loan Interest Deduction at a Glance

This table summarizes the features of the student loan interest deduction.

Don't rely on this table alone. Refer to the text for more details.

Feature Description
Maximum benefit You can reduce your income subject to tax by up to $2,500.
Loan qualifications Your student loan:
• must have been taken out solely to pay qualified education expenses, and
• can't be from a related person or made under a qualified employer plan.
Student qualifications The student must be:
• you, your spouse, or your dependent; and
• enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential at an eligible educational institution.
Limit on modified adjusted gross income (MAGI) $160,000 if married filing a joint return;
$80,000 if single, head of household, or qualifying widow(er).

Student Loan Interest Defined

Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.

Qualified Student Loan

This is a loan you took out solely to pay qualified education expenses (defined later) that were:

  • For you, your spouse, or a person who was your dependent when you took out the loan;

  • Paid or incurred within a reasonable period of time before or after you took out the loan; and

  • For education provided during an academic period for an eligible student.

Loans from the following sources aren't qualified student loans.

  • A related person.

  • A qualified employer plan.

Your dependent.

Generally, your dependent is someone who is either a:

  • Qualifying child, or

  • Qualifying relative.

You can find more information about dependents in Pub. 501.



Exceptions.

For purposes of the student loan interest deduction, the following are exceptions to the general rules for dependents.

  • An individual can be your dependent even if you are the dependent of another taxpayer.

  • An individual can be your dependent even if the individual files a joint return with a spouse.

  • An individual can be your dependent even if the individual had gross income for the year that was equal to or more than the exemption amount for the year ($4,050 for 2016).



Reasonable period of time.

Qualified education expenses are treated as paid or incurred within a reasonable period of time before or after you take out the loan if they are paid with the proceeds of student loans that are part of a federal postsecondary education loan program.

Even if not paid with the proceeds of that type of loan, the expenses are treated as paid or incurred within a reasonable period of time if both of the following requirements are met.

  • The expenses relate to a specific academic period.

  • The loan proceeds are disbursed within a period that begins 90 days before the start of that academic period and ends 90 days after the end of that academic period.

If neither of the above situations applies, the reasonable period of time usually is determined based on all the relevant facts and circumstances.



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. If an educational institution uses credit hours or clock hours and doesn't have academic terms, each payment period can be treated as an academic period.



Eligible student.

This is a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.



Enrolled at least half-time.

A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study.

The standard for what is half of the normal full-time work load is determined by each eligible educational institution. However, the standard may not be lower than any of those established by the U.S. Department of Education under the Higher Education Act of 1965.



Related person.

You can't deduct interest on a loan you get from a related person. Related persons include:

  • Your spouse;

  • Your brothers and sisters;

  • Your half brothers and half sisters;

  • Your ancestors (parents, grandparents, etc.);

  • Your lineal descendants (children, grandchildren, etc.); and

  • Certain corporations, partnerships, trusts, and exempt organizations.



Qualified employer plan.

You can't deduct interest on a loan made under a qualified employer plan or under a contract purchased under such a plan.



Qualified Education Expenses

For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items.

  • Tuition and fees.

  • Room and board.

  • Books, supplies, and equipment.

  • Other necessary expenses (such as transportation).

The cost of room and board qualifies only to the extent that it isn't more than:

  • The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student; or

  • If greater, the actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

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.

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

For purposes of the student loan interest deduction, an eligible educational institution also includes an institution conducting 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.

An educational institution must meet the above criteria only during the academic period(s) for which the student loan was incurred. The deductibility of interest on the loan isn't affected by the institution's subsequent loss of eligibility.

This is an Image: taxtip.gif

The educational institution should be able to tell you if it is an eligible educational institution.



Adjustments to Qualified Education Expenses

You must reduce your qualified education expenses by the total amount paid for them with the following tax-free items.

Include as Interest

In addition to simple interest on the loan, if all other requirements are met, the items discussed below can be student loan interest.

Loan origination fee.

In general, this is a one-time fee charged by the lender when a loan is made. To be deductible as interest, a loan origination fee must be for the use of money rather than for property or services (such as commitment fees or processing costs) provided by the lender. A loan origination fee treated as interest accrues over the life of the loan.

Loan origination fees weren't required to be reported on Form 1098-E, Student Loan Interest Statement, for loans made before September 1, 2004. If loan origination fees aren't included in the amount reported on your Form 1098-E, you can use any reasonable method to allocate the loan origination fees over the term of the loan.



Capitalized interest.

This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. Capitalized interest is treated as interest for tax purposes and is deductible as payments of principal are made on the loan. No deduction for capitalized interest is allowed in a year in which no loan payments were made.



Interest on revolving lines of credit.

This interest, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) only to pay qualified education expenses. See Qualified Education Expenses , earlier.



Interest on refinanced student loans.

This includes interest on both:

  • Consolidated loans—loans used to refinance more than one student loan of the same borrower, and

  • Collapsed loans—two or more loans of the same borrower that are treated by both the lender and the borrower as one loan.

This is an Image: caution.gif

If you refinance a qualified student loan for more than your original loan and you use the additional amount for any purpose other than qualified education expenses, you can't deduct any interest paid on the refinanced loan.



Allocating Payments Between Interest and Principal

The allocation of payments between interest and principal for tax purposes might not be the same as the allocation shown on the Form 1098-E or other statement you receive from the lender or loan servicer. To make the allocation for tax purposes, a payment generally applies first to stated interest that remains unpaid as of the date the payment is due, second to any loan origination fees allocable to the payment, third to any capitalized interest that remains unpaid as of the date the payment is due, and fourth to the outstanding principal.

Example.

In August 2015, Peg took out a $10,000 student loan to pay the tuition for her senior year of college. The lender charged a 3% loan origination fee ($300) that was withheld from the funds Peg received. The interest (5% simple) on this loan accrued while she completed her senior year and for 6 months after she graduated. At the end of that period, the lender determined the amount to be repaid by capitalizing all accrued but unpaid interest ($625 interest accrued from August 2015 through October 2016) and adding it to the outstanding principal balance of the loan. The loan is payable over 60 months, with a payment of $200.51 due on the first of each month, beginning November 2016.

Peg didn't receive a Form 1098-E for 2016 from her lender because the amount of interest she paid didn't require the lender to issue an information return. However, she did receive an account statement from the lender that showed the following 2016 payments on her outstanding loan of $10,625 ($10,000 principal + $625 accrued but unpaid interest).

Payment Date Payment Stated Interest Principal
November 2016 $200.51 $44.27 $156.24
December 2016 $200.51 $43.62 $156.89
Totals $401.02 $87.89 $313.13

To determine the amount of interest that could be deducted on the loan for 2016, Peg starts with the total amount of stated interest she paid, $87.89. Next, she allocates the loan origination fee over the term of the loan ($300 ÷ 60 months = $5 per month). A total of $10 ($5 of each of the two principal payments) should be treated as interest for tax purposes. Peg then applies the unpaid capitalized interest ($625) to the two principal payments in the order in which they were made, and determines that the remaining amount of principal of both payments is treated as interest for tax purposes. Assuming that Peg qualifies to claim the student loan interest deduction, she can deduct $401.02 ($87.89 + $10 + $303.13).

For 2017, Peg will continue to allocate $5 of the loan origination fee to the principal portion of each monthly payment she makes and treat that amount as interest for tax purposes. She also will apply the remaining amount of capitalized interest ($625 − $303.13 = $321.87) to the principal payments in the order in which they are made until the balance is zero, and treat those amounts as interest for tax purposes.

Don't Include as Interest

You can't claim a student loan interest deduction for any of the following items.

  • Interest you paid on a loan if, under the terms of the loan, you aren't legally obligated to make interest payments.

  • Loan origination fees that are payments for property or services provided by the lender, such as commitment fees or processing costs.

  • Interest you paid on a loan to the extent payments were made through your participation in the National Health Service Corps Loan Repayment Program (the "NHSC Loan Repayment Program") or certain other loan repayment assistance programs. For more information, see Student Loan Repayment Assistance in chapter 5.

When Must Interest Be Paid?

You can deduct all interest you paid during the year on your student loan, including voluntary payments, until the loan is paid off.

Can You Claim the Deduction?

Generally, you can claim the deduction if all of the following requirements are met.

  • Your filing status is any filing status except married filing separately.

  • No one else is claiming an exemption for you on his or her tax return.

  • You are legally obligated to pay interest on a qualified student loan.

  • You paid interest on a qualified student loan.

Claiming an exemption for you.

Another taxpayer is claiming an exemption for you if he or she lists your name and other required information on his or her Form 1040 (or Form 1040A), line 6c, or Form 1040NR, line 7c.



Example 1.

During 2016, Josh paid $600 interest on his qualified student loan. Only he is legally obligated to make the payments. No one claimed an exemption for Josh for 2016. Assuming all other requirements are met, Josh can deduct the $600 of interest he paid on his 2016 Form 1040 or 1040A.

Example 2.

During 2016, Jo paid $1,100 interest on her qualified student loan. Only she is legally obligated to make the payments. Jo's parents claimed an exemption for her on their 2016 tax return. In this case, neither Jo nor her parents may deduct the student loan interest Jo paid in 2016.

Interest paid by others.

If you are the person legally obligated to make interest payments and someone else makes a payment of interest on your behalf, you are treated as receiving the payments from the other person and, in turn, paying the interest.

Example 1.

Darla obtained a qualified student loan to attend college. After Darla's graduation from college, she worked as an intern for a nonprofit organization. As part of the internship program, the nonprofit organization made an interest payment on behalf of Darla. This payment was treated as additional compensation and reported on her Form W-2, box 1. Assuming all other qualifications are met, Darla can deduct this payment of interest on her tax return.

Example 2.

Ethan obtained a qualified student loan to attend college. After graduating from college, the first monthly payment on his loan was due in December. As a gift, Ethan's mother made this payment for him. No one is claiming a dependency exemption for Ethan on his or her tax return. Assuming all other qualifications are met, Ethan can deduct this payment of interest on his tax return.



No Double Benefit Allowed

You can't deduct as interest on a student loan any amount that is an allowable deduction under any other provision of the tax law (for example, home mortgage interest).

Figuring the Deduction

Your student loan interest deduction is generally the smaller of:

  • $2,500, or

  • The interest you paid during the tax year.

However, the amount determined above may be phased out (gradually reduced) or eliminated based on your filing status and MAGI as explained below. You can use Worksheet 4-1 (at the end of this chapter) to figure both your MAGI and your deduction.

Form 1098-E.

To help you figure your student loan interest deduction, you should receive Form 1098-E. Generally, an institution (such as a bank or governmental agency) that received interest payments of $600 or more during 2016 on one or more qualified student loans must send Form 1098-E (or acceptable substitute) to each borrower by January 31, 2017.

For qualified student loans taken out before September 1, 2004, the institution is required to include on Form 1098-E only payments of stated interest. Other interest payments, such as certain loan origination fees and capitalized interest, may not appear on the form you receive. However, if you pay qualifying interest that isn't included on Form 1098-E, you can also deduct those amounts. See Allocating Payments Between Interest and Principal , earlier.

The lender may ask for a completed Form W-9S, or similar statement to obtain the borrower's name, address, and taxpayer identification number. The form may also be used by the borrower to certify that the student loan was incurred solely to pay for qualified education expenses.



Effect of the Amount of Your Income on the Amount of Your Deduction

The amount of your student loan interest deduction is phased out (gradually reduced) if your MAGI is between $65,000 and $80,000 ($130,000 and $160,000 if you file a joint return). You can't claim a student loan interest deduction if your MAGI is $80,000 or more ($160,000 or more if you file a joint return).

Modified adjusted gross income (MAGI).

For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return before subtracting any deduction for student loan interest. However, as discussed below, there may be other modifications.



Table 4-2 shows how the amount of your MAGI can affect your student loan interest deduction.

Table 4-2. Effect of MAGI on Student Loan Interest Deduction
IF your filing status is... AND your MAGI is... THEN your student loan interest deduction is...
single,
head of household, or qualifying widow(er)
not more than $65,000 not affected by the phaseout.
more than $65,000
but less than
$80,000
reduced because of the phaseout.
$80,000 or more eliminated by the phaseout.
married filing joint return not more than $130,000 not affected by the phaseout.
more than $130,000
but less than $160,000
reduced because of the phaseout.
$160,000 or more eliminated by the phaseout.

MAGI when using Form 1040A.

If you file Form 1040A, your MAGI is the AGI on line 22 of that form figured without taking into account any amount on line 18 (student loan interest deduction) and line 19 (tuition and fees deduction).



MAGI when using Form 1040.

If you file Form 1040, your MAGI is the AGI on line 38 of that form figured without taking into account any amount on line 33 (student loan interest deduction), line 34 (tuition and fees deduction), or line 35 (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.



MAGI when using Form 1040NR.

If you file Form 1040NR, your MAGI is the AGI on line 36 of that form figured without taking into account any amount on line 33 (student loan interest deduction) and line 34 (domestic production activities deduction).



MAGI when using Form 1040NR-EZ.

If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form figured without taking into account any amount on line 9 (student loan interest deduction).



Phaseout.

If your MAGI is within the range of incomes where the credit must be reduced, you must figure your reduced deduction. To figure the phaseout, multiply your interest deduction (before the phaseout, but not more than $2,500) by a fraction. The numerator (top part) is your MAGI minus $65,000 ($130,000 in the case of a joint return). The denominator (bottom part) is $15,000 ($30,000 in the case of a joint return). Subtract the result from your deduction (before the phaseout) to give you the amount you can deduct.



Example 1.

During 2016, you paid $800 interest on a qualified student loan. Your 2016 MAGI is $145,000 and you are filing a joint return. You must reduce your deduction by $400, figured as follows.

$800 × $145,000 − $130,000
$30,000
= $400

Your reduced student loan interest deduction is $400 ($800 − $400).

Example 2.

The facts are the same as in Example 1 except that you paid $2,750 interest. Your maximum deduction for 2016 is $2,500. You must reduce your maximum deduction by $1,250, figured as follows.

$2,500 × $145,000 − $130,000
$30,000
= $1,250

In this example, your reduced student loan interest deduction is $1,250 ($2,500 − $1,250).

Which Worksheet To Use

Generally, you figure the deduction using the Student Loan Interest Deduction Worksheet in the Form 1040, Form 1040A, or Form 1040NR instructions. However, if you are filing Form 2555, Foreign Earned Income; Form 2555-EZ, Foreign Earned Income Exclusion; Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa; or you are excluding income from sources within Puerto Rico, you must complete Worksheet 4-1 .

Claiming the Deduction

The student loan interest deduction is an adjustment to income. To claim the deduction, enter the allowable amount on line 33 (Form 1040), line 18 (Form 1040A), line 33 (Form 1040NR), or line 9 (Form 1040NR-EZ).

Worksheet 4-1. Student Loan Interest Deduction Worksheet

Use this worksheet instead of the worksheet in the Form 1040 instructions if you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico. Before using this worksheet, you must complete Form 1040,lines 7 through 32, plus any amount to be entered on the dotted line next to line 36.

1. Enter the total interest you paid in 2016 on qualified student loans. Don't enter
more than $2,500
1.
2. Enter the amount from Form 1040, line 22 2.
3. Enter the total of the amounts from Form 1040,
lines 23 through 32
3.
4. Enter the total of any amounts entered on the dotted line next to Form 1040, line 36 4.
5. Add lines 3 and 4 5.
6. Subtract line 5 from line 2 6.
7. Enter any foreign earned income exclusion and/or housing
exclusion (Form 2555, line 45; or Form 2555-EZ, line 18)
7.
8. Enter any foreign housing deduction (Form 2555, line 50) 8.
9. Enter the amount of income from Puerto Rico you are excluding 9.
10. Enter the amount of income from American Samoa you are
excluding (Form 4563, line 15)
10.
11. Add lines 6 through 10. This is your modified adjusted gross income 11.
12. Enter the amount shown below for your filing status 12.
• Single, head of household, or qualifying widow(er)—$65,000
• Married filing jointly—$130,000
13. Is the amount on line 11 more than the amount on line 12?
No. Skip lines 13 and 14, enter -0- on line 15, and go to line 16.
Yes. Subtract line 12 from line 11 13.
14. Divide line 13 by $15,000 ($30,000 if married filing jointly). Enter the result as a decimal
(rounded to at least three places). If the result is 1.000 or more, enter 1.000
14. .
15. Multiply line 1 by line 14 15.
16. Student loan interest deduction. Subtract line 15 from line 1. Enter the result here
and on Form 1040, line 33. Don't include this amount in figuring any other
deduction on your return (such as on Schedule A, C, E, etc.)
16.

5. Student Loan Cancellations and Repayment Assistance

Introduction

Generally, if you are responsible for making loan payments, and the loan is canceled (forgiven), you must include the amount that was forgiven in your gross income for tax purposes. However, if you fulfill certain requirements, two types of student loan assistance may be tax free. The types of assistance discussed in this chapter are:

  • Student loan cancellation, and

  • Student loan repayment assistance.

Student Loan Cancellation

If your student loan is canceled, you may not have to include any amount in income. This section describes the requirements for tax-free treatment of canceled student loans.

Qualifying Loans

To qualify for tax-free treatment, for the cancellation of your loan, your loan must have been made by a qualified lender to assist you in attending an eligible educational institution and contain a provision that all or part of the debt will be canceled if you work:

  • For a certain period of time,

  • In certain professions, and

  • For any of a broad class of employers.

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The cancellation of your loan won't qualify for tax-free treatment if it is canceled because of services you performed for the educational institution that made the loan or other organization that provided the funds. See Exception, later.

Eligible educational institution.

This is an educational 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.



Qualified lenders.

These include the following.

  1. The United States, or an instrumentality thereof.

  2. A state, territory, or possession of the United States; or the District of Columbia; or any political subdivision thereof.

  3. A public benefit corporation that is tax exempt under section 501(c)(3); and that has assumed control of a state, county, or municipal hospital; and whose employees are considered public employees under state law.

  4. An eligible educational institution, if the loan is made:

    1. As part of an agreement with an entity described in (1), (2), or (3) under which the funds to make the loan were provided to the educational institution; or

    2. Under a program of the educational institution that is designed to encourage its students to serve in occupations with unmet needs or in areas with unmet needs where the services provided by the students (or former students) are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

Occupations with unmet needs include medicine, nursing, teaching, and law.



Section 501(c)(3) organization.

This is any corporation, community chest, fund, or foundation organized and operated exclusively for one or more of the following purposes.

  • Charitable.

  • Religious.

  • Educational.

  • Scientific.

  • Literary.

  • Testing for public safety.

  • Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment).

  • The prevention of cruelty to children or animals.



Exception.

The cancellation of your loan doesn't qualify as tax-free student loan cancellation if your student loan was made by an educational institution and is canceled because of services you performed for the educational institution or other organization that provided the funds.



Refinanced Loan

If you refinanced a student loan with another loan from an eligible educational institution or a tax-exempt organization, that loan may also be considered as made by a qualified lender. The refinanced loan is considered made by a qualified lender if it is made under a program of the refinancing organization that is designed to encourage students to serve in occupations with unmet needs or in areas with unmet needs where the services required of the students are for or under the direction of a governmental unit or a tax-exempt section 501(c)(3) organization.

