Publication 17: Your Federal Income Tax; Education Credits

This is archived information that pertains only to the 2003 Tax Year. If you
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Important Changes for 2003

Hope and lifetime learning credits. If you are married and filing a joint return, the amount of your Hope or lifetime learning credit for 2003 is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $83,000 and $103,000. You cannot claim a credit if your MAGI is $103,000 or more. This is an increase from the 2002 limits of $82,000 and $102,000. There was no change in the limits for any other filing status. For more information see Effect of the Amount of Your Income on the Amount of Your Credit, later.

Lifetime learning credit. Beginning in 2003, the amount of qualified education expenses you can take into account in figuring your lifetime learning credit increases from $5,000 to $10,000. The credit will equal 20% of these qualified expenses, with the maximum credit being $2,000. See Lifetime Learning Credit, later, for more information.

Introduction

This chapter discusses two tax credits (referred to here as education credits) available to persons who pay expenses for higher education.

Can you claim both education credits this year.

For each student, you can elect for any year only one of the credits. For example, if you elect to take the Hope credit for a child on your 2003 tax return, you cannot, for that same child, also claim the lifetime learning credit for 2003.

If you are eligible to claim the Hope credit and you are also eligible to claim the lifetime learning credit for the same student in the same year, you can choose to claim either credit, but not both. For 2003, if the total qualified education expenses for a student are less than $7,500, it will generally be to your benefit to claim the Hope credit.

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

Differences between the Hope and lifetime learning credits.

There are several differences between the Hope credit and the lifetime learning credit. For example, you can claim the Hope credit based on the same student's expenses for no more than 2 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 the two credits are summarized in Table 37–1.

Table 37–1.

Comparison of Education Credits

Hope Credit		Lifetime Learning Credit
Up to $1,500 credit per eligible student		Up to $2,000 credit per return
Available ONLY until the first 2 years of postsecondary education are completed		Available for all years of postsecondary education and for courses to acquire or improve job skills
Available ONLY for 2 years per eligible student		Available for an unlimited number of years
Student must be pursuing an undergraduate degree or other recognized educational credential		Student does not need to be pursuing a degree or other recognized educational credential
Student must be enrolled at least half time for at least one academic period beginning during the year		Available for one or more courses
No felony drug conviction on student's record		Felony drug conviction rule does not apply

Useful Items - You may want to see:

The following rules will help you determine if you are eligible to claim an education credit on your tax return.

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

Qualified education expenses are defined later under What Expenses Qualify. 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.

Your filing status is married filing separately.
You are listed as a dependent in the Exemptions section on another person's tax return (such as your parents'). See Who Can Claim a Dependent's Expenses, later.
Your modified adjusted gross income is $51,000 or more ($103,000 or more in the case of a joint return). Modified adjusted gross income 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 2003 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens.

The education credits are 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, a credit is allowed for qualified education expenses paid in 2003 for an academic period beginning in 2003 or in the first 3 months of 2004.

For example, if you paid $1,500 in December 2003 for qualified tuition for the Spring 2004 semester beginning in January 2004, you may be able to use that $1,500 in figuring your 2003 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. In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period.

Paid with borrowed funds.

You can claim an education credit for qualified education expenses paid with the proceeds of a loan. You use the expenses to figure the education 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.

For purposes of an education 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 any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. 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.

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 is not 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 is not a qualified expense because the books and materials are not 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.

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

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

Tax-free educational assistance.

This includes:

Tax-free part of scholarships and fellowships (see chapter 13 and chapter 1 of Publication 970,
Pell grants (see chapter 1 of Publication 970),
Employer-provided educational assistance (see chapter 11 of Publication 970),
Veterans' educational assistance (see chapter 1 of Publication 970), and
Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

Amounts that do not reduce qualified education expenses.

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

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

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

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

Example 1.

In 2003, Jackie 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 may be used to pay any of Jackie's college expenses. Because she applied it toward her tuition, the scholarship is tax free. Therefore, for purposes of figuring an education credit (either Hope or lifetime learning), she must first use the $2,000 scholarship to reduce her tuition (her only qualified education expense). The student loan is not tax-free educational assistance, so she does not use it to reduce her qualified expenses. Jackie is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship) in 2003.