Student Loan Repayment Assistance

Student loan repayments made to you are tax free if you received them for any of the following.

  • The National Health Service Corps (NHSC) Loan Repayment Program (NHSC Loan Repayment Program).

  • A state education loan repayment program eligible for funds under the Public Health Service Act.

  • Any other state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health services in under served or health professional shortage areas (as determined by such state).

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You can't deduct the interest you paid on a student loan to the extent payments were made through your participation in the above programs.

6. Tuition and Fees Deduction

Introduction

You may be able to deduct qualified education expenses paid during the year for yourself, your spouse, or your dependent(s). You can't claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education, as explained later under Qualified Education Expenses .

What is the tax benefit of the tuition and fees deduction?

The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000.

This deduction is claimed as an adjustment to income. This means you can claim this deduction even if you don't itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if you don't qualify for the American opportunity or lifetime learning credits.



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You can choose the education benefit that will give you the lowest tax. You may want to compare the tuition and fees deduction to the education credits. See chapter 2 (American opportunity credit) and chapter 3 (lifetime learning credit) for more information on the education credits.

Table 6-1 summarizes the features of the tuition and fees deduction.

Can You Claim the Deduction?

The following rules will help you determine if you can claim the tuition and fees deduction.

Who Can Claim the Deduction?

Generally, you can claim the tuition and fees deduction if all three of the following requirements are met.

  1. You pay qualified education expenses of higher education.

  2. You pay the education expenses for an eligible student.

  3. The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return.

The term "qualified education expenses" is defined later under Qualified Education Expenses . "Eligible student" is defined later under Who Is an Eligible Student . For more information on claiming the deduction for a dependent, see Who Can Claim a Dependent's Expenses , later.

Table 6-1. Tuition and Fees Deduction at a Glance

Don't rely on this table alone. Refer to the text for complete details.

Question Answer
What is the maximum benefit? You can reduce your income subject to tax by up to $4,000.
What is the limit on modified adjusted gross income (MAGI)? $160,000 if married filing a joint return;
$80,000 if single, head of household, or qualifying widow(er).
Where is the deduction taken? As an adjustment to income on
Form 1040 or Form 1040A.
For whom must the expenses be paid? A student enrolled in an eligible educational institution who is either:
• you,
• your spouse, or
• your dependent for whom you claim an exemption.
What tuition and fees are deductible? Tuition and fees required for enrollment or attendance at an eligible postsecondary educational institution, but not including personal, living, or family expenses, such as room and board.

Who Can't Claim the Deduction?

You can't claim the tuition and fees deduction if any of the following apply.

  • Your filing status is married filing separately.

  • Another person can claim an exemption for you as a dependent on his or her tax return. You can't take the deduction even if the other person doesn't actually claim that exemption.

  • Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return).

  • You (or your spouse) were a nonresident alien for any part of 2016 and the nonresident alien didn't elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Pub. 519.

What Expenses Qualify?

The tuition and fees deduction is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Generally, the deduction is allowed for qualified education expenses paid in 2016 in connection with enrollment at an institution of higher education during 2016 or for an academic period beginning in 2016 or in the first 3 months of 2017.

For example, if you paid $1,500 in December 2016 for qualified tuition for the spring 2017 semester beginning in January 2017, you may be able to use that $1,500 in figuring your 2016 deduction.

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. If an educational institution uses credit hours or clock hours and doesn't have academic terms, each payment period can be treated as an academic period.



Paid with borrowed funds.

You can claim a tuition and fees deduction for qualified education expenses paid with the proceeds of a loan. Use the expenses to figure the deduction for the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan disbursements 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 a tuition and fees deduction for qualified education expenses not refunded when a student withdraws.



Qualified Education Expenses

For purposes of the tuition and fees deduction, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.

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.

An eligible educational institution also includes certain educational institutions located outside the United States that are eligible to participate in a student aid program administered by the U.S. Department of Education.

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The educational institution should be able to tell you if it is an eligible educational institution.



Related expenses.

Student activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.



Prepaid expenses.

Qualified education expenses paid in 2016 for an academic period that begins in the first 3 months of 2017 can be used in figuring an education credit for 2016 only. See Academic period , earlier. For example, if you pay $2,000 in December 2016 for qualified tuition for the 2017 winter quarter that begins in January 2017, you can use that $2,000 in figuring an education credit for 2016 only (if you meet all the other requirements).



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You can't use any amount you paid in 2015 or 2017 to figure the qualified education expenses you use to figure your 2016 education credit(s).

In the following examples, assume that each student is an eligible student and each college or university an eligible educational institution.

Example 1.

Jackson is a sophomore in University V's degree program in dentistry. This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Because the equipment rental fee must be paid to University V for enrollment and attendance, Jackson's equipment rental fee is a qualified education expense.

Example 2.

Donna and Charles, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. Charles bought his books from a friend, so what he paid for them isn't a qualified education expense. Donna bought hers at College W's bookstore. Although Donna paid College W directly for her first-year books and materials, her payment isn't a qualified education expense because the books and materials aren't required to be purchased from College W for enrollment or attendance at the institution.

Example 3.

When Marci enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and the student government. No portion of the fee covers personal expenses. Although labeled as a student activity fee, the fee is required for Marci's enrollment and attendance at College X. Therefore, it is a qualified expense.

No Double Benefit Allowed

You can't do any of the following.

  • Deduct qualified education expenses you deduct under any other provision of the law, for example, as a business expense.

  • Deduct qualified education expenses for a student on your income tax return if you or anyone else claims an American opportunity or lifetime learning credit for that same student in the same year.

  • Deduct qualified education expenses that have been used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or a qualified tuition program (QTP). For a QTP, this applies only to the amount of tax-free earnings that were distributed, not to the recovery of contributions to the program. See Coordination With Tuition and Fees Deduction in chapter 8.

  • Deduct qualified education expenses that have been paid with tax-free interest on U.S. savings bonds (Form 8815). See Figuring the Tax-Free Amount in chapter 10.

  • Deduct qualified education expenses that have been paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. See the following section on Adjustments to Qualified Education Expenses.

Adjustments to Qualified Education Expenses

For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. The result is the amount of adjusted qualified education expenses for each student. You must also reduce qualified education expenses by the other amounts referred to in No Double Benefit Allowed , earlier.

Tax-free educational assistance.

For tax-free educational assistance received in 2016, 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.

Some tax-free educational assistance received after 2016 may be treated as a refund of qualified education expenses paid in 2016. This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2016 for qualified education expenses paid on behalf of a student in 2016 (or attributable to enrollment at an eligible educational institution during 2016).

If this tax-free educational assistance is received after 2016 but before you file your 2016 income tax return, see Refunds received after 2016 but before your income tax return is filed , later. If this tax-free educational assistance is received after 2016 and after you file your 2016 income tax return, see Refunds received after 2016 and after your income tax return is filed , later.

This tax-free educational assistance includes:



Generally, any scholarship or fellowship grant is treated as tax free. However, a scholarship or fellowship grant isn't treated as tax free to the extent the student includes it in gross income (the student may or may not be required to file a tax return for the year the scholarship or fellowship grant is received) and either of the following is true.

  • 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 chapter 1.

  • 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 chapter 1.

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You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. For details, see Adjustments to Qualified Education Expenses in chapters 2 and 3.

Refunds.

A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Some tax-free educational assistance received after 2016 may be treated as a refund. See Tax-free educational assistance , earlier.



Refunds received in 2016.

For each student, figure the adjusted qualified education expenses for 2016 by adding all the qualified education expenses for 2016 and subtracting any refunds of those expenses received from the eligible educational institution during 2016.



Refunds received after 2016 but before your income tax return is filed.

If anyone receives a refund after 2016 of qualified education expenses paid on behalf of a student in 2016 and the refund is paid before you file an income tax return for 2016, the amount of qualified education expenses for 2016 is reduced by the amount of the refund.



Refunds received after 2016 and after your income tax return is filed.

If anyone receives a refund after 2016 of qualified education expenses paid on behalf of a student in 2016 and the refund is paid after you file an income tax return for 2016, you may need to repay some or all of the credit. See Credit recapture , later.



Coordination with education savings bond, Coverdell education savings account, and qualified tuition programs.

Reduce your qualified education expenses by any qualified education expenses used to figure the exclusion from gross income of (a) interest received under an education savings bond program, or (b) any distribution from a Coverdell education savings account or qualified tuition program (QTP). For a QTP, this applies only to the amount of tax-free earnings that were distributed, not to the recovery of contributions to the program.



Credit recapture.

If any tax-free educational assistance for the qualified education expenses paid in 2016 or any refund of your qualified education expenses paid in 2016 is received after you file your 2016 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2016 by reducing that amount by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2016 and figure the amount by which your 2016 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 $3,500 of qualified education expenses in December 2016, and your child began college in January 2017. You claimed $3,500 as the tuition and fees deduction on your 2016 income tax return. The reduction reduced your taxable income by $3,500. Also, you claimed no tax credits in 2016. Your child withdrew from two classes and you received a refund of $2,000 in 2017 after you filed your 2016 tax return. Refigure your 2016 tuition and fees deduction using $1,500 of qualified education expenses instead of the $3,500. The refigured tuition and fees deduction is $1,500. Don't file an amended 2016 tax return to account for this adjustment. Instead, include the difference of $2,000 (but only to the extent this difference would have increased your 2016 tax) on the "Other income" line of your 2017 Form 1040. You can't file Form 1040A for 2017.



Amounts that don't reduce qualified education expenses.

Don't 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.

Don't 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 Qualified education expenses in chapter 1.

  • The use of the money isn't restricted.



Example 1.

In 2016, Jackie paid $3,000 for tuition and $5,000 for room and board at University X. The university didn't require her to pay any fees in addition to her tuition in order to enroll in or attend classes. To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. The terms of the scholarship state that it can be used to pay any of Jackie's college expenses.

University X applies the $2,000 scholarship against Jackie's $8,000 total bill, and Jackie pays the $6,000 balance of her bill from University X with a combination of her student loan and her savings. Jackie doesn't report any portion of the scholarship as income on her tax return.

In figuring the tuition and fees deduction, Jackie must reduce her qualified education expenses by the amount of the scholarship ($2,000) because she excluded the entire scholarship from her income. The student loan isn't tax-free educational assistance, so she doesn't need to reduce her qualified expenses by any part of the loan proceeds. Jackie is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship) in 2016.

Example 2.

The facts are the same as in Example 1, except that Jackie reports her entire scholarship as income on her tax return. Because Jackie reported the entire $2,000 scholarship in her income, she doesn't need to reduce her qualified education expenses. Jackie is treated as having paid $3,000 in qualified education expenses.

Expenses That Don't Qualify

Qualified education expenses don't include amounts paid for:

  • Insurance;

  • Medical expenses (including student health fees);

  • Room and board;

  • Transportation; or

  • Similar personal, living, or family expenses.

This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.

Sports, games, hobbies, and noncredit courses.

Qualified education expenses generally don't include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify.



Comprehensive or bundled fees.

Some eligible educational institutions combine all of their fees for an academic period into one amount. If you don't receive, or don't have access to, an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. The institution is generally required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T. See Figuring the Deduction , later, for more information about Form 1098-T.



Who Is an Eligible Student?

For purposes of the tuition and fees deduction, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (as defined under Qualified Education Expenses , earlier).

Who Can Claim a Dependent's Expenses?

Generally, in order to claim the tuition and fees deduction for qualified education expenses for a dependent, you must:

  1. Have paid the expenses, and

  2. Claim an exemption for the student as a dependent.

For you to be able to deduct qualified education expenses for your dependent, you must claim an exemption for that individual. You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c.

IF your dependent is an eligible student and you... AND... THEN...
claim an exemption for your dependent you paid all qualified education expenses for your dependent only you can deduct the qualified education expenses that you paid. Your dependent can't take a deduction.
claim an exemption for your dependent your dependent paid all qualified education expenses no one is allowed to take a deduction.
don't claim an exemption for your dependent you paid all qualified education expenses no one is allowed to take a deduction.
don't claim an exemption for your dependent your dependent paid all qualified education expenses no one is allowed to take a deduction.

Expenses paid by dependent.

If your dependent pays qualified education expenses, no one can take a tuition and fees deduction for those expenses. Neither you nor your dependent can deduct the expenses. For purposes of the tuition and fees deduction, you aren't treated as paying any expenses actually paid by a dependent for whom you or anyone other than the dependent can claim an exemption. This rule applies even if you don't claim an exemption for your dependent on your tax return.



Expenses paid by you.

If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring your tuition and fees deduction.



Expenses paid under divorce decree.

Qualified education expenses paid directly to an eligible educational institution for a student under a court-approved divorce decree are treated as paid by the student. Only the student would be eligible to take a tuition and fees deduction for that payment, and then only if no one else could claim an exemption for the student.



Expenses paid by others.

Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. If you claim, or can claim, an exemption on your tax return for the student, you aren't considered to have paid the expenses and you can't deduct them. If the student isn't a dependent, only the student can deduct payments made directly to the institution for his or her expenses. If the student is your dependent, no one can deduct the payments.



Example.

In 2016, Ms. Baker makes a payment directly to an eligible educational institution for her grandson Dan's qualified education expenses. For purposes of deducting tuition and fees, Dan is treated as receiving the money from his grandmother and, in turn, paying his own qualified education expenses.

If an exemption can't be claimed for Dan on anyone else's tax return, only Dan can claim a tuition and fees deduction for his grandmother's payment. If someone else can claim an exemption for Dan, no one will be allowed a deduction for Ms. Baker's payment.

Tuition reduction.

When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1.



Figuring the Deduction

The maximum tuition and fees deduction in 2016 is $4,000, $2,000, or $0, depending on the amount of your MAGI. See Effect of the Amount of Your Income on the Amount of Your Deduction , later.

Form 1098-T.

To help you figure your tuition and fees deduction, the student may receive Form 1098-T (see Appendix A for a completed example of Form 1098-T). Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2017. An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. However, the amount on Form 1098-T, boxes 1 and 2, might be different than what you paid. When figuring the deduction, use only the amounts you paid in 2016 for qualified education expenses.

In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student.

The eligible educational institution may ask for a completed Form W-9S or similar statement to obtain the student's name, address, and taxpayer identification number.



Effect of the Amount of Your Income on the Amount of Your Deduction

If your MAGI isn't more than $65,000 ($130,000 if you are married filing jointly), your maximum tuition and fees deduction is $4,000. If your MAGI is larger than $65,000 ($130,000 if you are married filing jointly), but isn't more than $80,000 ($160,000 if you are married filing jointly), your maximum deduction is $2,000. No tuition and fees deduction is allowed if your MAGI is larger than $80,000 ($160,000 if you are married filing jointly).

Modified adjusted gross income (MAGI).

For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return before subtracting any deduction for tuition and fees. However, as discussed below, there may be other modifications.



MAGI when using Form 1040A.

If you file Form 1040A, your MAGI is the AGI on line 22 of that form, figured without taking into account any amount on line 19 (tuition and fees deduction).



MAGI when using Form 1040.

If you file Form 1040, your MAGI is the AGI on line 38 of that form, figured without taking into account any amount on line 34 (tuition and fees deduction), or line 35 (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.

Table 6-2 shows how the amount of your MAGI can affect your tuition and fees deduction.

You can use Worksheet 6-1 to figure your MAGI.



Table 6-2. Effect of MAGI on Maximum Tuition and Fees Deduction

IF your filing status is... AND your MAGI is... THEN your maximum tuition and fees deduction is...
single,
head of household, or qualifying widow(er)
not more than $65,000 $4,000.
more than $65,000
but not more than $80,000
$2,000.
more than $80,000 $0.
married filing joint return not more than $130,000 $4,000.
more than $130,000
but not more than $160,000
$2,000.
more than $160,000 $0.

Claiming the Deduction

You claim a tuition and fees deduction by completing Form 8917 and submitting it with your Form 1040 or Form 1040A. Enter the deduction on Form 1040, line 34, or Form 1040A, line 19. A filled-in Form 8917 is shown at the end of this chapter.

Illustrated Example

Tim Pfister, a single taxpayer, enrolled full-time at a local college to earn a degree in engineering. This is the first year of his postsecondary education. During 2016, he paid $3,600 for his qualified 2016 tuition expense. Both he and the college meet all of the requirements for the tuition and fees deduction. Tim's total income (Form 1040, line 22) and MAGI are $26,000. He figures his deduction of $3,600 as shown on Form 8917, later.

Worksheet 6-1. MAGI for the Tuition and Fees Deduction

Use this worksheet if you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico. Before using this worksheet, you must complete Form 1040, lines 7 through 33, and figure any amount to be entered on the dotted line next to line 36.

1. Enter the amount from Form 1040, line 22 1.
2. Enter the total from Form 1040, lines 23 through 33 2.
3. Enter the total of any amounts entered on the dotted line next to Form 1040, line 36 3.
4. Add lines 2 and 3 4.
5. Subtract line 4 from line 1 5.
6. Enter your foreign earned income exclusion and/or housing
exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)
6.
7. Enter your foreign housing deduction (Form 2555, line 50) 7.
8. Enter the amount of income from Puerto Rico you are excluding 8.
9. Enter the amount of income from American Samoa you are
excluding (Form 4563, line 15)
9.
10. Add lines 5 through 9. This is your modified adjusted gross income 10.
Note. If the amount on line 10 is more than $80,000 ($160,000 if married filing jointly), you can't take the deduction for tuition and fees.

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Form 8917 for Tim Pfister

Please click here for the text description of the image.

7. Coverdell Education Savings Account (ESA)

Introduction

If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return.

There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. However, total contributions for the beneficiary in any year can't be more than $2,000, no matter how many accounts have been established. See Contributions , later.

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This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses.

What is the tax benefit of the Coverdell ESA?

Contributions to a Coverdell ESA aren't deductible, but amounts deposited in the account grow tax free until distributed.

If, for a year, distributions from an account aren't more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary won't owe tax on the distributions. See Tax-Free Distributions , later.

Table 7-1 summarizes the main features of the Coverdell ESA.



Table 7-1. Coverdell ESA at a Glance

Don't rely on this table alone. It provides only general highlights. See the text for definitions of terms and for more complete explanations.

Question Answer
What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary.
Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs.
Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary.
Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return).
Are distributions tax free? Yes, if the distributions aren't more than the beneficiary's adjusted qualified education expenses for the year.


What Is a Coverdell ESA?

A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account.

When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary.

To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created.

The document creating and governing the account must be in writing and must satisfy the following requirements.

  1. The trustee or custodian must be a bank or an entity approved by the IRS.

  2. The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions.

    1. The contribution is in cash.

    2. The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary.

    3. The contribution wouldn't result in total contributions for the year (not including rollover contributions) being more than $2,000.

  3. Money in the account can't be invested in life insurance contracts.

  4. Money in the account can't be combined with other property except in a common trust fund or common investment fund.

  5. The balance in the account generally must be distributed within 30 days after the earlier of the following events.

    1. The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary.

    2. The beneficiary's death.

Qualified Education Expenses

Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses.

Designated beneficiary.

This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account.



Contributions to a qualified tuition program (QTP).

A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. See chapter 8 .



Eligible Educational Institution

For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school.

Eligible postsecondary school.

This 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.



Eligible elementary or secondary school.

This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law.



Qualified Higher Education Expenses

These are expenses related to enrollment or attendance at an eligible postsecondary school. As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time.

  1. The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school.

    1. Tuition and fees.

    2. Books, supplies, and equipment.

  2. Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school.

  3. Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below).

    The expense for room and board qualifies only to the extent that it isn't more than the greater of the following two amounts.

    1. The allowance for room and board, as determined by the school, that was 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 school.

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

  4. The purchase of computer or peripheral equipment, computer software, or Internet access and related services if it is to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This does not include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature.)

Half-time student.

A student is enrolled "at least half-time" if he or she 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.



Qualified Elementary and Secondary Education Expenses

These are expenses related to enrollment or attendance at an eligible elementary or secondary school. As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. There are special rules for computer-related expenses.

  1. The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school.

    1. Tuition and fees.

    2. Books, supplies, and equipment.

    3. Academic tutoring.

    4. Special needs services for a special needs beneficiary.

  2. The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school.

    1. Room and board.

    2. Uniforms.

    3. Transportation.

    4. Supplementary items and services (including extended day programs).

  3. The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. (This doesn't include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature.)

Contributions

Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. For individuals filing joint returns, that amount is $220,000.

Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. There is no requirement that an organization's income be below a certain level.

Contributions must meet all of the following requirements.

  1. They must be in cash.

  2. They can't be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary.

  3. They must be made by the due date of the contributor's tax return (not including extensions).

Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions aren't more than the contribution limits (defined later) for a year.

Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary.

Table 7-2 summarizes many of the features of contributing to a Coverdell ESA.

When contributions are considered made.

Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. They must be made by the due date (not including extensions) for filing your return for the preceding year.

For example, if you make a contribution to a Coverdell ESA in February 2017, and you designate it as a contribution for 2016, you are considered to have made that contribution on December 31, 2016.



Contribution Limits

There are two yearly limits.

  1. One on the total amount that can be contributed for each designated beneficiary in any year.

  2. One on the amount that any individual can contribute for any one designated beneficiary for a year.

Limit for each designated beneficiary.

For 2016, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary can't be more than $2,000. This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Rollovers are discussed under Rollovers and Other Transfers , later.

Example.

When Maria Luna was born in 2015, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. In 2016, the total of all contributions to Maria's three Coverdell ESAs can't be more than $2,000. For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. These contributions could be put into any of Maria's Coverdell ESA accounts.



Limit for each contributor.

Generally, you can contribute up to $2,000 for each designated beneficiary for 2016. This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary.

Example.

The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2016, he could also contribute $2,000 to Edgar's Coverdell ESA.



Reduced limit.

Your contribution limit may be reduced. If your MAGI (defined later) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you can't contribute to anyone's Coverdell ESA.



Table 7-2. Coverdell ESA Contributions at a Glance

Don't rely on this table alone. It provides only general highlights. See the text for more complete explanations.

Question Answer
Are contributions deductible? No.
What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary.
What if more than one Coverdell ESA has been opened for the same designated beneficiary? The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary.
What if more than one individual makes contributions for the same designated beneficiary? The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute.
Can contributions other than cash be made to a Coverdell ESA? No.
When must contributions stop? No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary.

Modified adjusted gross income (MAGI).

For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return.



MAGI when using Form 1040A.

If you file Form 1040A, your MAGI is the AGI on line 22 of that form.



MAGI when using Form 1040.

If you file Form 1040, your MAGI is the AGI on line 38 of that form, 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.



MAGI when using Form 1040NR.

If you file Form 1040NR, your MAGI is the AGI on line 36 of that form.



MAGI when using Form 1040NR-EZ.

If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form.

If you have any of these adjustments, you can use Worksheet 7-1 to figure your MAGI for Form 1040.



Worksheet 7-1. MAGI for a Coverdell ESA

1. Enter your adjusted gross income
(Form 1040, line 38)
1.
2. Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18) 2.
3. Enter your foreign housing deduction (Form 2555, line 50) 3.
4. Enter the amount of income from Puerto Rico you are excluding 4.
5. Enter the amount of income from American Samoa you are excluding (Form 4563, line 15) 5.
6. Add lines 2, 3, 4, and 5 6.
7. Add lines 1 and 6. This is your modified adjusted gross income 7.

Figuring the limit.

To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. The numerator (top part) is your MAGI minus $95,000 ($190,000 if filing a joint return). The denominator (bottom part) is $15,000 ($30,000 if filing a joint return). Subtract the result from $2,000. This is the amount you can contribute for each beneficiary. You can use Worksheet 7-2 to figure the limit on contributions.

Worksheet 7-2. Coverdell ESA Contribution Limit

1. Maximum contribution 1. $ 2,000
2. Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1) 2.
3. Enter $190,000 if married filing jointly; $95,000 for all other filers 3.
4. Subtract line 3 from line 2. If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8 4.
5. Enter $30,000 if married filing jointly; $15,000 for all other filers 5.
Note. If the amount on line 4 is greater than or equal to the amount on line 5, stop here. You aren't allowed to contribute to a Coverdell ESA for 2016.
6. Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places) 6. .
7. Multiply line 1 by line 6 7.
8. Subtract line 7 from line 1 8.
Note. The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000.

Example.

Paul, who is single, had MAGI of $96,500 for 2016. Paul can contribute up to $1,800 in 2016 for each beneficiary, as shown in the illustrated Worksheet 7-2.

Worksheet 7-2. Coverdell ESA Contribution Limit—Illustrated

1. Maximum contribution 1. $ 2,000
2. Enter your modified adjusted gross
income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1)
2. 96,500
3. Enter $190,000 if married filing jointly; $95,000 for all other filers 3. 95,000
4. Subtract line 3 from line 2. If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8 4. 1,500
5. Enter $30,000 if married filing jointly; $15,000 for all other filers 5. 15,000
Note. If the amount on line 4 is greater than or equal to the amount on line 5,
stop here. You aren't allowed to
contribute to a Coverdell ESA for 2016
.
6. Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places) 6. .100
7. Multiply line 1 by line 6 7. 200
8. Subtract line 7 from line 1 8. 1,800
Note.The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000.


Additional Tax on Excess Contributions

The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. Excess contributions are the total of the following two amounts.

  1. Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier).

  2. Excess contributions for the preceding year, reduced by the total of the following two amounts.

    1. Distributions (other than those rolled over as discussed later) during the year.

    2. The contribution limit for the current year minus the amount contributed for the current year.

Exceptions.

The excise tax doesn't apply if excess contributions made during 2016 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2017, for a calendar year taxpayer).

However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Box 2 of that form will show the amount of earnings on your excess contributions. Code "2" or "3" entered in the blank box below boxes 5 and 6 indicates the year in which the earnings are taxable. See Instructions for Recipient of your Form 1099-Q, on the back of copy B. Enter the amount of earnings on Form 1040 (or Form 1040NR), line 21, for the applicable tax year. For more information, see Taxable Distributions , later.

The excise tax doesn't apply to any rollover contribution.



Note.

Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year.

Example.

In 2015, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Because Greta didn't withdraw the excess before June 1, 2016, she had to pay an additional tax of $18 (6% × $300) when she filed her 2015 tax return.

In 2016, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. Using the steps shown earlier under Additional Tax on Excess Contributions , Greta figures the excess contribution in her account at the end of 2016 as follows.

(1) $500 excess contributions made in 2016
+ (2) $300 excess contributions in ESA at end of 2015
− (2a) $250 distribution during 2016
$550 excess at end of 2016 × 6% = $33

If Greta limits 2017 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2016), she won't owe any additional tax in 2017 for excess contributions.

Figuring and reporting the additional tax.

You figure this excise tax on Form 5329, Part V. Report the additional tax on Form 1040, line 59 (or Form 1040NR, line 57).



Rollovers and Other Transfers

Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. The beneficiary's interest can be transferred to a spouse or former spouse because of divorce.

Rollovers

Any amount distributed from a Coverdell ESA isn't taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under age 30. This age limitation doesn't apply if the new beneficiary is a special needs beneficiary.

An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution.

Don't report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. These aren't taxable distributions.

Members of the beneficiary's family.

For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary.

  1. Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.

  2. Brother, sister, stepbrother, or stepsister.

  3. Father or mother or ancestor of either.

  4. Stepfather or stepmother.

  5. Son or daughter of a brother or sister.

  6. Brother or sister of father or mother.

  7. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

  8. The spouse of any individual listed above.

  9. First cousin.



Example.

When Aaron graduated from college last year, he had $5,000 left in his Coverdell ESA. He wanted to give this money to his younger sister, who was still in high school. In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution.

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You can make only one rollover from a Coverdell ESA to another Coverdell ESA in any 12-month period regardless of the number of Coverdell ESAs you own. However, you can make unlimited transfers from one Coverdell ESA trustee directly to another Coverdell ESA trustee because such transfers aren't considered to be distributions or rollovers. The limit of one rollover during any 12-month period doesn't apply to the rollover of a military death gratuity or Servicemembers' Group Life Insurance (SGLI) payment.

Military death gratuity.

If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Members of the beneficiary's family , earlier). Such payments are made to an eligible survivor upon the death of a member of the U.S. Armed Forces. The contribution to a Coverdell ESA from survivor benefits received can't be made later than 1 year after the date on which you receive the gratuity or SGLI payment.

This rollover contribution isn't subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . The amount you roll over can't exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs.

The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and won't be taxed when distributed. See Distributions , later.



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The limit of one rollover during any 12-month period doesn't apply to the rollover of a military death gratuity or SGLI payment.

Changing the Designated Beneficiary

The designated beneficiary can be changed. See Members of the beneficiary's family , earlier. There aren't any tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs beneficiary.

Example.

Assume the same situation for Aaron as in the last example (see Rollovers , earlier). Instead of closing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister.

Transfer Because of Divorce

If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it isn't a taxable transfer. After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own.

Example.

In their divorce settlement, Peg received her ex-husband's Coverdell ESA. In this process, the account was transferred into her name. Peg now treats the funds in this Coverdell ESA as if she were the original owner.

Distributions

The designated beneficiary of a Coverdell ESA can take a distribution at any time. Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (defined later) the beneficiary has in the same tax year.

See Table 7-3 for highlights.

Table 7-3. Coverdell ESA Distributions at a Glance

Don't rely on this table alone. It provides only general highlights. See the text for definitions of terms and for more complete explanations.

Question Answer
Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free? Generally, yes, to the extent the amount of the distribution isn't more than the designated beneficiary's adjusted qualified education expenses.
After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. Also, certain transfers to members of the beneficiary's family are permitted.
Does the designated beneficiary need to be enrolled for a minimum number of courses to claim tax-free distribution? No.


Adjusted qualified education expenses.

To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. Tax-free educational assistance includes:

The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses.



Tax-Free Distributions

Generally, distributions are tax free if they aren't more than the beneficiary's adjusted qualified education expenses for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return.

Taxable Distributions

A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year.

Excess distribution.

This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year.



Earnings and basis.

You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2016. The amount of your gross distribution will be shown in box 1. For 2016, instead of dividing the gross distribution between your earnings (box 2) and your basis (amount already taxed) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2016. This will be shown in the blank box below boxes 5 and 6.

The amount contributed from survivor benefits (see Military death gratuity , earlier) is treated as part of your basis and won't be taxed when distributed.



Figuring the Taxable Portion of a Distribution

The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. Figure the taxable portion for 2016 as shown in the following steps.

  1. Multiply the total amount distributed by a fraction. The numerator (top part) is the basis (contributions not previously distributed) at the end of 2015 plus total contributions for 2016 and the denominator (bottom part) is the value (balance) of the account at the end of 2016 plus the amount distributed during 2016.

  2. Subtract the amount figured in (1) from the total amount distributed during 2016. The result is the amount of earnings included in the distribution(s).

  3. Multiply the amount of earnings figured in (2) by a fraction. The numerator (top part) is the adjusted qualified education expenses paid during 2016 and the denominator (bottom part) is the total amount distributed during 2016.

  4. Subtract the amount figured in (3) from the amount figured in (2). The result is the amount the beneficiary must include in income.

The taxable amount must be reported on Form 1040 or Form 1040NR, line 21.

Example.

You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2016. There were no contributions in 2016. This is your first distribution from the account, so your basis in the account on December 31, 2015, was $1,500. The value (balance) of your account on December 31, 2016, was $950. You had $700 of adjusted qualified education expenses (AQEE) for the year. Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows.

1. $850 (distribution) × $1,500 basis + $0 contributions
$950 value + $850 distribution
= $708 (basis portion of distribution)

2. $850 (distribution) − $708 (basis portion of distribution)
= $142 (earnings included in distribution)

3. $142 (earnings) × $700 AQEE
$850 distribution
= $117 (tax-free earnings)

4. $142 (earnings) − $117 (tax-free earnings)
= $25 (taxable earnings)

You must include $25 in income as distributed earnings not used for qualified education expenses. Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line.

Worksheet 7-3 , at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s).

Coordination With American Opportunity and Lifetime Learning Credits

The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses aren't used for both benefits. This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit.

Example.

Derek Green had $5,800 of qualified higher education expenses for 2016, his first year in college. He paid his college expenses from the following sources.

Partial tuition scholarship (tax free) $1,500
Coverdell ESA distribution 1,000
Gift from parents 2,100
Earnings from part-time job 1,200

Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return.

Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses.

Total qualified higher education expenses $5,800
Minus: Tax-free educational assistance −1,500
Minus: Expenses taken into account in
figuring American opportunity credit
− 4,000
Equals: Adjusted qualified higher education
expenses (AQHEE)
$ 300

Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. The balance in Derek's account was $1,800 on December 31, 2016. Prior to 2016, $2,100 had been contributed to this account. Contributions for 2016 totaled $400. Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below.

1. $1,000 (distribution) × $2,100 basis + $400 contributions
$1,800 value + $1,000 distribution
= $893 (basis portion of distribution)

2. $1,000 (distribution) − $893 (basis portion of distribution)
= $107 (earnings included in distribution)

3. $107 (earnings) × $300 AQHEE
$1,000 distribution
= $32 (tax-free earnings)

4. $107 (earnings) − $32 (tax-free earnings)
= $75 (taxable earnings)

Derek must include $75 in income (Form 1040, line 21). This is the amount of distributed earnings not used for adjusted qualified higher education expenses.

Coordination With Qualified Tuition Program (QTP) Distributions

If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjusted qualified higher education expenses, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. The following two examples illustrate possible allocations.

Example 1.

In 2016, Beatrice graduated from high school and began her first semester of college. That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for college. To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. No one claimed Beatrice as a dependent, nor was she eligible for an education credit. She didn't receive any tax-free educational assistance in 2016. Beatrice must allocate her total qualified education expenses between the two distributions.

  1. Beatrice knows that tax-free treatment will be available if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free.

  2. Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). She can't use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses don't qualify a QTP for tax-free treatment.

  3. Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. (See Figuring the Taxable Portion of a Distribution in chapter 8 for more information.)

Example 2.

Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. In this case, she allocates her qualified education expenses as follows.

  1. Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribution remaining.

  2. Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total).

    $3,000 QHEE × $800 ESA distribution
    $4,000 total distribution
    = $600
    QHEE (ESA)

    $3,000 QHEE × $3,200 QTP distribution
    $4,000 total distribution
    = $2,400
    QHEE (QTP)

  3. Beatrice then figures the taxable part of the following.

    1. Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). See Figuring the Taxable Portion of a Distribution , earlier, in this chapter.

    2. QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8).

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The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. However, you don't have to allocate your expenses in the same way. You can use any reasonable method.

Losses on Coverdell ESA Investments

If you have a loss on your investment in a Coverdell ESA, you may be able to deduct the loss on your income tax return. You can deduct the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Your basis is the total amount of contributions to that Coverdell ESA. You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit.

Additional Tax on Taxable Distributions

Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income.

Exceptions.

The 10% additional tax doesn't apply to the following distributions.

  1. Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary.

  2. Made because the designated beneficiary is disabled. A person is considered to be disabled if he or she shows proof that he or she can't do any substantial gainful activity because of his or her physical or mental condition. A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration.

  3. Included in income because the designated beneficiary received:

    1. A tax-free scholarship or fellowship grant (see Tax-Free Scholarships and Fellowship Grants in chapter 1);

    2. Veterans' educational assistance (see Veterans' Benefits in chapter 1);

    3. Employer-provided educational assistance (see chapter 11 ); or

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

  4. Made on account of the attendance of the designated beneficiary at a U.S. military academy (such as the USMA at West Point). This exception applies only to the extent that the amount of the distribution doesn't exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U.S. Code) attributable to such attendance.

  5. Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier).

  6. Made before June 1, 2017, of an excess 2016 contribution (and any earnings on it). The distributed earnings must be included in gross income for the year in which the excess contribution was made.

Exception (3) applies only to the extent the distribution isn't more than the scholarship, allowance, or payment.



Figuring the additional tax.

Use Part II of Form 5329, to figure any additional tax. Report the amount on Form 1040, line 59, or Form 1040NR, line 57.



When Assets Must Be Distributed

Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs.

  1. The designated beneficiary reaches age 30. In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. However, this rule doesn't apply if the beneficiary is a special needs beneficiary.

  2. The designated beneficiary dies before reaching age 30. In this case, the remaining assets must generally be distributed within 30 days after the date of death.

Exception for Transfer to Surviving Spouse or Family Member

If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. ("Family member" was defined earlier under Rollovers .) This means the spouse or other family member can treat the Coverdell ESA as his or her own and doesn't need to withdraw the assets until he or she reaches age 30. This age limitation doesn't apply if the new beneficiary is a special needs beneficiary. There are no tax consequences as a result of the transfer.

How To Figure the Taxable Earnings

When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. You determine these earnings as shown in the following two steps.

  1. Multiply the amount distributed by a fraction. The numerator (top part) is the basis (contributions not previously distributed) at the end of 2015 plus total contributions for 2016, and the denominator (bottom part) is the balance in the account at the end of 2016 plus the amount distributed during 2016.

  2. Subtract the amount figured in (1) from the total amount distributed during 2016. The result is the amount of earnings included in the distribution.

For an example, see steps 1 and 2 of the Example under Figuring the Taxable Portion of a Distribution, earlier.

The beneficiary or other person receiving the distribution must report this amount on Form 1040 or Form 1040NR, line 21, listing the type and amount of income on the dotted line.

Worksheet 7-3 Instructions. Coverdell ESA—Taxable Distributions and Basis

Line G. Enter the total distributions received from all Coverdell ESAs during 2016. Don't include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Also, don't include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made.
Line 2. Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2015, is the total of:
• All contributions to this Coverdell ESA before 2016
• Minus the tax-free portion of any distributions from this Coverdell ESA before 2016.
If your last distribution from this Coverdell ESA was before 2016, you must start with the basis in your account as of the end of the last year in which you took a distribution. For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. For years after 2001, you can find that amount by using the ending basis from the worksheet in Pub. 970 for that year. You can determine your basis in this Coverdell ESA as of December 31, 2015, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2016.
Line 4. Enter the total distributions received from this Coverdell ESA in 2016. Don't include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period).
Also, don't include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions.
Line 7. Enter the total value of this Coverdell ESA as of December 31, 2016, plus any outstanding rollovers contributed to the account after 2015, but before the end of the 60-day rollover period. A statement should be sent to you by January 31, 2017, for this Coverdell ESA showing the value on December 31, 2016.
A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. An outstanding rollover is any amount withdrawn within 60 days before the end of 2016 (November 2 through December 31) that was rolled over after December 31, 2016, but within the 60-day rollover period.