Example 2.

The facts are the same as in Example 1, except that Jackie uses the $2,000 scholarship to pay room and board, and, therefore, reports her entire scholarship as income on her tax return. In this case, the scholarship is allocated to expenses other than qualified education expenses. Jackie is treated as paying the entire $3,000 tuition with other funds and can figure her education credit on the entire $3,000.

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 do not 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 do not receive or do not 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 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.

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

For you to claim an education 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 line 6c, Form 1040 (or Form 1040A).

IF you...	THEN only...
claim an exemption on your tax return for a dependent who is an eligible student	you can claim a credit based on that dependent's expenses. The dependent cannot claim a credit.
do not 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 a credit. You cannot claim a 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 education credit.

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 an education credit. If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring an education 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 2003, Ms. Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. For purposes of claiming an education credit, Todd is treated as receiving the money as a gift from his grandmother and, in turn, paying his qualified education expenses himself.

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

If anyone, such as Todd's parents, claims an exemption for Todd on his or her tax return, whoever claims the exemption may be able to use the expenses to claim an education credit. If anyone else claims an exemption for Todd, Todd cannot claim an education 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 of Publication 970.

The amount of your education credit is phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $41,000 and $51,000 ($83,000 and $103,000 if you file a joint return). You cannot claim an education credit if your MAGI is $51,000 or more ($103,000 or more if you file a joint return).

MAGI when using Form 1040.

If you file Form 1040, your MAGI is the AGI on line 34 of that form, modified by adding back any:

Foreign earned income exclusion,
Foreign housing exclusion,
Exclusion of income for bona fide residents of American Samoa, and
Exclusion of income from Puerto Rico.

For more information about the phaseout of an education credit, see Form 8863.

You may be able to claim a Hope credit of up to $1,500 for qualified education expenses paid for each eligible student.

To claim the Hope 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.

Did not have expenses that were used to figure a Hope credit in any 2 earlier tax years.
Had not completed the first 2 years of postsecondary education (generally, the freshman and sophomore years of college) before 2003.
For at least one academic period beginning in 2003, was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.
Was free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of 2003.

Completion of first 2 years.

A student who was awarded 2 years of academic credit for postsecondary work completed before 2003 has completed the first 2 years of postsecondary education. This student generally would not be an eligible student for purposes of the Hope credit.

Example 1.

Marty graduated from high school in June 2002. In September, he enrolled in an undergraduate degree program at College U, and attended full time for both the 2002 Fall and 2003 Spring semesters. For the 2003 Fall semester, Marty was enrolled less than half-time. Because Marty was enrolled in an undergraduate degree program on at least a half-time basis for at least one academic period that began during 2002 and at least one academic period that began during 2003, he is an eligible student for tax years 2002 and 2003 (including the 2003 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 half-time basis for the 2002 Spring and Fall semesters, Sharon became a full-time student for the 2003 Spring semester. College V classified Sharon as a second-semester sophomore for the 2003 Spring semester and as a first-semester junior for the 2003 Fall semester. Because College V did not classify Sharon as having completed the first two years of postsecondary education as of the beginning of 2003, Sharon is an eligible student for tax year 2003. Therefore, the qualified education expenses paid for the 2003 Spring semester and the 2003 Fall semester are taken into account in calculating any Hope credit for 2003.

Example 3.

During the 2002 Fall semester, Luis was a high school student who took classes on a half-time basis at College X. Luis was not 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 Luis was not enrolled in a degree program at College X during 2002, Luis was not an eligible student for tax year 2002.

Example 4.

The facts are the same as in Example 3. During the 2003 Spring semester, Luis again attended College X but not as part of a degree program. Luis graduated from high school in June 2003. For the 2003 Fall semester, Luis enrolled as a full-time student in College X as part of a degree program, and College X awarded Luis credit for his prior coursework at College X. Because Luis was enrolled in a degree program at College X for the 2003 Fall term on at least a half-time basis, Luis is an eligible student for all of tax year 2003. Therefore, the qualified education expenses paid for classes taken at College X during both the 2003 Spring semester (during which Luis was not enrolled in a degree program) and the 2003 Fall semester are taken into account in computing any Hope credit.

Example 5.