Worksheet 7-3. Coverdell ESA—Taxable Distributions and Basis

How to complete this worksheet.


Complete Part I, lines A through H, on only one worksheet.
Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs.
Complete Part III, the Summary (line 16), on only one worksheet.
Caution. If you had a distribution from a Qualified Tuition Program (QTP), see Coordination With Qualified Tuition Program (QTP) Distributions.
Part I. Qualified Education Expenses (Complete for total expenses.)
A. Enter your total qualified education expenses for 2016 A.
B. Enter those qualified education expenses paid for with tax-free educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance) B.
C. Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040), Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR) C.
D. Enter those qualified higher education expenses on which
an American opportunity or lifetime learning credit was based
D.
E. Add lines B, C, and D E.
F. Subtract line E from line A. This is your adjusted qualified education expense for 2016 F.
G. Enter your total distributions from all Coverdell ESAs during 2016. Don't include rollovers
or the return of excess contributions (see instructions)
G.
H. Divide line F by line G. Enter the result as a decimal (rounded to at least 3 places). If the
result is 1.000 or more, enter 1.000
H. .
Part II. Taxable Distributions and Basis (Complete separately for each account.)
1. Enter the amount contributed to this Coverdell ESA for 2016, including contributions made for 2016 from January 1, 2017, through April 18, 2017. Don't include rollovers or the return of excess contributions 1.
2. Enter your basis in this Coverdell ESA as of December 31, 2015 (see instructions) 2.
3. Add lines 1 and 2 3.
4. Enter the total distributions from this Coverdell ESA during 2016. Don't include rollovers
or the return of excess contributions (see instructions)
4.
5. Multiply line 4 by line H. This is the amount of adjusted qualified
education expense attributable to this Coverdell ESA
5.
6. Subtract line 5 from line 4 6.
7. Enter the total value of this Coverdell ESA as of December 31, 2016,
plus any outstanding rollovers (see instructions)
7.
8. Add lines 4 and 7 8.
9. Divide line 3 by line 8. Enter the result as a decimal (rounded to
at least 3 places). If the result is 1.000 or more, enter 1.000
9. .
10. Multiply line 4 by line 9. This is the amount of basis allocated to your
distributions, and is tax free
10.
Note. If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15.
11. Subtract line 10 from line 4 11.
12. Divide line 5 by line 4. Enter the result as a decimal (rounded to
at least 3 places). If the result is 1.000 or more, enter 1.000
12. .
13. Multiply line 11 by line 12. This is the amount of qualified education
expenses allocated to your distributions, and is tax free
13.
14. Subtract line 13 from line 11. This is the portion of the distributions from this
Coverdell ESA in 2016 that you must include in income
14.
15. Subtract line 10 from line 3. This is your basis in this Coverdell ESA as of December 31, 2016 15.
Part III. Summary (Complete only once.)
16. Taxable amount. Add together all amounts on line 14 for all your Coverdell ESAs. Enter here
and include on Form 1040, line 21
; or Form 1040NR, line 21, listing the type and amount of income on the dotted line
16.

8. Qualified Tuition Program (QTP)

Introduction

Qualified tuition programs (QTPs) are also called "529 plans."

States may establish and maintain programs that allow you to either prepay or contribute to an account for paying a student's qualified education expenses at a postsecondary institution. Eligible educational institutions may establish and maintain programs that allow you to prepay a student's qualified education expenses. If you prepay tuition, the student (designated beneficiary) will be entitled to a waiver or a payment of qualified education expenses. You can't deduct either payments or contributions to a QTP. For information on a specific QTP, you will need to contact the state agency or eligible educational institution that established and maintains it.

What is the tax benefit of a QTP?

No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. See Are Distributions Taxable , later, for more information.

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Even if a QTP is used to finance a student's education, the student or the student's parents still may be eligible to claim the American opportunity credit or the lifetime learning credit. See Coordination With American Opportunity and Lifetime Learning Credits, later.



What Is a Qualified Tuition Program?

A qualified tuition program is a program set up to allow you to either prepay or contribute to an account established for paying a student's qualified education expenses at an eligible educational institution. QTPs can be established and maintained by states (or agencies or instrumentalities of a state) and eligible educational institutions. The program must meet certain requirements. Your state government or the eligible educational institution in which you are interested can tell you whether or not they participate in a QTP.

Qualified education expenses.

These are expenses related to enrollment or attendance at an Eligible educational institution (defined later). As shown in the following list, to be qualified, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time. See Half-time student , later.

  1. The following expenses must be required for enrollment or attendance of a Designated beneficiary (defined later) at an eligible educational institution.

    1. Tuition and fees.

    2. Books, supplies, and equipment.

  2. Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible educational institution.

  3. Expenses for room and board must be incurred by students who are enrolled at least half-time.

    The expense for room and board qualifies only to the extent that it isn't more than the greater of the following two amounts.

    1. The allowance for room and board, as determined by the eligible educational institution, that was 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 may need to contact the eligible educational institution for qualified room and board costs.

  4. The purchase of computer or peripheral equipment, computer software, or Internet access and related services if it is to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution. (This does not include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature.)



Designated beneficiary.

The designated beneficiary is generally the student (or future student) for whom the QTP is intended to provide benefits. The designated beneficiary can be changed after participation in the QTP begins. If a state or local government or certain tax-exempt organizations purchase an interest in a QTP as part of a scholarship program, the designated beneficiary is the person who receives the interest as a scholarship.



Half-time student.

A student is enrolled "at least half-time" if he or she is enrolled for at least half the full-time academic workload for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled.



Eligible educational institution.

For purposes of a QTP, this 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.



How Much Can You Contribute?

Contributions to a QTP on behalf of any beneficiary can't be more than the amount necessary to provide for the qualified education expenses of the beneficiary. There are no income restrictions on the individual contributors.

You can contribute to both a QTP and a Coverdell ESA in the same year for the same designated beneficiary.

Recontribution of Refunded Amounts

If a student receives a refund of qualified education expenses that were treated as paid by a QTP distribution, the student can recontribute these amounts into a QTP for which they are the beneficiary within 60 days after the date of the refund to avoid the need to figure the taxable part of the QTP distribution.

Are Distributions Taxable?

The part of a distribution representing the amount paid or contributed to a QTP doesn't have to be included in income. This is a return of the investment in the plan.

The designated beneficiary generally doesn't have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified education expenses (defined under Figuring the Taxable Portion of a Distribution , later).

Earnings and return of investment.

You will receive a Form 1099-Q from each of the programs from which you received a QTP distribution in 2016. The amount of your gross distribution (box 1) shown on each form will be divided between your earnings (box 2) and your basis, or return of investment (box 3). Form 1099-Q should be sent to you by January 31, 2017.



Figuring the Taxable Portion of a Distribution

To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP distributions for the tax year to the adjusted qualified education expenses.

Adjusted qualified education expenses.

This amount is the total qualified education expenses reduced by any tax-free educational assistance. Tax-free educational assistance includes:



Taxable earnings.

Use the following steps to figure the taxable part.

  1. Multiply the total distributed earnings shown on Form 1099-Q, box 2, by a fraction. The numerator (top part) is the adjusted qualified education expenses paid during the year and the denominator (bottom part) is the total amount distributed during the year.

  2. Subtract the amount figured in (1) from the total distributed earnings. The result is the amount the beneficiary must include in income. Report it on Form 1040 or Form 1040NR, line 21.

Example 1.

In 2009, Sara Clarke's parents opened a savings account for her with a QTP maintained by their state government. Over the years they contributed $18,000 to the account. The total balance in the account was $27,000 on the date the distribution was made. In the summer of 2016, Sara enrolled in college and had $8,300 of qualified education expenses for the rest of the year. She paid her college expenses from the following sources.

Gift from parents $1,600
Partial tuition scholarship (tax free) 3,100
QTP distribution 5,300

Before Sara can determine the taxable part of her QTP distribution, she must reduce her total qualified education expenses by any tax-free educational assistance.

Total qualified education expenses $8,300
Minus: Tax-free educational assistance −3,100
Equals: Adjusted qualified
education expenses (AQEE)
$5,200

Since the remaining expenses ($5,200) are less than the QTP distribution, part of the earnings will be taxable.

Sara's Form 1099-Q shows that $950 of the QTP distribution is earnings. Sara figures the taxable part of the distributed earnings as follows.

1. $950 (earnings) × $5,200 AQEE

$5,300 distribution
= $932 (tax-free earnings)

2. $950 (earnings) − $932 (tax-free earnings)
= $18 (taxable earnings)

Sara must include $18 in income (Form 1040, line 21) as distributed QTP earnings not used for adjusted qualified education expenses.



Coordination With American Opportunity and Lifetime Learning Credits

An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses aren't used for both benefits. This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit.

Example 2.

Assume the same facts as in Example 1 , except that Sara's parents claimed an American opportunity credit of $2,500 (based on $4,000 expenses).

Total qualified education expenses $8,300
Minus: Tax-free educational assistance − 3,100
Minus: Expenses taken into account
in figuring American opportunity credit
− 4,000
Equals: Adjusted qualified
education expenses (AQEE)
$1,200

The taxable part of the distribution is figured as follows.

1. $950 (earnings) × $1,200 AQEE
$5,300 distribution
= $215 (tax-free earnings)

2. $950 (earnings) − $215 (tax-free earnings)
= $735 (taxable earnings)

Sara must include $735 in income (Form 1040, line 21). This represents distributed earnings not used for adjusted qualified education expenses.

Coordination With Coverdell ESA Distributions

If a designated beneficiary receives distributions from both a QTP and a Coverdell ESA in the same year, and the total of these distributions is more than the beneficiary's adjusted qualified higher education expenses, the expenses must be allocated between the distributions. For purposes of this allocation, disregard any qualified elementary and secondary education expenses.

Example 3.

Assume the same facts as in Example 2 , except that instead of receiving a $5,300 distribution from her QTP, Sara received $4,600 from that account and $700 from her Coverdell ESA. In this case, Sara must allocate her $1,200 of adjusted qualified higher education expenses (AQHEE) between the two distributions.

$1,200 AQHEE × $700 ESA distribution
$5,300 total distribution
= $158
AQHEE (ESA)

$1,200 AQHEE × $4,600 QTP distribution
$5,300 total distribution
= $1,042
AQHEE (QTP)

Sara then figures the taxable portion of her Coverdell ESA distribution based on qualified higher education expenses of $158, and the taxable portion of her QTP distribution based on the other $1,042.

Note.

If you are required to allocate your expenses between Coverdell ESA and QTP distributions, and you have adjusted qualified elementary and secondary education expenses, see the examples in chapter 7 under Coordination With Qualified Tuition Program (QTP) Distributions .

Coordination With Tuition and Fees Deduction

A tuition and fees deduction can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses aren't used for both benefits.

Losses on QTP Investments

If you have a loss on your investment in a QTP account, you may be able to claim the loss on your income tax return. You can claim the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Your basis is the total amount of contributions to that QTP account. You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit.

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The aggregation rules that applied if you had distributions from more than one QTP account during a year were eliminated for distributions after 2014. For more information, see Notice 2016-13 available at www.irs.gov/irb/2016-07_IRB/ar06.html.

Additional Tax on Taxable Distributions

Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income.

Exceptions.

The 10% additional tax doesn't apply to the following distributions.

  1. Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary.

  2. Made because the designated beneficiary is disabled. A person is considered to be disabled if he or she shows proof that he or she can't do any substantial gainful activity because of his or her physical or mental condition. A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration.

  3. Included in income because the designated beneficiary received:

    1. A tax-free scholarship or fellowship grant (see Tax-Free Scholarships and Fellowship Grants in chapter 1);

    2. Veterans' educational assistance (see Veterans' Benefits in chapter 1);

    3. Employer-provided educational assistance (see chapter 11 ); or

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

  4. Made on account of the attendance of the designated beneficiary at a U.S. military academy (such as the USNA at Annapolis). This exception applies only to the extent that the amount of the distribution doesn't exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U.S. Code) attributable to such attendance.

  5. Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier).

Exception (3) applies only to the extent the distribution isn't more than the scholarship, allowance, or payment.



Figuring the additional tax.

Use Part II of Form 5329 to figure any additional tax. Report the amount on Form 1040, line 59, or Form 1040NR, line 57.



Rollovers and Other Transfers

Assets can be rolled over or transferred from one QTP to another. In addition, the designated beneficiary can be changed without transferring accounts.

Rollovers

Any amount distributed from a QTP isn't taxable if it is rolled over to another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse). An amount is rolled over if it is paid to another QTP within 60 days after the date of the distribution.

Don't report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. These aren't taxable distributions.

Members of the beneficiary's family.

For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary.

  1. Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.

  2. Brother, sister, stepbrother, or stepsister.

  3. Father or mother or ancestor of either.

  4. Stepfather or stepmother.

  5. Son or daughter of a brother or sister.

  6. Brother or sister of father or mother.

  7. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

  8. The spouse of any individual listed above.

  9. First cousin.



Example.

When Aaron graduated from college last year, he had $5,000 left in his QTP. He wanted to give this money to his younger brother, who was in junior high school. In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his brother's QTP within 60 days of the distribution.

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If the rollover is to another QTP for the same beneficiary, only one rollover is allowed within 12 months of a previous transfer to any QTP for that designated beneficiary.

Changing the Designated Beneficiary

There are no income tax consequences if the designated beneficiary of an account is changed to a member of the beneficiary's family. See Members of the beneficiary's family , earlier.

Example.

Assume the same situation as in the last example. Instead of closing his QTP and paying the distribution into his brother's QTP, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his brother.

9. Education Exception to Additional Tax on Early IRA Distributions

Introduction

Generally, if you take a distribution from your IRA before you reach age 59½, you must pay a 10% additional tax on the early distribution. This applies to any IRA you own, whether it is a traditional IRA (including a SEP-IRA), a Roth IRA, or a SIMPLE IRA. The additional tax on an early distribution from a SIMPLE IRA may be as high as 25%. See Pub. 560, Retirement Plans for Small Business, for information on SEP-IRAs, and Pub. 590-B for information about distributions from all other IRAs.

However, you can take distributions from your IRAs for qualified higher education expenses without having to pay the 10% additional tax. You may owe income tax on at least part of the amount distributed, but you may not have to pay the 10% additional tax.

Generally, if the taxable part of the distribution is less than or equal to the adjusted qualified education expenses (AQEE), none of the distribution is subject to the additional tax. If the taxable part of the distribution is more than the AQEE, only the excess is subject to the additional tax.

Who Is Eligible?

You can take a distribution from your IRA before you reach age 59½ and not have to pay the 10% additional tax if, for the year of the distribution, you pay qualified education expenses for:

  • yourself;

  • your spouse; or

  • your or your spouse's child, foster child, adopted child, or descendant of any of them.

Qualified education expenses.

For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance.

In addition, if the student is at least a half-time student, room and board are qualified education expenses.

The expense for room and board qualifies only to the extent that it isn't more than the greater of the following two amounts.

  1. The allowance for room and board, as determined by the eligible educational institution, that was 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 may need to contact the eligible educational institution for qualified room and board costs.



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.



Half-time student.

A student is enrolled "at least half-time" if he or she 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.



Figuring the Amount Not Subject to the 10% Tax

To determine the amount of your distribution that isn't subject to the 10% additional tax, first figure your adjusted qualified education expenses. You do this by reducing your total qualified education expenses by any tax-free educational assistance, which includes:

Don't reduce the qualified education expenses by amounts paid with funds the student receives as:

  • Payment for services, such as wages;

  • A loan;

  • A gift;

  • An inheritance given to either the student or the individual making the withdrawal; or

  • A withdrawal from personal savings (including savings from a qualified tuition program (QTP)).

If your IRA distribution is equal to or less than your adjusted qualified education expenses, you aren't subject to the 10% additional tax.

Example 1.

In 2016, Erin (age 32) took a year off from teaching to attend graduate school full-time. She paid $5,800 of qualified education expenses from the following sources.

Employer-provided educational assistance
(tax free)
$5,000
Early distribution from IRA
(taxable part is $500)
3,200

Before Erin can determine if she must pay the 10% additional tax on her IRA distribution, she must reduce her total qualified education expenses.

Total qualified education expenses $5,800
Minus: Tax-free educational assistance −5,000
Equals: Adjusted qualified
education expenses (AQEE)
$ 800

Because Erin's AQEE ($800) are more than the taxable part of her IRA distribution ($500), she doesn't have to pay the 10% additional tax on any part of this distribution. However, she must include the $500 taxable earnings in her gross income subject to income tax.

Example 2.

Assume the same facts as in Example 1 , except that Erin deducted some of the contributions to her IRA, so the taxable part of her early distribution is higher by $1,000. This must be included in her income subject to income tax.

The taxable part of Erin's IRA distribution ($1,000) is larger than her $800 AQEE. Therefore, she must pay the 10% additional tax on $200, the taxable part of her distribution ($1,000) that is more than her qualified education expenses ($800). She doesn't have to pay the 10% additional tax on the remaining $800 of her taxable distribution.

Reporting Early Distributions

By January 31, 2017, the payer of your IRA distribution should send you Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The information on this form will help you determine how much of your distribution is taxable for income tax purposes and how much is subject to the 10% additional tax.

If you received an early distribution from your IRA, you must report the taxable part of the distribution on Form 1040, line 15b, or Form 1040NR, line 16b. Then, if you qualify for an exception for qualified higher education expenses, you must file Form 5329 to show how much, if any, of your early distribution is subject to the 10% additional tax. See the instructions for Form 5329, Part I, for help in completing the form and entering the results on Form 1040 or 1040NR.

There are many other situations in which Form 5329 is required. If, during 2016, you had other distributions from IRAs or qualified retirement plans, or have made excess contributions to certain tax-favored accounts, see the instructions for line 59 (Form 1040) or line 57 (Form 1040NR) to determine if you must file Form 5329.

10. Education Savings Bond Program

Introduction

Generally, you must pay tax on the interest earned on U.S. savings bonds. If you don't include the interest in income in the years it is earned, you must include it in your income in the year in which you cash in the bonds.

However, when you cash in certain savings bonds under an education savings bond program, you may be able to exclude the interest from income.

Who Can Cash in Bonds Tax Free?

You may be able to cash in qualified U.S. savings bonds without having to include in your income some or all of the interest earned on the bonds if you meet the following conditions.

  • You pay qualified education expenses for yourself, your spouse, or a dependent for whom you claim an exemption on your return.

  • Your modified adjusted gross income (MAGI) is less than $92,550 ($146,300 if married filing jointly).

  • Your filing status isn't married filing separately.

Qualified U.S. savings bonds.

A qualified U.S. savings bond is a series EE bond issued after 1989 or a series I bond. The bond must be issued either in your name (as the sole owner) or in the name of both you and your spouse (as co-owners).

The owner must be at least 24 years old before the bond's issue date. The issue date is printed on the front of the savings bond.

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The issue date isn't necessarily the date of purchase—it will be the first day of the month in which the bond is purchased (or posted, if bought electronically).



Qualified education expenses.

These include the following items you pay for either yourself, your spouse, or a dependent for whom you claim an exemption.

  1. Tuition and fees required to enroll at or attend an eligible educational institution. Qualified education expenses don't include expenses for room and board or for courses involving sports, games, or hobbies that aren't part of a degree or certificate-granting program.

  2. Contributions to a qualified tuition program (QTP) (see How Much Can You Contribute in chapter 8).

  3. Contributions to a Coverdell education savings account (ESA) (see Contributions in chapter 7).



Adjusted qualified education expenses.

You must reduce your qualified education expenses by all of the following tax-free benefits.

  1. Tax-free part of scholarships and fellowship grants (see Tax-Free Scholarships and Fellowship Grants in chapter 1).

  2. Expenses used to figure the tax-free portion of distributions from a Coverdell ESA (see Qualified Education Expenses in chapter 7).

  3. Expenses used to figure the tax-free portion of distributions from a QTP (see Qualified education expenses in chapter 8).

  4. Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as:

    1. Veterans' educational assistance benefits (see Veterans' Benefits in chapter 1);

    2. Qualified tuition reductions (see Qualified Tuition Reduction in chapter 1); or

    3. Employer-provided educational assistance (see chapter 11 ).

  5. Any expenses used in figuring the American opportunity and lifetime learning credits. See What Expenses Qualify in chapter 2 (American opportunity credit), and What Expenses Qualify in chapter 3 (lifetime learning credit), for more information.



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.



Dependent for whom you claim an exemption.

You claim an exemption for a person if you list his or her name and other required information on Form 1040 (or Form 1040A), line 6c.



Modified adjusted gross income (MAGI).

For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return without taking into account this interest exclusion. However, as discussed below, there may be other modifications.



MAGI when using Form 1040A.

If you file Form 1040A, your MAGI is the AGI on line 22 of that form figured without taking into account any savings bond interest exclusion and modified by adding back any amount on line 18 (student loan interest deduction) and line 19 (tuition and fees deduction).



MAGI when using Form 1040.

If you file Form 1040, your MAGI is the AGI on line 38 of that form figured 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.

Use the worksheet in the instructions for line 9 of Form 8815 to figure your MAGI. If you claim any of the exclusion or deduction items (1)–(6) listed above, add the amount of the exclusion or deduction to the amount on line 5 of the worksheet. Don't add in the deduction for (7) student loan interest and (8) tuition and fees, or (9) domestic production activities because line 4 of the worksheet already includes these amounts. Enter the total on Form 8815, line 9, as your MAGI.

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Because the deduction for interest expenses attributable to royalties and other investments is limited to your net investment income, you can't figure the deduction until you have figured this interest exclusion. Therefore, if you had interest expenses attributable to royalties and deductible on Schedule E (Form 1040), Supplemental Income and Loss, you must make a special computation of your deductible interest without regard to this exclusion to figure the net royalty income included in your MAGI. See Royalties included in MAGI under Education Savings Bond Program in Pub. 550, chapter 1.



Figuring the Tax-Free Amount

If the total you receive when you cash in the bonds isn't more than the adjusted qualified education expenses for the year, all of the interest on the bonds may be tax free. However, if the total you receive when you cash in the bonds is more than the adjusted expenses, only part of the interest may be tax free.

To determine the tax-free amount, multiply the interest part of the proceeds by a fraction. The numerator (top part) of the fraction is the adjusted qualified education expenses (AQEE) you paid during the year. The denominator (bottom part) of the fraction is the total proceeds you received during the year.

Example.

In February 2016, Mark and Joan Washington, a married couple, cashed a qualified series EE U.S. savings bond. They received proceeds of $9,000, representing principal of $6,000 and interest of $3,000. In 2016, they paid $7,650 of their daughter's college tuition. They aren't claiming an American opportunity or lifetime learning credit for those expenses, and their daughter doesn't have any tax-free educational assistance. Their MAGI for 2016 was $80,000.

$3,000
interest
× $7,650 AQEE = $2,550
tax-free interest
$9,000 proceeds

They can exclude $2,550 of interest in 2016. They must pay tax on the remaining $450 ($3,000 − $2,550) interest.

Effect of the Amount of Your Income on the Amount of Your Exclusion

The amount of your interest exclusion is gradually reduced (phased out) if your MAGI is between $77,550 and $92,550 (between $116,300 and $146,300 if your filing status is married filing jointly). You cannot exclude any of the interest if your MAGI is equal to or more than the upper limit.

The phaseout, if any, is figured for you when you fill out Form 8815.

Claiming the Exclusion

Use Form 8815 to figure your education savings bond interest exclusion. Enter your exclusion on line 3 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. Attach Form 8815 to your tax return.

11. Employer-Provided Educational Assistance

Introduction

If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer shouldn't include those benefits with your wages, tips, and other compensation shown on your Form W-2, box 1. This also means that you don't have to include the benefits on your income tax return.

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You can't use any of the tax-free education expenses paid for by your employer as the basis for any other deduction or credit, including the American opportunity credit and lifetime learning credit.

Educational assistance program.

To qualify as an educational assistance program, the plan must be written and must meet certain other requirements. Your employer can tell you whether there is a qualified program where you work.



Educational assistance benefits.

Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. Education generally includes any form of instruction or training that improves or develops your capabilities. The payments don't have to be for work-related courses or courses that are part of a degree program.

Educational assistance benefits don't include payments for the following items.

  1. Meals, lodging, or transportation.

  2. Tools or supplies (other than textbooks) that you can keep after completing the course of instruction.

  3. Courses involving sports, games, or hobbies unless they:

    1. Have a reasonable relationship to the business of your employer, or

    2. Are required as part of a degree program.



Benefits over $5,250.

If your employer pays more than $5,250 in educational assistance benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (Form W-2, box 1) the amount that you must include in income.



Working condition fringe benefit.

However, if the benefits over $5,250 also qualify as a working condition fringe benefit, your employer doesn't have to include them in your wages. A working condition fringe benefit is a benefit that, had you paid for it, you could deduct as an employee business expense. For more information on working condition fringe benefits, see Working Condition Benefits in chapter 2 of Pub. 15-B, Employer's Tax Guide to Fringe Benefits.



12. Business Deduction for Work-Related Education

What's New

Standard mileage rate. Generally, if you claim a business deduction for work-related education and you drive your car to and from school, the amount you can deduct for miles driven from January 1, 2016, through December 31, 2016, is 54 cents a mile. For more information, see Transportation Expenses under What Expenses Can Be Deducted.

Introduction

This chapter discusses work-related education expenses you may be able to deduct as business expenses.

To claim such a deduction, you must:

  • Itemize your deductions on Schedule A (Form 1040 or 1040NR) if you are an employee;

  • File Schedule C (Form 1040), Profit or Loss From Business, Schedule C-EZ (Form 1040), Net Profit From Business, or Schedule F (Form 1040), Profit or Loss From Farming, if you are self-employed; and

  • Have expenses for education that meet the requirements discussed under Qualifying Work-Related Education , later.

What is the tax benefit of taking a business deduction for work-related education?

If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses (except for impairment-related work expenses of disabled individuals) is greater than 2% of your adjusted gross income (AGI). An itemized deduction reduces the amount of your income subject to tax.

If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. This reduces the amount of your income subject to both income tax and self-employment tax.

Your work-related education expenses may also qualify you for other tax benefits, such as the American opportunity and lifetime learning credits. You may qualify for these other benefits even if you don't meet the requirements listed above.

Also, your work-related education expenses may qualify you to claim more than one tax benefit. Generally, you may claim any number of benefits as long as you use different expenses to figure each one.



Qualifying Work-Related Education

You can deduct the costs of qualifying work-related education as business expenses. This is education that meets at least one of the following two tests.

  • The education is required by your employer or the law to keep your present salary, status, or job. The required education must serve a bona fide business purpose of your employer.

  • The education maintains or improves skills needed in your present work.

However, even if the education meets one or both of the above tests, it isn't qualifying work-related education if it:

  • Is needed to meet the minimum educational requirements of your present trade or business, or

  • Is part of a program of study that will qualify you for a new trade or business.

You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree.

Use Figure 12-1 as a quick check to see if your education qualifies.

Education Required by Employer or by Law

Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. This additional education is qualifying work-related education if all three of the following requirements are met.

  • It is required for you to keep your present salary, status, or job.

  • The requirement serves a bona fide business purpose of your employer.

  • The education isn't part of a program that will qualify you for a new trade or business.

When you get more education than your employer or the law requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in your present work. See Education To Maintain or Improve Skills , later.

Example.

You are a teacher who has satisfied the minimum requirements for teaching. Your employer requires you to take an additional college course each year to keep your teaching job. If the courses won't qualify you for a new trade or business, they are qualifying work-related education even if you eventually receive a master's degree and an increase in salary because of this extra education.

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Figure 12-1

Please click here for the text description of the image.

Education To Maintain or Improve Skills

If your education isn't required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. This could include refresher courses, courses on current developments, and academic or vocational courses.

Example.

You repair televisions, radios, and stereo systems for XYZ Store. To keep up with the latest changes, you take special courses in radio and stereo service. These courses maintain and improve skills required in your work.

Maintaining skills vs. qualifying for new job.

Education to maintain or improve skills needed in your present work isn't qualifying education if it will also qualify you for a new trade or business.



Education during temporary absence.

If you stop working for a year or less in order to get education to maintain or improve skills needed in your present work and then return to the same general type of work, your absence is considered temporary. Education that you get during a temporary absence is qualifying work-related education if it maintains or improves skills needed in your present work.

Example.

You quit your biology research job to become a full-time biology graduate student for 1 year. If you return to work in biology research after completing the courses, the education is related to your present work even if you don't go back to work with the same employer.



Education during indefinite absence.

If you stop work for more than a year, your absence from your job is considered indefinite. Education during an indefinite absence, even if it maintains or improves skills needed in the work from which you are absent, is considered to qualify you for a new trade or business. Therefore, it isn't qualifying work-related education.



Education To Meet Minimum Requirements

Education you need to meet the minimum educational requirements for your present trade or business isn't qualifying work-related education. The minimum educational requirements are determined by:

  • Laws and regulations;

  • Standards of your profession, trade, or business; and

  • Your employer.

Once you have met the minimum educational requirements that were in effect when you were hired, you don't have to meet any new minimum educational requirements. This means that if the minimum requirements change after you were hired, any education you need to meet the new requirements can be qualifying education.

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You haven't necessarily met the minimum educational requirements of your trade or business simply because you are already doing the work.

Example 1.

You are a full-time engineering student. Although you haven't received your degree or certification, you work part time as an engineer for a firm that will employ you as a full-time engineer after you finish college. Although your college engineering courses improve your skills in your present job, they are also needed to meet the minimum job requirements for a full-time engineer. The education isn't qualifying work-related education.

Example 2.

You are an accountant and you have met the minimum educational requirements of your employer. Your employer later changes the minimum educational requirements and requires you to take college courses to keep your job. These additional courses can be qualifying work-related education because you have already satisfied the minimum requirements that were in effect when you were hired.

Requirements for Teachers

States or school districts usually set the minimum educational requirements for teachers. The requirement is the college degree or the minimum number of college hours usually required of a person hired for that position.

If there are no requirements, you will have met the minimum educational requirements when you become a faculty member. The determination of whether you are a faculty member of an educational institution must be made on the basis of the particular practices of the institution. You generally will be considered a faculty member when one or more of the following occurs.

  • You have tenure.

  • Your years of service count toward obtaining tenure.

  • You have a vote in faculty decisions.

  • Your school makes contributions for you to a retirement plan other than social security or a similar program.

Example 1.

The law in your state requires beginning secondary school teachers to have a bachelor's degree, including 10 professional education courses. In addition, to keep the job, a teacher must complete a fifth year of training within 10 years from the date of hire. If the employing school certifies to the state Department of Education that qualified teachers can't be found, the school can hire persons with only 3 years of college. However, to keep their jobs, these teachers must get a bachelor's degree and the required professional education courses within 3 years.

Under these facts, the bachelor's degree, whether or not it includes the 10 professional education courses, is considered the minimum educational requirement for qualification as a teacher in your state.

If you have all the required education except the fifth year, you have met the minimum educational requirements. The fifth year of training is qualifying work-related education unless it is part of a program of study that will qualify you for a new trade or business.

Example 2.

Assume the same facts as in Example 1 , except that you have a bachelor's degree and only six professional education courses. The additional four education courses can be qualifying work-related education. Although you don't have all the required courses, you have already met the minimum educational requirements.

Example 3.

Assume the same facts as in Example 1 , except that you are hired with only 3 years of college. The courses you take that lead to a bachelor's degree (including those in education) aren't qualifying work-related education. They are needed to meet the minimum educational requirements for employment as a teacher.

Example 4.

You have a bachelor's degree and you work as a temporary instructor at a university. At the same time, you take graduate courses toward an advanced degree. The rules of the university state that you can become a faculty member only if you get a graduate degree. Also, you can keep your job as an instructor only as long as you show satisfactory progress toward getting this degree. You haven't met the minimum educational requirements to qualify you as a faculty member. The graduate courses aren't qualifying work-related education.

Certification in a new state.

Once you have met the minimum educational requirements for teachers for your state, you are considered to have met the minimum educational requirements in all states. This is true even if you must get additional education to be certified in another state. Any additional education you need is qualifying work-related education. You have already met the minimum requirements for teaching. Teaching in another state isn't a new trade or business.

Example.

You hold a permanent teaching certificate in State A and are employed as a teacher in that state for several years. You move to State B and are promptly hired as a teacher. You are required, however, to complete certain prescribed courses to get a permanent teaching certificate in State B. These additional courses are qualifying work-related education because the teaching position in State B involves the same general kind of work for which you were qualified in State A.



Education That Qualifies You for a New Trade or Business

Education that is part of a program of study that will qualify you for a new trade or business isn't qualifying work-related education. This is true even if you don't plan to enter that trade or business.

If you are an employee, a change of duties that involves the same general kind of work isn't a new trade or business.

Example 1.

You are an accountant. Your employer requires you to get a law degree at your own expense. You register at a law school for the regular curriculum that leads to a law degree. Even if you don't intend to become a lawyer, the education isn't qualifying because the law degree will qualify you for a new trade or business.

Example 2.

You are a general practitioner of medicine. You take a 2-week course to review developments in several specialized fields of medicine. The course doesn't qualify you for a new profession. It is qualifying work-related education because it maintains or improves skills required in your present profession.

Example 3.

While working in the private practice of psychiatry, you enter a program to study and train at an accredited psychoanalytic institute. The program will lead to qualifying you to practice psychoanalysis. The psychoanalytic training doesn't qualify you for a new profession. It is qualifying work-related education because it maintains or improves skills required in your present profession.

Bar or CPA Review Course

Review courses to prepare for the bar examination or the certified public accountant (CPA) examination aren't qualifying work-related education. They are part of a program of study that can qualify you for a new profession.

Teaching and Related Duties

All teaching and related duties are considered the same general kind of work. A change in duties in any of the following ways isn't considered a change to a new business.

  • Elementary school teacher to secondary school teacher.

  • Teacher of one subject, such as biology, to teacher of another subject, such as art.

  • Classroom teacher to guidance counselor.

  • Classroom teacher to school administrator.

What Expenses Can Be Deducted?

If your education meets the requirements described earlier under Qualifying Work-Related Education , you can generally deduct your education expenses as business expenses. If you aren't self-employed, you can deduct business expenses only if you itemize your deductions.

You can't deduct expenses related to tax-exempt and excluded income.

Deductible expenses.

The following education expenses can be deducted.

  • Tuition, books, supplies, lab fees, and similar items.

  • Certain transportation and travel costs.

  • Other education expenses, such as costs of research and typing when writing a paper as part of an educational program.



Nondeductible expenses.

You can't deduct personal or capital expenses. For example, you can't deduct the dollar value of vacation time or annual leave you take to attend classes. This amount is a personal expense.



Unclaimed reimbursement.

If you don't claim reimbursement that you are entitled to receive from your employer, you can't deduct the expenses that apply to that unclaimed reimbursement.

Example.

Your employer agrees to pay your education expenses if you file a voucher showing your expenses. You don't file a voucher and you don't get reimbursed. Because you didn't file a voucher, you can't deduct the expenses on your tax return.



Transportation Expenses

If your education qualifies, you can deduct local transportation costs of going directly from work to school. If you are regularly employed and go to school on a temporary basis, you can also deduct the costs of returning from school to home.

Temporary basis.

You go to school on a temporary basis if either of the following situations applies to you.

  1. Your attendance at school is realistically expected to last 1 year or less and does indeed last for 1 year or less.

  2. Initially, your attendance at school is realistically expected to last 1 year or less, but at a later date your attendance is reasonably expected to last more than 1 year. Your attendance is temporary up to the date you determine it will last more than 1 year.

If you are in either situation (1) or (2), your attendance isn't temporary if facts and circumstances indicate otherwise.



Attendance not on a temporary basis.

You don't go to school on a temporary basis if either of the following situations applies to you.

  1. Your attendance at school is realistically expected to last more than 1 year. It doesn't matter how long you actually attend.

  2. Initially, your attendance at school is realistically expected to last 1 year or less, but at a later date your attendance is reasonably expected to last more than 1 year. Your attendance isn't temporary after the date you determine it will last more than 1 year.



Deductible Transportation Expenses

If you are regularly employed and go directly from home to school on a temporary basis, you can deduct the round-trip costs of transportation between your home and school. This is true regardless of the location of the school, the distance traveled, or whether you attend school on nonwork days.

Transportation expenses include the actual costs of bus, subway, cab, or other fares, as well as the costs of using your car. Transportation expenses don't include amounts spent for travel, meals, or lodging while you are away from home overnight.

Example 1.

You regularly work in a nearby town, and go directly from work to home. You also attend school every work night for 3 months to take a course that improves your job skills. Since you are attending school on a temporary basis, you can deduct your daily round-trip transportation expenses in going between home and school. This is true regardless of the distance traveled.

Example 2.

Assume the same facts as in Example 1 , except that on certain nights you go directly from work to school and then home. You can deduct your transportation expenses from your regular work site to school and then home.

Example 3.

Assume the same facts as in Example 1 , except that you attend the school for 9 months on Saturdays, nonwork days. Since you are attending school on a temporary basis, you can deduct your round-trip transportation expenses in going between home and school.

Example 4.

Assume the same facts as in Example 1 , except that you attend classes twice a week for 15 months. Since your attendance in school isn't considered temporary, you can't deduct your transportation expenses in going between home and school. If you go directly from work to school, you can deduct the one-way transportation expenses of going from work to school. If you go from work to home to school and return home, your transportation expenses can't be more than if you had gone directly from work to school.

Using your car.

If you use your car (whether you own or lease it) for transportation to school, you can deduct your actual expenses or use the standard mileage rate to figure the amount you can deduct. The standard mileage rate for miles driven from January 1, 2016, through December 31, 2016, is 54 cents a mile. Whichever method you use, you can also deduct parking fees and tolls. See Pub. 463, chapter 4, for information on deducting your actual expenses of using a car.



Travel Expenses

You can deduct expenses for travel, meals (see 50% limit on meals , later), and lodging if you travel overnight mainly to obtain qualifying work-related education.

Travel expenses for qualifying work-related education are treated the same as travel expenses for other employee business purposes. For more information, see chapter 1 of Pub. 463.

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You can't deduct expenses for personal activities such as sightseeing, visiting, or entertaining.

Mainly personal travel.

If your travel away from home is mainly personal, you can't deduct all of your expenses for travel, meals, and lodging. You can deduct only your expenses for lodging and 50% of your expenses for meals during the time you attend the qualified educational activities.

Whether a trip's purpose is mainly personal or educational depends upon the facts and circumstances. An important factor is the comparison of time spent on personal activities with time spent on educational activities. If you spend more time on personal activities, the trip is considered mainly educational only if you can show a substantial nonpersonal reason for traveling to a particular location.



Example 1.

John works in Newark, New Jersey. He traveled to Chicago to take a deductible 1-week course at the request of his employer. His main reason for going to Chicago was to take the course.

While there, he took a sightseeing trip, entertained some friends, and took a side trip to Pleasantville for a day.

Since the trip was mainly for business, John can deduct his round-trip airfare to Chicago. He can't deduct his transportation expenses of going to Pleasantville. He can deduct only the meals (subject to the 50% limit) and lodging connected with his educational activities.

Example 2.

Sue works in Boston. She went to a university in Michigan to take a course for work. The course is qualifying work-related education.

She took one course, which is one-fourth of a full course load of study. She spent the rest of the time on personal activities. Her reasons for taking the course in Michigan were all personal.

Sue's trip is mainly personal because three-fourths of her time is considered personal time. She can't deduct the cost of her round-trip train ticket to Michigan. She can deduct one-fourth of the meals (subject to the 50% limit) and lodging costs for the time she attended the university.

Example 3.

Dave works in Nashville and recently traveled to California to take a 2-week seminar. The seminar is qualifying work-related education.

While there, he spent an extra 8 weeks on personal activities. The facts, including the extra 8-week stay, show that his main purpose was to take a vacation.

Dave can't deduct his round-trip airfare or his meals and lodging for the 8 weeks. He can deduct only his expenses for meals (subject to the 50% limit) and lodging for the 2 weeks he attended the seminar.

Cruises and conventions.

Certain cruises and conventions offer seminars or courses as part of their itinerary. Even if the seminars or courses are work related, your deduction for travel may be limited. This applies to:

  • Travel by ocean liner, cruise ship, or other form of luxury water transportation; and

  • Conventions outside the North American area.

For a discussion of the limits on travel expense deductions that apply to cruises and conventions, see Luxury Water Travel and Conventions in chapter 1 of Pub. 463.



50% limit on meals.

You can deduct only 50% of the cost of your meals while traveling away from home to obtain qualifying work-related education. If you were reimbursed for the meals, see How To Treat Reimbursements , later.

Employees must use Form 2106 or Form 2106-EZ to apply the 50% limit.



Travel as Education

You can't deduct the cost of travel as a form of education even if it is directly related to your duties in your work or business.

Example.

You are a French language teacher. While on sabbatical leave granted for travel, you traveled through France to improve your knowledge of the French language. You chose your itinerary and most of your activities to improve your French language skills. You can't deduct your travel expenses as education expenses. This is true even if you spent most of your time learning French by visiting French schools and families, attending movies or plays, and engaging in similar activities.

No Double Benefit Allowed

You can't do either of the following.

  • Deduct work-related education expenses as business expenses if you benefit from these expenses under any other provision of the law.

  • Deduct work-related education expenses paid with tax-free scholarship, grant, or employer-provided
    educational assistance.

Adjustments to Qualifying Work-Related Education Expenses

If you pay qualifying work-related education expenses with certain tax-free funds, you can't claim a deduction for those amounts. You must reduce the qualifying expenses by the amount of such expenses allocable to the tax-free educational assistance.

Tax-free educational assistance.

This includes:



Amounts that don't reduce qualifying work-related education expenses.

Don't reduce the qualifying work-related 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.



Also, don't reduce the qualifying work-related education expenses by any scholarship or fellowship grant reported as income on the student's return or any scholarship which, by its terms, can't be applied to qualifying work-related education expenses.

How To Treat Reimbursements

How you treat reimbursements depends on the arrangement you have with your employer.

There are two basic types of reimbursement arrangements—accountable plans and nonaccountable plans. You can tell the type of plan you are reimbursed under by the way the reimbursement is reported on your Form W-2.

Note.

The following rules about reimbursement arrangements also apply to expense allowances received from your employer.

Accountable Plans

To be an accountable plan, your employer's reimbursement arrangement must require you to meet all three of the following rules.

  • Your expenses must have a business connection. This means your expenses must be deductible under the rules for qualifying work-related education explained earlier.

  • You must adequately account to your employer for your expenses within a reasonable period of time.

  • You must return any reimbursement or allowance in excess of the expenses accounted for within a reasonable period of time.

If you are reimbursed under an accountable plan, your employer shouldn't include any reimbursement of income on your Form W-2, box 1.

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If your employer included reimbursements on your Form W-2, box 1, and you meet all three rules for accountable plans, ask your employer for a corrected Form W-2.

Accountable plan rules not met.

Even though you are reimbursed under an accountable plan, some of your expenses may not meet all three rules for accountable plans. Those expenses that fail to meet the three rules are treated as having been reimbursed under a Nonaccountable Plan (discussed later).



Expenses equal reimbursement.

Under an accountable plan, if your expenses equal your reimbursement, you don't complete Form 2106 or 2106-EZ. Because your expenses and reimbursements are equal, you don't have a deduction.



Excess expenses.

If your expenses are more than your reimbursement, you can deduct your excess expenses. This is discussed later under Deducting Business Expenses .



Allocating your reimbursements for meals.

Because your excess meal expenses are subject to the 50% limit, you must figure them separately from your other expenses. If your employer paid you a single amount to cover both meals and other expenses, you must allocate the reimbursement so that you can figure your excess meal expenses separately. Make the allocation as follows.

  1. Divide your meal expenses by your total expenses.

  2. Multiply your total reimbursement by the result from (1). This is the allocated reimbursement for your meal expenses.

  3. Subtract the amount figured in (2) from your total reimbursement. The difference is the allocated reimbursement for your other expenses of qualifying work-related education.

Example.

Your employer paid you an expense allowance of $2,000 under an accountable plan. The allowance was to cover all of your expenses of traveling away from home to take a 2-week training course for work. There was no indication of how much of the reimbursement was for each type of expense. Your actual expenses equal $2,500 ($425 for meals + $700 lodging + $150 transportation expenses + $1,225 for books and tuition).

Using the steps listed above, allocate the reimbursement between the $425 meal expenses and the $2,075 other expenses.

1. $425 meal expenses = 0.17
$2,500 total expenses

2. $2,000 (reimbursement) × 0.17
= $340 (allocated reimbursement for meal expenses)

3. $2,000 (reimbursement) − $340 (meals)
= $1,660 (allocated reimbursement for other qualifying work-related education expenses)

Your excess meal expenses are $85 ($425 − $340) and your excess other expenses are $415 ($2,075 − $1,660). After you apply the 50% limit to your meals, you have a deduction for work-related education expenses of $458 (($85 × 50%) + $415).



Nonaccountable Plans

Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a nonaccountable plan with your wages, salary, or other pay and report the total on your Form W-2, box 1.

You can deduct your expenses regardless of whether they are more than, less than, or equal to your reimbursement. This is discussed later under Deducting Business Expenses . An illustrated example of a nonaccountable plan, using Form 2106-EZ, is shown at the end of this chapter.

Reimbursements for nondeductible expenses.

Reimbursements you received for nondeductible expenses are treated as paid under a nonaccountable plan. You must include them in your income. For example, you must include in your income reimbursements your employer gave you for expenses of education that:

  • You need to meet the minimum educational requirements for your job, or

  • Is part of a program of study that can qualify you for a new trade or business.

For more information on accountable and nonaccountable plans, see chapter 6 of Pub. 463.



Deducting Business Expenses

Self-employed persons and employees report their business expenses differently.

The following information explains what forms you must use to deduct the cost of your qualifying work-related education as a business expense.

Self-Employed Persons

If you are self-employed, you must report the cost of your qualifying work-related education on the appropriate form used to report your business income and expenses (generally, Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040)). If your education expenses include expenses for a car or truck, travel, or meals, report those expenses the same way you report other business expenses for those items. See the instructions for the form you file for information on how to complete it.

Employees

If you are an employee, you can deduct the cost of qualifying work-related education only if you:

  1. Didn't receive (and weren't entitled to receive) any reimbursement from your employer;

  2. Were reimbursed under a nonaccountable plan (amount is included on Form W-2, box 1); or

  3. Received reimbursement under an accountable plan, but the amount received was less than your expenses for which you claimed reimbursement.

If either (1) or (2) applies, you can deduct the total qualifying cost. If (3) applies, you can deduct only the qualifying costs that were more than your reimbursement.

In order to deduct the cost of your qualifying work-related education as a business expense, include the amount with your deduction for any other employee business expenses on Schedule A (Form 1040), line 21, or Schedule A (Form 1040NR), line 7. (Special rules for expenses of certain performing artists and fee-basis officials and for impairment-related work expenses are explained later.)

This deduction (except for impairment-related work expenses of disabled individuals) is subject to the 2%-of-adjusted-gross-income limit that applies to most miscellaneous itemized deductions.

Form 2106 or 2106-EZ.

To figure your deduction for employee business expenses, including qualifying work-related education, you generally must complete Form 2106 or 2106-EZ.



Form not required.

Don't complete either Form 2106 or 2106-EZ if:

  • All reimbursements, if any, are included on your Form W-2, box 1; and

  • You aren't claiming travel, transportation, meal, or entertainment expenses.

If you meet both of these requirements, enter the expenses directly on Schedule A (Form 1040), line 21, or Schedule A (Form 1040NR), line 7. (Special rules for expenses of certain Performing Artists and Fee-Basis Officials and for Impairment-Related Work Expenses are explained later.)



Using Form 2106-EZ.

This form is shorter and easier to use than Form 2106. Generally, you can use this form if:

  • All reimbursements, if any, are included on your Form W-2, box 1; and

  • You are using the standard mileage rate if you are claiming vehicle expenses.

If you don't meet both of these requirements, use Form 2106.



Performing Artists and Fee-Basis Officials

If you are a qualified performing artist, or a state (or local) government official who is paid in whole or in part on a fee basis, you can deduct the cost of your qualifying work-related education as an adjustment to gross income rather than as an itemized deduction.

Include the cost of your qualifying work-related education with any other employee business expenses on Form 1040, line 24, or Form 1040NR, line 35 (on the dotted line next to line 35, enter the amount of your deduction and "QPA"). You don't have to itemize your deductions on Schedule A (Form 1040 or 1040NR), and, therefore, the deduction isn't subject to the 2%-of-adjusted-gross-income limit. You must complete Form 2106 or 2106-EZ to figure your deduction even if you meet the requirements described earlier under Form not required .

For more information on qualified performing artists, see chapter 6 of Pub. 463.

Impairment-Related Work Expenses

If you are disabled and have impairment-related work expenses that are necessary for you to be able to get qualifying work-related education, you can deduct these expenses on Schedule A (Form 1040), line 28, or Schedule A (Form 1040NR), line 14. They aren't subject to the 2%-of-adjusted-gross-income limit. To deduct these expenses, you must complete Form 2106 or 2106-EZ even if you meet the requirements described earlier under Form not required .

For more information on impairment-related work expenses, see chapter 6 of Pub. 463.

Recordkeeping

This is an Image: files.gif

You must keep records as proof of any deduction claimed on your tax return. Generally, you should keep your records for 3 years from the date of filing the tax return and claiming the deduction.

If you are an employee who is reimbursed for expenses and you give your records and documentation to your employer, you don't have to keep duplicate copies of this information. However, you should keep your records for a 3-year period if:

  • You claim deductions for expenses that are more than your reimbursement,

  • Your employer doesn't use adequate accounting procedures to verify expense accounts,

  • You are related to your employer, or

  • Your expenses are reimbursed under a nonaccountable plan.

Examples of records to keep.

If any of the above cases apply to you, you must be able to prove that your expenses are deductible. You should keep adequate records or have sufficient evidence that will support your expenses. Estimates or approximations don't qualify as proof of an expense. Some examples of what can be used to help prove your expenses are the following.

  1. Documents, such as transcripts, course descriptions, catalogs, etc., showing periods of enrollment in educational institutions, principal subjects studied, and descriptions of educational activity.

  2. Canceled checks and receipts to verify amounts you spent for:

    1. Tuition and books,

    2. Meals and lodging while away from home overnight for educational purposes,

    3. Travel and transportation, and

    4. Other education expenses.

  3. Statements from your employer explaining whether the education was necessary for you to keep your job, salary, or status; how the education helped maintain or improve skills needed in your job; how much reimbursement you received; and, if you are a teacher, the type of certificate and subjects taught.

  4. Complete information about any scholarship or fellowship grants, including amounts you received during the year.



Illustrated Example

Victor Jones teaches math at a private high school in North Carolina. He was selected to attend a 3-week math seminar at a university in California. The seminar will improve his skills in his current job and is qualifying work-related education. He was reimbursed for his expenses under his employer's nonaccountable plan, so his reimbursement of $2,100 is included in the wages shown on his Form W-2, box 1. Victor will file Form 1040.

His actual expenses for the seminar are as follows.

Lodging $1,050
Meals 526
Airfare 550
Taxi fares 50
Tuition and books 400
Total Expenses $2,576

Victor files Form 2106-EZ with his tax return. He shows his expenses for the seminar in Part I of the form. He enters $1,650 ($1,050 + $550 + $50) on line 3 to account for his lodging, airfare, and taxi fares. He enters $400 on line 4 for his tuition and books. On the line provided for total meals and entertainment expenses, Victor enters $526 for meal expenses. He multiplies that amount by 50% and enters the result, $263, on line 5. On line 6, Victor totals the amounts from lines 3 through 5. He carries the total, $2,313, to Schedule A (Form 1040), line 21.

Since he doesn't claim any vehicle expenses, Victor leaves Part II blank. His filled-in form is shown on the next page.

This is an Image: 25221v03.gif

Form 2106-EZ for V. Jones

Please click here for the text description of the image.

13. How To Get Tax Help

If you have questions about a tax issue, need help preparing your tax return, or want to download free publications, forms, or instructions, go to IRS.gov and find resources that can help you right away.

Preparing and filing your tax return.

Find free options to prepare and file your return on IRS.gov or in your local community if you qualify.

The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally make $54,000 or less, persons with disabilities, the elderly, and limited-English-speaking taxpayers who need help preparing their own tax returns. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors.

You can go to IRS.gov and click on the Filing tab to see your options for preparing and filing your return which include the following.

  • Free File. Go to IRS.gov/freefile. See if you qualify to use brand-name software to prepare and e-file your federal tax return for free.

  • VITA. Go to IRS.gov/vita, download the free IRS2Go app, or call 1-800-906-9887 to find the nearest VITA location for free tax preparation.

  • TCE. Go to IRS.gov/tce, download the free IRS2Go app, or call 1-888-227-7669 to find the nearest TCE location for free tax preparation.



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Getting answers to your tax law questions. On IRS.gov get answers to your tax questions anytime, anywhere.

  • Go to IRS.gov/help or IRS.gov/letushelp pages for a variety of tools that will help you get answers to some of the most common tax questions.

  • Go to IRS.gov/ita for the Interactive Tax Assistant, a tool that will ask you questions on a number of tax law topics and provide answers. You can print the entire interview and the final response for your records.

  • Go to IRS.gov/pub17 to get Pub. 17, Your Federal Income Tax for Individuals, which features details on tax-saving opportunities, 2016 tax changes, and thousands of interactive links to help you find answers to your questions. View it online in HTML or as a PDF or, better yet, download it to your mobile device to enjoy eBook features.

  • You may also be able to access tax law information in your electronic filing software.

Getting tax forms and publications.

Go to IRS.gov/forms to view, download, or print all of the forms and publications you may need. You can also download and view popular tax publications and instructions (including the 1040 instructions) on mobile devices as an eBook at no charge. Or, you can go to IRS.gov/orderforms to place an order and have forms mailed to you within 10 business days.



Using direct deposit.

The fastest way to receive a tax refund is to combine direct deposit and IRS e-file. Direct deposit securely and electronically transfers your refund directly into your financial account. Eight in 10 taxpayers use direct deposit to receive their refund. IRS issues more than 90% of refunds in less than 21 days.



Delayed refund for returns claiming certain credits.

Due to changes in the law, the IRS can’t issue refunds before February 15, 2017, for returns that claim the earned income credit (EIC) or the additional child tax credit (ACTC). This applies to the entire refund, not just the portion associated with these credits.



Getting a transcript or copy of a return.

The quickest way to get a copy of your tax transcript is to go to IRS.gov/transcripts. Click on either "Get Transcript Online" or "Get Transcript by Mail" to order a copy of your transcript. If you prefer, you can:

  • Order your transcript by calling 1-800-908-9946.

  • Mail Form 4506-T or Form 4506T-EZ (both available on IRS.gov).



Using online tools to help prepare your return.

Go to IRS.gov/tools for the following.



Resolving tax-related identity theft issues.

  • The IRS doesn’t initiate contact with taxpayers by email or telephone to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

  • Go to IRS.gov/idprotection for information and videos.

  • If your SSN has been lost or stolen or you suspect you are a victim of tax-related identity theft, visit IRS.gov/id to learn what steps you should take.



Checking on the status of your refund.

  • Go to IRS.gov/refunds.

  • Due to changes in the law, the IRS can’t issue refunds before February 15, 2017, for returns that claim the EIC or the ACTC. This applies to the entire refund, not just the portion associated with these credits.

  • Download the official IRS2Go app to your mobile device to check your refund status.

  • Call the automated refund hotline at 1-800-829-1954.



Making a tax payment.

The IRS uses the latest encryption technology to ensure your electronic payments are safe and secure. You can make electronic payments online, by phone, and from a mobile device using the IRS2Go app. Paying electronically is quick, easy, and faster than mailing in a check or money order. Go to IRS.gov/payments to make a payment using any of the following options.

  • IRS Direct Pay: Pay your individual tax bill or estimated tax payment directly from your checking or savings account at no cost to you.

  • Debit or credit card: Choose an approved payment processor to pay online, by phone, and by mobile device.

  • Electronic Funds Withdrawal: Offered only when filing your federal taxes using tax preparation software or through a tax professional.

  • Electronic Federal Tax Payment System: Best option for businesses. Enrollment is required.

  • Check or money order: Mail your payment to the address listed on the notice or instructions.

  • Cash: If cash is your only option, you may be able to pay your taxes at a participating retail store.



What if I can’t pay now?

Go to IRS.gov/payments for more information about your options.

  • Apply for an online payment agreement (IRS.gov/opa) to meet your tax obligation in monthly installments if you can’t pay your taxes in full today. Once you complete the online process, you will receive immediate notification of whether your agreement has been approved.

  • Use the Offer in Compromise Pre-Qualifier (IRS.gov/oic) to see if you can settle your tax debt for less than the full amount you owe.



Checking the status of an amended return.

Go to IRS.gov and click on Where’s My Amended Return? (IRS.gov/wmar) under the "Tools" bar to track the status of Form 1040X amended returns. Please note that it can take up to 3 weeks from the date you mailed your amended return for it to show up in our system and processing it can take up to 16 weeks.



Understanding an IRS notice or letter.

Go to IRS.gov/notices to find additional information about responding to an IRS notice or letter.



Contacting your local IRS office.

Keep in mind, many questions can be resolved on IRS.gov without visiting an IRS Tax Assistance Center (TAC). Go to IRS.gov/letushelp for the topics people ask about most. If you still need help, IRS TACs provide tax help when a tax issue can’t be handled online or by phone. All TACs now provide service by appointment so you’ll know in advance that you can get the service you need without waiting. Before you visit, go to IRS.gov/taclocator to find the nearest TAC, check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”



Watching IRS videos.

The IRS Video portal (IRSvideos.gov) contains video and audio presentations for individuals, small businesses, and tax professionals.



Getting tax information in other languages.

For taxpayers whose native language isn’t English, we have the following resources available. Taxpayers can find information on IRS.gov in the following languages.

The IRS TACs provide over-the-phone interpreter service in over 170 languages, and the service is available free to taxpayers.



The Taxpayer Advocate Service Is Here To Help You

What is the Taxpayer Advocate Service?

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights.



What Can the Taxpayer Advocate Service Do For You?

We can help you resolve problems that you can’t resolve with the IRS. And our service is free. If you qualify for our assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:

  • Your problem is causing financial difficulty for you, your family, or your business,

  • You face (or your business is facing) an immediate threat of adverse action, or

  • You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised.



How Can You Reach Us?

We have offices in every state, the District of Columbia, and Puerto Rico. Your local advocate’s number is in your local directory and at taxpayeradvocate.irs.gov. You can also call us at 1-877-777-4778.



How Can You Learn About Your Taxpayer Rights?

The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Our Tax Toolkit at taxpayeradvocate.irs.gov can help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.



How Else Does the Taxpayer Advocate Service Help Taxpayers?

TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, please report it to us at IRS.gov/sams.



Low Income Taxpayer Clinics

Low Income Taxpayer Clinics (LITCs) serve individuals whose income is below a certain level and need to resolve tax problems such as audits, appeals, and tax collection disputes. Some clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. To find a clinic near you, visit IRS.gov/litc or see IRS Publication 4134, Low Income Taxpayer Clinic List.

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 2016.

  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 2016 joint tax return they claim exemptions for their two dependent children, Sean (age 22, 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 $121,000. Because Dave and Valerie have unusually high itemized deductions, their taxable income is $10,000 and their tax before credits is $1,003.

Sean enrolled as a full-time graduate student in August 2016 at California State College. He graduated with his bachelor's degree in 2015 and didn't attend school from January 2016 through July 2016. His parents claimed the American opportunity credit for Sean for 2012, 2013, 2014, and 2015.

Carey enrolled full-time as a freshman at the same college in January 2016 to begin working on her bachelor's degree.

In 2016, Dave and Valerie paid $7,000 in tuition for Sean and $8,000 in tuition and $500 for mandatory course materials, not purchased from the college, for Carey. Carey received a $2,000 scholarship.

California State College issued two Forms 1098-T, one for Sean and one for Carey, and sent them to the Joneses residence. The $2,000 scholarship that Carey received is reported in box 5 of her Form 1098-T. California State College reports amounts billed in 2016 instead of amounts paid during 2016. In completing Form 8863, the Joneses should include actual adjusted qualified education expenses paid, or deemed to have been paid, which may be different from what is reported on Form 1098-T. Therefore, the Joneses use the amounts they paid for tuition and mandatory course materials. Because the scholarship Carey received was applied to tuition (a qualified expense), they don't include that in the amount they paid for qualified tuition expenses. Neither Sean nor Carey has been convicted of a felony for possession or distribution of a controlled substance before the end of 2016.

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 isn't 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 68 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 2016 to be $1,400 (line 12). They can't claim the full amount because their MAGI of $121,000 is greater than $111,000. They enter the reduced amount of $700 (figured on Part II, line 18) on the Credit Limit Worksheet, line 1. The $700 is added to their nonrefundable American opportunity credit ($1,500 on line 2 of the Credit Limit Worksheet) for a total nonrefundable credit of $2,200. The Joneses enter $1,003 on line 7 of the Credit Limit Worksheet, which is the smaller of their tax from line 47 of their Form 1040 (which is $1,003) or the $2,200 on line 3 of the Credit Limit Worksheet. They enter $1,003 on Form 8863, Part II, line 19, and on Form 1040, line 50.

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Form 1098-T

Please click here for the text description of the image.

Adjusted Qualified Education Expenses Worksheet (Form 8863 instructions) for Carey Jones

Adjusted Qualified Education Expenses Worksheet (Form 8863 instructions)
1. Total qualified education expenses paid for or on behalf of the student in 2016 for the academic period 10,500
2. Less adjustments:
a. Tax-free educational assistance received in 2016 allocable to the academic period 2,000
b. Tax-free educational assistance received in 2017 (and before you file your 2016 tax return) allocable to the academic period 0
c. Refunds of qualified education expenses paid in 2016 if the refund is received in 2016 or in 2017 before you file your 2016 tax return 0
3. Total adjustments (add lines 2a, 2b, and 2c) 2,000
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

Please click here for the text description of the image.

Adjusted Qualified Education Expenses Worksheet (Form 8863 instructions) for Sean Jones

Adjusted Qualified Education Expenses Worksheet (Form 8863 instructions)
1. Total qualified education expenses paid for or on behalf of the student in 2016 for the academic period 7,000
2. Less adjustments:
a. Tax-free educational assistance received in 2016 allocable to the academic period 0
b. Tax-free educational assistance received in 2017 (and before you file your 2016 tax return) allocable to the academic period 0
c. Refunds of qualified education expenses paid in 2016 if the refund is received in 2016 or in 2017 before you file your 2016 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)

Complete this worksheet to figure the amount to enter on line 19.
1. Enter the amount from Form 8863, line 18 1. 700
2. Enter the amount from Form 8863, line 9 2. 1,500
3. Add lines 1 and 2 3. 2,200
4. Enter the amount from:

Form 1040, line 47; or

Form 1040A, line 30

4. 1,003
5. Enter the amount from either:

Form 1040, lines 48 and 49, and the amount from Schedule R, line 22; or

Form 1040A, lines 31 and 32

5. 0
6. Subtract line 5 from line 4 6. 1,003
7. Enter the smaller of line 3 or line 6 here and on Form 8863, line 19 7. 1,003


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Form 8863 for Dave and Valerie Jones

Please click here for the text description of the image.

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Carey Jones page 2

Please click here for the text description of the image.

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Filled-in Form 8863 Jones page 2

Please click here for the text description of the image.

Appendix B. Highlights of Education Tax Benefits for Tax Year 2016

This chart highlights some differences among the benefits discussed in this publication. See the text for definitions and details.Don't rely on this chart alone.

Caution:You generally can't claim more than one benefit for the same education expense.

Scholarships,
Fellowship Grants,
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 must pay.

40% of the credit may be refundable
(limited to $1,000 per student).
Credits can reduce the 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, 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

Computer or peripheral equipment, computer software, or Internet access and related services

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,
Fellowship Grants,
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
Can't 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 Can't be to
meet minimum educational requirements of present trade/business

Can't 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
$55,000 – $65,000

$111,000 – $131,000 for joint returns
$65,000 – $80,000

$130,000 –
$160,000 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 $77,550 – $92,550

$116,300 – $146,300 for
joint returns
No phaseout No phaseout
Any nontaxable distribution is limited to the amount that doesn't 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 aren't taxable and something else when determining if a scholarship or fellowship grant isn't 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 doesn't 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 U.S. 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 U.S. 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 fellowship grants. 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 fellowship grants 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 U.S. 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.

    • Didn't have expenses that were used to figure an American opportunity or Hope scholarship credit in any 4 earlier tax years.

    • Hadn't completed the first 4 years of postsecondary education (generally the freshman through senior years) in an earlier tax year.

    • 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. Doesn't include expenses for room and board. Doesn't include expenses for courses involving sports, games, or hobbies (including noncredit courses) that aren't 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. Includes computer or peripheral equipment, computer software, or Internet access and related services. 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). Doesn't include expenses for room and board. Doesn't include expenses for courses involving sports, games, or hobbies that aren't 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. Doesn't include expenses for room and board. Doesn't include expenses for courses involving sports, games, or hobbies (including noncredit courses) that aren't 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 computer or peripheral equipment, computer software, or Internet access and related services. Also includes expenses for special needs services and computer access.

  7. Scholarships and fellowship grants. 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.



Index

Symbols

529 program (see Qualified tuition program (QTP))

A

Academic period
American opportunity credit, Academic period.
Lifetime learning credit, Academic period.
Student loan interest deduction, Academic period.
Tuition and fees deduction, Academic period.
Accountable plans, Accountable Plans, Allocating your reimbursements for meals.
Additional tax
Coverdell ESA
On excess contributions, Additional Tax on Excess Contributions, Figuring and reporting the additional tax.
On taxable distributions, Additional Tax on Taxable Distributions
IRA distributions, education exception, Education Exception to Additional Tax on Early IRA Distributions
Qualified tuition program (QTP), on taxable distributions, Additional Tax on Taxable Distributions
Adjusted qualified education expenses (see Qualified education expenses)
American opportunity credit
Adjustments to qualified education expenses, Adjustments to Qualified Education Expenses
Claiming dependent's expenses, Who Can Claim a Dependent's Expenses?, Tuition reduction.
Tuition reduction, Tuition reduction.
Claiming the credit, Can You Claim the Credit?, Who Can't Claim the Credit?, Claiming the Credit
Qualifying to claim (Figure 2-1),
Coordination with Coverdell ESA distributions, Figuring the Taxable Portion of a Distribution
Coordination with qualified tuition program (QTP) distributions, Coordination With American Opportunity and Lifetime Learning Credits
Eligible educational institution, Eligible educational institution.
Eligible student, Who Is an Eligible Student?
Requirements (Figure 2-2),
Expenses qualifying for, What Expenses Qualify?, Adjustments to Qualified Education Expenses
Figuring the credit, Figuring the Credit
Income level, effect on amount of credit, Effect of the Amount of Your Income on the Amount of Your Credit, Phaseout.
Income limits, Effect of the Amount of Your Income on the Amount of Your Credit, Phaseout.
Modified adjusted gross income (MAGI), Modified adjusted gross income (MAGI).
Worksheet 2-1, Claiming the Credit
Overview of American opportunity credit (Table 2-1),
Phaseout, Phaseout.
Qualified education expenses, Qualified Education Expenses
Tax benefit of, What is the tax benefit of the American opportunity credit?
Armed Forces Health Professions Scholarship and Financial Assistance Program, Exceptions.
Assistance (see Tax help)
Athletic scholarships, Athletic Scholarships

B

Bar review course, Bar or CPA Review Course
Bonds, education savings (see Education savings bond program)
Business deduction for work-related education, Business Deduction for Work-Related Education, Illustrated Example
Accountable plans, Accountable Plans, Allocating your reimbursements for meals.
Adjustments to qualifying work-related education expenses, Adjustments to Qualifying Work-Related Education Expenses
Allocating meal reimbursements, Allocating your reimbursements for meals.
Deductible education expenses, What Expenses Can Be Deducted?, Adjustments to Qualifying Work-Related Education Expenses
Deducting business expenses, Deducting Business Expenses, Impairment-Related Work Expenses
Double benefit not allowed, No Double Benefit Allowed
Education required by employer or by law, Education Required by Employer or by Law
Education to maintain or improve skills, Education To Maintain or Improve Skills
Education to meet minimum requirements, Education To Meet Minimum Requirements, Certification in a new state.
Education to qualify for new trade or business, Education That Qualifies You for a New Trade or Business, Teaching and Related Duties
Excess expenses, accountable plan, Excess expenses., Allocating your reimbursements for meals.
Indefinite absence, Education during indefinite absence.
Maintaining skills vs. qualifying for new job, Maintaining skills vs. qualifying for new job.
Nonaccountable plans, Nonaccountable Plans
Nondeductible expenses, Nondeductible expenses.
Qualified education expenses, What Expenses Can Be Deducted?, Adjustments to Qualifying Work-Related Education Expenses
Recordkeeping requirements, Recordkeeping, Examples of records to keep.
Reimbursements, treatment of, How To Treat Reimbursements, Reimbursements for nondeductible expenses.
Tax benefit of, What is the tax benefit of taking a business deduction for work-related education?
Tax-free educational assistance, Tax-free educational assistance.
Teachers, Requirements for Teachers, Teaching and Related Duties
Temporary absence to acquire education, Education during temporary absence.
Transportation expenses, Transportation Expenses, Using your car.
Travel expenses, Travel Expenses

C

Cancellation of student loan (see Student loan cancellation)
Candidate for a degree
Scholarships and fellowship grants, Candidate for a degree.
Change of designated beneficiary
Coverdell ESA, Changing the Designated Beneficiary
Qualified tuition program, Changing the Designated Beneficiary
Collapsed loans, Interest on refinanced student loans.
Comprehensive or bundled fees
American opportunity credit, Comprehensive or bundled fees.
Lifetime learning credit, Comprehensive or bundled fees.
Tuition and fees deduction, Comprehensive or bundled fees.
Consolidated loans used to refinance student loans, Interest on refinanced student loans.
Conventions outside U.S., Cruises and conventions.
Coverdell education savings account (ESA), Coverdell Education Savings Account (ESA), Figuring the Taxable Portion of a Distribution, Coordination With American Opportunity and Lifetime Learning Credits, Worksheet 7-3. Coverdell ESA—Taxable Distributions and Basis
Additional tax
On excess contributions, Additional Tax on Excess Contributions, Figuring and reporting the additional tax.
On taxable distributions, Additional Tax on Taxable Distributions
Assets to be distributed at age 30 or death of beneficiary, When Assets Must Be Distributed
Contribution limits, Contribution Limits, Figuring the limit.
Figuring the limit (Worksheet 6-2), Figuring the limit.
Contributions to, Contributions, Figuring and reporting the additional tax.
Table 7-2, Contributions
Coordination with American opportunity and lifetime learning credits, Coordination With American Opportunity and Lifetime Learning Credits
Coordination with qualified tuition program (QTP), Coordination With Qualified Tuition Program (QTP) Distributions
Defined, What Is a Coverdell ESA?
Distributions, Distributions, How To Figure the Taxable Earnings
Overview (Table 7-3), Distributions
Divorce, transfer due to, Transfer Because of Divorce
Eligible educational institution, Eligible Educational Institution
Figuring taxable portion of distribution, Figuring the Taxable Portion of a Distribution
Worksheet 7-3, Worksheet 7-3. Coverdell ESA—Taxable Distributions and Basis
Figuring the taxable earnings in required distribution, How To Figure the Taxable Earnings
Losses, Losses on Coverdell ESA Investments
Modified adjusted gross income (MAGI), Modified adjusted gross income (MAGI)., MAGI when using Form 1040NR-EZ.
Worksheet 6-1, Worksheet 7-1. MAGI for a Coverdell ESA
Overview (Table 6-1), Coverdell Education Savings Account (ESA)
Qualified education expenses, Qualified Education Expenses, Qualified Elementary and Secondary Education Expenses
Rollovers, Rollovers
Tax benefit of, What is the tax benefit of the Coverdell ESA?
Tax-free distributions, Tax-Free Distributions
Taxable distributions, Taxable Distributions, Figuring the additional tax.
Worksheet 7-3 to figure, Worksheet 7-3. Coverdell ESA—Taxable Distributions and Basis
Transfers, Rollovers
CPA review course, Bar or CPA Review Course
Credits
American opportunity (see American opportunity credit)
Lifetime learning (see Lifetime learning credit)
Cruises, educational, Cruises and conventions.

D

Deductions (see Business deduction for work-related education)
Designated beneficiary
Coverdell ESA, What Is a Coverdell ESA?, Changing the Designated Beneficiary
Qualified tuition program (QTP), Designated beneficiary., Changing the Designated Beneficiary
Disabilities, persons with
Impairment-related work expenses, Impairment-Related Work Expenses
Distributions (see specific benefit)
Divorce
Coverdell ESA transfer due to, Transfer Because of Divorce
Expenses paid under decree
American opportunity credit, Expenses paid by dependent.
Lifetime learning credit, Expenses paid by dependent.
Tuition and fees deduction, Expenses paid under divorce decree.
Double benefit not allowed
American opportunity credit, No Double Benefit Allowed
Lifetime learning credit, No Double Benefit Allowed
Student loan interest deduction, No Double Benefit Allowed
Tuition and fees deduction, No Double Benefit Allowed
Work-related education, No Double Benefit Allowed

E

Early distributions from IRAs, Education Exception to Additional Tax on Early IRA Distributions, Reporting Early Distributions
Eligible educational institution, Eligible educational institution.
Figuring amount not subject to 10% tax, Figuring the Amount Not Subject to the 10% Tax
Qualified education expenses, Qualified education expenses.
Reporting, Reporting Early Distributions
Education IRA (see Coverdell education savings account (ESA))
Education loans (see Student loan interest deduction)
Education savings account (see Coverdell education savings account (ESA))
Education savings bond program
Cashing in bonds tax free, Who Can Cash in Bonds Tax Free?, MAGI when using Form 1040.
Claiming dependent's exemption, Dependent for whom you claim an exemption.
Claiming exclusion, Claiming the Exclusion
Eligible educational institution, Eligible educational institution.
Figuring tax-free amount, Figuring the Tax-Free Amount
Income level, effect on amount of exclusion, Effect of the Amount of Your Income on the Amount of Your Exclusion
Modified adjusted gross income (MAGI), Modified adjusted gross income (MAGI)., MAGI when using Form 1040.
Phaseout, Effect of the Amount of Your Income on the Amount of Your Exclusion
Qualified education expenses, Qualified education expenses.
Educational assistance, employer-provided (see Employer-provided educational assistance)
Eligible educational institution
American opportunity credit, Eligible educational institution.
Cancellation of student loan, Eligible educational institution.
Coverdell ESA, Eligible Educational Institution
Early distributions from IRAs, Eligible educational institution.
Education savings bond program, Eligible educational institution.
Lifetime learning credit, Eligible educational institution.
Qualified tuition program (QTP), Eligible educational institution.
Qualified tuition reduction, Qualified Tuition Reduction
Scholarships and fellowship grants, Eligible educational institution., Eligible educational institution.
Student loan cancellation, Eligible educational institution.
Student loan interest deduction, Eligible educational institution.
Tuition and fees deduction, Eligible educational institution.
Eligible elementary or secondary school
Coverdell ESA, Eligible elementary or secondary school.
Eligible student
American opportunity credit, Who Is an Eligible Student?
Lifetime learning credit, Who Is an Eligible Student?
Student loan interest deduction, Eligible student.
Tuition and fees deduction, Who Is an Eligible Student?
Employees
Deducting work-related education expenses, Employees
Employer-provided educational assistance, Employer-Provided Educational Assistance, Working condition fringe benefit.
ESAs (see Coverdell education savings account (ESA))
Estimated tax, Reminders
Excess contributions
Coverdell ESA, Additional Tax on Excess Contributions, Figuring and reporting the additional tax.
Excess expenses, accountable plan, Excess expenses., Allocating your reimbursements for meals.
Expenses (see specific benefit)

F

Family members, beneficiary
Coverdell ESA, Members of the beneficiary's family.
Qualified tuition program (QTP), Members of the beneficiary's family.
Fee-basis officials, work-related education deduction, Performing Artists and Fee-Basis Officials
Fellowship grants (see Scholarships and fellowship grants)
Figures (see Tables and figures)
Financial aid (see Scholarships and fellowship grants)
Form 1098-E
Student loan interest deduction, Loan origination fee., Form 1098-E.
Form 1098-T, Reminders
American opportunity credit, Form 1098-T.
Lifetime learning credit, Form 1098-T.
Tuition and fees deduction, Form 1098-T.
Form 1099-Q
Coverdell ESA, Exceptions., Earnings and basis.
Qualified tuition program (QTP), Earnings and return of investment.
Form 1099-R
Early distributions from IRAs, Reporting Early Distributions
Form 2106, 50% limit on meals., Form 2106 or 2106-EZ.
Form 2106-EZ, 50% limit on meals., Form 2106 or 2106-EZ., Using Form 2106-EZ.
Filled-in example,
Form 5329
Coverdell ESA, Figuring the additional tax.
Early distributions from IRAs, Reporting Early Distributions
Qualified tuition program (QTP), Figuring the additional tax.
Form 8815, MAGI when using Form 1040., Claiming the Exclusion
Form 8863
Filled-in examples,
Form 8917
Filled-in examples,
Form W-9S, Form 1098-T., Form 1098-T., Form 1098-E., Form 1098-T.
Fulbright grants, Fulbright Grants

H

Half-time student
American opportunity credit, Enrolled at least half-time.
Coverdell ESA, Half-time student.
Early distributions from IRAs, Half-time student.
Student loan interest deduction, Enrolled at least half-time.

I

Identity theft, Resolving tax-related identity theft issues.
Illustrated example of education credits (Appendix A), Appendix A. Illustrated Example of Education Credits,
Impairment-related work expenses
Work-related education deduction, Impairment-Related Work Expenses
Individual retirement arrangements (IRAs), Coverdell Education Savings Account (ESA)
Early distributions (see Early distributions from IRAs)

L

Lifetime learning credit, Differences between the American opportunity and lifetime learning credits.
Academic period, Academic period.
Adjustments to qualified education expenses, Adjustments to Qualified Education Expenses
Claiming dependent's expenses, Who Can Claim a Dependent's Expenses?
Tuition reduction, Tuition reduction.
Claiming the credit, Can You Claim the Credit?, Who Can't Claim the Credit? , Claiming the Credit
Qualifying to claim (Figure 3-1),
Coordination with Coverdell ESA distributions, Figuring the Taxable Portion of a Distribution, Coordination With American Opportunity and Lifetime Learning Credits
Coordination with qualified tuition program (QTP) distributions, Coordination With American Opportunity and Lifetime Learning Credits
Eligible educational institution, Eligible educational institution.
Eligible student, Who Is an Eligible Student?
Expenses qualifying for, What Expenses Qualify? , Amounts that don't reduce qualified education expenses.
Figuring the credit, Figuring the Credit, Claiming the Credit
Income level, effect on amount of credit, Effect of the Amount of Your Income on the Amount of Your Credit
Income limits, Effect of the Amount of Your Income on the Amount of Your Credit
Modified adjusted gross income (MAGI), Modified adjusted gross income (MAGI).
Worksheet 3-1, MAGI when using Form 1040.
Overview (Table 3-1), Table 3-1. Overview of the Lifetime Learning Credit for 2016
Phaseout, Phaseout.
Qualified education expenses, Qualified Education Expenses, Amounts that don't reduce qualified education expenses.
Qualifying to claim (Figure 3-1),
Tax benefit of, What is the tax benefit of the lifetime learning credit?
Loans
Cancellation (see Student loan cancellation)
Capitalized interest on student loan, Capitalized interest.
Origination fees on student loan, Loan origination fee.
Qualified education expenses paid with
American opportunity credit, Academic period.
Lifetime learning credit, Paid with borrowed funds.
Student loan repayment assistance, Student Loan Repayment Assistance
Losses, deducting
Coverdell ESA, Losses on Coverdell ESA Investments
Qualified tuition program (QTP), Losses on QTP Investments
Luxury water transportation, Cruises and conventions.

M

Mileage deduction for work-related education, What's New, Using your car.
Military academy cadets, Payment to Service Academy Cadets
Missing children, photographs of, Reminders
Modified adjusted gross income (MAGI)
American opportunity credit
Worksheet 2-1, Claiming the Credit
Coverdell ESA, Modified adjusted gross income (MAGI)., MAGI when using Form 1040NR-EZ.
Worksheet 6-1, Worksheet 7-1. MAGI for a Coverdell ESA
Education savings bond program, Modified adjusted gross income (MAGI)., MAGI when using Form 1040.
Lifetime learning credit, Modified adjusted gross income (MAGI).
Worksheet 3-1, MAGI when using Form 1040.
Student loan interest deduction, Modified adjusted gross income (MAGI).
Table 4-2, Table 4-2. Effect of MAGI on Student Loan Interest Deduction
Tuition and fees deduction, Modified adjusted gross income (MAGI).
Table 6-2, Table 6-2. Effect of MAGI on Maximum Tuition and Fees Deduction
Worksheet 6-1, Worksheet 6-1. MAGI for the Tuition and Fees Deduction

N

National Health Service Corps Scholarship Program, Exceptions., Exceptions.
Nonaccountable plans
Work-related education, Nonaccountable Plans

Q

Qualified education expenses
Adjustments to
American opportunity credit, Adjustments to Qualified Education Expenses
Coverdell ESA, Adjusted qualified education expenses.
Education savings bond program, Adjusted qualified education expenses.
Lifetime learning credit, Adjustments to Qualified Education Expenses
Qualified tuition program (QTP), Adjusted qualified education expenses.
Student loan interest deduction, Adjustments to Qualified Education Expenses
Tuition and fees deduction, Adjustments to Qualified Education Expenses
Work-related education, Adjustments to Qualifying Work-Related Education Expenses
American opportunity credit, Qualified Education Expenses, Adjustments to Qualified Education Expenses
Coverdell ESA, Qualified Education Expenses, Qualified Elementary and Secondary Education Expenses
Early distributions from IRAs, Qualified education expenses.
Education savings bond program, Qualified education expenses.
Expenses not qualified
American opportunity credit, Expenses That Don't Qualify, Comprehensive or bundled fees.
Lifetime learning credit, Expenses That Don't Qualify
Tuition and fees deduction, Expenses That Don't Qualify
Lifetime learning credit, Qualified Education Expenses, Amounts that don't reduce qualified education expenses.
Qualified tuition program (QTP), Qualified education expenses.
Scholarships and fellowship grants, Qualified education expenses.
Student loan interest deduction, Qualified Education Expenses
Tuition and fees deduction, What Expenses Qualify?, Adjustments to Qualified Education Expenses
Work-related education, What Expenses Can Be Deducted?, Adjustments to Qualifying Work-Related Education Expenses
Qualified elementary and secondary education expenses
Coverdell ESAs, Qualified Elementary and Secondary Education Expenses
Qualified employer plans
Student loan interest deduction not allowed, Qualified employer plan.
Qualified student loans, Qualified Student Loan, Qualified employer plan.
Qualified tuition program (QTP), Qualified Tuition Program (QTP), Changing the Designated Beneficiary
Additional tax on taxable distributions, Additional Tax on Taxable Distributions
Change of designated beneficiary, Changing the Designated Beneficiary
Contributions to, How Much Can You Contribute?
Coordination with American opportunity and lifetime learning credits, Coordination With American Opportunity and Lifetime Learning Credits
Coordination with Coverdell ESA distributions, Coordination With Coverdell ESA Distributions
Defined, What Is a Qualified Tuition Program?
Eligible educational institution, Eligible educational institution.
Figuring taxable portion of distribution, Figuring the Taxable Portion of a Distribution
Losses, Losses on QTP Investments
Qualified education expenses, Qualified education expenses.
Recontribution, Recontribution of Refunded Amounts
Rollovers, Rollovers and Other Transfers, Changing the Designated Beneficiary
Tax benefit of, What is the tax benefit of a QTP?
Taxability of distributions, Are Distributions Taxable?, Figuring the additional tax.
Taxable earnings, Taxable earnings.
Transfers, Rollovers and Other Transfers, Changing the Designated Beneficiary
Qualified tuition reduction, Qualified Tuition Reduction, How To Report
Qualified U.S. savings bonds, Qualified U.S. savings bonds.
Qualifying work-related education, Qualifying Work-Related Education, Teaching and Related Duties
Determining if qualified (Figure 11-1),

R

Recapture
American opportunity credit, Credit recapture.
Lifetime learning credit, Credit recapture.
Tuition and fees deduction, Credit recapture.
Recordkeeping requirements
Work-related education, Recordkeeping, Examples of records to keep.
Refinanced student loans, Interest on refinanced student loans., Refinanced Loan
Reimbursements
Nondeductible expenses, Reimbursements for nondeductible expenses.
Work-related education, How To Treat Reimbursements, Reimbursements for nondeductible expenses.
Related persons
Coverdell ESA, Members of the beneficiary's family.
Qualified tuition program (QTP), Members of the beneficiary's family.
Student loan interest deduction, Related person.
Repayment programs (see Student loan repayment assistance)
Reporting
American opportunity credit, Claiming the Credit
Coverdell ESA, Exceptions., Figuring and reporting the additional tax., Figuring the Taxable Portion of a Distribution, Figuring the additional tax.
Early distributions from IRAs, Reporting Early Distributions
Education savings bond program, Claiming the Exclusion
Lifetime learning credit, Claiming the Credit
Qualified tuition program (QTP), Taxable earnings., Losses on QTP Investments, Rollovers
Scholarships and fellowship grants, taxable, Reporting Scholarships and Fellowship Grants
Student loan interest deduction, Claiming the Deduction
Tuition and fees deduction, Claiming the Deduction
Tuition reduction, taxable, How To Report
Work-related education expenses, Deducting Business Expenses, Impairment-Related Work Expenses
Revolving lines of credit, interest on, Interest on revolving lines of credit.
Rollovers
Coverdell ESA, Rollovers
Qualified tuition program (QTP), Rollovers and Other Transfers, Changing the Designated Beneficiary

S

Scholarships and fellowship grants, Scholarships and Fellowship Grants, Form 1040NR-EZ., Coordination with Pell grants and other scholarships., Coordination with Pell grants and other scholarships.
Athletic scholarships, Athletic Scholarships
Eligible educational institution, Eligible educational institution., Eligible educational institution.
Figuring tax-free and taxable parts (Worksheet 1-1), Worksheet 1-1.
Qualified education expenses, Qualified education expenses.
Reporting, Reporting Scholarships and Fellowship Grants
Scholarship, defined, Scholarships and Fellowship Grants
Tax treatment of (Table 1-1), Tax-Free Scholarships and Fellowship Grants
Tax-free, Tax-Free Scholarships and Fellowship Grants, Athletic Scholarships
Taxable, Taxable Scholarships and Fellowship Grants
Section 501(c)(3) organizations (see Student loan cancellation)
Section 529 program (see Qualified tuition program (QTP))
Self-employed persons
Deducting work-related education expenses, Self-Employed Persons
Service academy cadets, Payment to Service Academy Cadets
Sports, games, hobbies, and noncredit courses
American opportunity credit, Sports, games, hobbies, and noncredit courses.
Education savings bond program, Qualified education expenses.
Lifetime learning credit, Sports, games, hobbies, and noncredit courses.
Tuition and fees deduction, Sports, games, hobbies, and noncredit courses.
Standard mileage rate
Work-related education, What's New, Using your car.
State prepaid education accounts (see Qualified tuition program (QTP))
Student loan cancellation, Student Loan Cancellation
Eligible educational institution, Eligible educational institution.
Section 501(c)(3) organizations, Section 501(c)(3) organization.
Student loan interest deduction
Academic period, Academic period.
Adjustments to qualified education expenses, Adjustments to Qualified Education Expenses
Allocation between interest and principal, Allocating Payments Between Interest and Principal
Claiming the deduction, Claiming the Deduction
Eligible educational institution, Eligible educational institution.
Eligible student, Eligible student.
Figuring the deduction, Figuring the Deduction, Which Worksheet To Use
Include as interest, Include as Interest
Income level, effect on amount of deduction, Effect of the Amount of Your Income on the Amount of Your Deduction
Loan repayment assistance, Don't Include as Interest
Modified adjusted gross income (MAGI), Modified adjusted gross income (MAGI)., Which Worksheet To Use
Table 4-2, Table 4-2. Effect of MAGI on Student Loan Interest Deduction
Not included as interest, Don't Include as Interest
Phaseout, Phaseout., Effect of the Amount of Your Income on the Amount of Your Deduction
Qualified education expenses, Qualified Education Expenses
Qualified employer plans, Qualified employer plan.
Qualified student loans, Qualified Student Loan, Qualified employer plan.
Reasonable period of time, Reasonable period of time.
Related persons, Related person.
Student loan interest, defined, Student Loan Interest Defined, When Must Interest Be Paid?
Third party interest payments, Interest paid by others.
When interest must be paid, When Must Interest Be Paid?
Worksheet 4-1, Worksheet 4-1. Student Loan Interest Deduction Worksheet
Student loan repayment assistance, Student Loan Repayment Assistance
Surviving spouse
Coverdell ESA transfer to, Exception for Transfer to Surviving Spouse or Family Member

T

Tables and figures
American opportunity credit
Eligible student requirements (Figure 2-2),
Overview (Table 2-1),
Qualifying to claim (Figure 2-1),
Comparison of education tax benefits (Appendix B),
Coverdell ESAs
Contributions to (Table 7-2), Contribution Limits
Distributions (Table 7-3), Distributions
Overview (Table 6-1), Coverdell Education Savings Account (ESA)
Education credits
Overview of American opportunity credit (Table 2-1),
Overview of lifetime learning credit (Table 3-1), Table 3-1. Overview of the Lifetime Learning Credit for 2016
Lifetime learning credit
Overview (Table 3-1), Table 3-1. Overview of the Lifetime Learning Credit for 2016
Qualifying to claim (Figure 3-1),
Scholarships and fellowship grants, taxability of (Table 1-1), Tax-Free Scholarships and Fellowship Grants
Student loan interest deduction
MAGI, effect of (Table 4-2), Table 4-2. Effect of MAGI on Student Loan Interest Deduction
Overview (Table 4-1), Table 4-1. Student Loan Interest Deduction at a Glance
Summary chart of differences between education tax benefits (Appendix B),
Tuition and fees deduction
MAGI, effect of (Table 6-2), Table 6-2. Effect of MAGI on Maximum Tuition and Fees Deduction
Overview (Table 6-1), Table 6-1. Tuition and Fees Deduction at a Glance
Work-related education, qualifying (Figure 112-1),
Tax help, How To Get Tax Help
Tax-free educational assistance
American opportunity credit, Tax-free educational assistance.
Coverdell ESA, Adjusted qualified education expenses.
Early distributions from IRAs, Figuring the Amount Not Subject to the 10% Tax
Education savings bond program, Adjusted qualified education expenses.
Lifetime learning credit, Tax-free educational assistance.
Qualified tuition program (QTP), Adjusted qualified education expenses.
Tuition and fees deduction, Tax-free educational assistance.
Work-related education, Tax-free educational assistance.
Taxable scholarships and fellowship grants, Taxable Scholarships and Fellowship Grants
Teachers, Requirements for Teachers, Teaching and Related Duties
Temporary-basis student, transportation expenses of, Temporary basis.
Title IV need-based education grants, Pell Grants and Other Title IV Need-Based Education Grants
Transfers
Coverdell ESA, Rollovers
Qualified tuition program (QTP), Rollovers and Other Transfers, Changing the Designated Beneficiary
Transportation expenses
Work-related education, Transportation Expenses, Using your car.
Travel expenses
50% limit on meals, 50% limit on meals.
Not deductible as form of education, Travel as Education
Work-related education, Travel Expenses
TTY/TDD information, How To Get Tax Help
Tuition and fees deduction, Tuition and Fees Deduction, Illustrated Example
Academic period, Academic period.
Adjustments to qualified education expenses, Adjustments to Qualified Education Expenses
Can you claim the deduction, Can You Claim the Deduction?
Claiming dependent's expenses, Who Can Claim a Dependent's Expenses?
Claiming the deduction, Claiming the Deduction
Double benefit not allowed, No Double Benefit Allowed
Eligible educational institution, Eligible educational institution.
Eligible student, Who Is an Eligible Student?
Expenses not qualifying for, Expenses That Don't Qualify
Expenses qualifying for, What Expenses Qualify?, Adjustments to Qualified Education Expenses
Figuring the deduction, Figuring the Deduction, MAGI when using Form 1040.
Income level, effect on amount of deduction, Effect of the Amount of Your Income on the Amount of Your Deduction
Loan used to pay tuition and fees, Paid with borrowed funds.
Modified adjusted gross income (MAGI), Modified adjusted gross income (MAGI).
Table 6-2, Table 6-2. Effect of MAGI on Maximum Tuition and Fees Deduction
Worksheet 6-1, Worksheet 6-1. MAGI for the Tuition and Fees Deduction
Overview (Table 6-1), Table 6-1. Tuition and Fees Deduction at a Glance
Qualified education expenses, What Expenses Qualify?, Adjustments to Qualified Education Expenses
Qualifying for deduction, Can You Claim the Deduction?
Tax benefit of, What is the tax benefit of the tuition and fees deduction?
Tax-free educational assistance, Tax-free educational assistance.
Tuition reduction
American opportunity credit, Tuition reduction.
Lifetime learning credit, Tuition reduction.
Qualified, Qualified Tuition Reduction, How To Report
Tuition and fees deduction, Tuition reduction.

U

U.S. savings bonds, Qualified U.S. savings bonds.
Unclaimed reimbursement
Work-related education, Unclaimed reimbursement.

V

Veterans' benefits, Veterans' Benefits

W

Withholding, Analyzing your tax withholding.
Work-related education (see Business deduction for work-related education)
Working condition fringe benefit, Working condition fringe benefit.
Worksheets
Coverdell ESA
Contribution limit (Worksheet 6-2), Figuring the limit.
MAGI, calculation of (Worksheet 6-1), Worksheet 7-1. MAGI for a Coverdell ESA
Taxable distributions and basis (Worksheet 6-3), Worksheet 7-3. Coverdell ESA—Taxable Distributions and Basis
Taxable distributions and basis (Worksheet 7-3), Worksheet 7-3. Coverdell ESA—Taxable Distributions and Basis
Lifetime learning credit MAGI calculation (Worksheet 3-1), MAGI when using Form 1040.
Scholarships and fellowship grants, taxable income (Worksheet 1-1), Worksheet 1-1.
Student loan interest deduction (Worksheet 4-1), Worksheet 4-1. Student Loan Interest Deduction Worksheet
Tuition and fees deduction, MAGI calculation (Worksheet 6-1), Worksheet 6-1. MAGI for the Tuition and Fees Deduction