Diana graduated from high school in June 2001. In January 2002, Diana enrolled in a one-year postsecondary certificate program on a full-time basis to obtain a certificate as a travel agent. Diana completed the program in December 2002, and was awarded a certificate. In January 2003, she enrolled in a one-year postsecondary certificate program on a full-time basis to obtain a certificate as a computer programmer. Diana is an eligible student for both tax years 2002 and 2003 because she meets the degree requirement, the work load requirement, and the year of study requirement for those years.

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 Department of Education under the Higher Education Act of 1965.

The maximum amount of Hope credit you can claim in 2003 is $1,500 times the number of eligible students. You can claim the full $1,500 for each eligible student for whom you paid at least $2,000 of qualified education expenses. However, the credit may be reduced based on your modified adjusted gross income (MAGI). See Effect of the Amount of Your Income on the Amount of Your Credit, earlier.

Example.

Jon and Karen Frost are married and file a joint tax return. For 2003, they claim an exemption for their dependent daughter on their tax return. Their MAGI is $70,000. Their daughter is in her sophomore (second) year of studies at the local university. Jon and Karen paid qualified education expenses of $4,300 in 2003.

Jon and Karen, their daughter, and the local university meet all of the requirements for the Hope credit. Jon and Karen can claim a $1,500 Hope credit in 2003. This is 100% of the first $1,000 of qualified education expenses, plus 50% of the next $1,000.

Form 1098–T.

To help you figure your Hope credit, you should receive Form 1098–T. Generally, an eligible educational institution (such as a college or university) must issue Form 1098–T (or acceptable substitute) to each enrolled student by February 2, 2004.

You claim the Hope credit by completing Parts I and III of Form 8863 and submitting it with your Form 1040 or 1040A. Enter the credit on Form 1040, line 47, or on Form 1040A, line 31. An illustrated example using Form 8863 appears at the end of this chapter.

You may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions.

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.

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 2003 is $2,000 (20% × $10,000). However, that amount may be reduced based on your modified adjusted gross income (MAGI). See Effect of the Amount of Your Income on the Amount of Your Credit, earlier.

Example.

Bruce and Toni are married and file a joint tax return. For 2003, 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 2003, Toni paid $6,000 of qualified education expenses for her Fall 2003 semester. Bruce and Toni can claim a $1,200 (20% × $6,000) lifetime learning credit on their 2003 joint tax return.

Form 1098–T.

To help you figure your lifetime learning credit, you should receive Form 1098–T. Generally, an eligible educational institution (such as a college or university) must issue Form 1098–T (or acceptable substitute) to each enrolled student by February 2, 2004.

You claim the lifetime learning credit by completing Parts II and III of Form 8863 and submitting it with your Form 1040 or 1040A. Enter the credit on Form 1040, line 47, or Form 1040A, line 31. An illustrated example using Form 8863 is shown at the end of this chapter.

If, after you file your 2003 tax return, you or someone else receives tax-free educational assistance for, or a refund of, an expense you used to figure an education credit on that return, you may have to repay all or part of the credit. You must refigure your education credit(s) for 2003 as if the assistance or refund was received in 2003. Subtract the amount of the refigured credit from the amount of the credit you claimed. The result is the amount you must repay. You add the repayment (recapture) to your tax liability for the year in which you receive the assistance or refund (see the instructions for your tax return for that year). Your original 2003 tax return does not change.

Dave and Valerie Jones are married and file a joint tax return. For 2003, they claim exemptions for their two dependent children on their tax return. Their modified adjusted gross income is $86,000. Their tax, before credits, is $9,701. Their son, Sean, will receive his bachelor's degree in psychology from the state college in May 2004. Their daughter, Corey, enrolled full-time at that same college in August 2002, to begin working on her bachelor's degree in physical education. In July 2003, Dave and Valerie paid $2,200 in tuition costs for each child for the Fall 2003 semester. In December 2003, they also paid $2,600 of tuition for each child for the Spring 2004 semester that begins in January.

Dave and Valerie, their children, and the college meet all of the requirements for the higher education credits. Because Sean is beyond the second (sophomore) year of his postsecondary education, his expenses do not qualify for the Hope credit. But, amounts paid for Sean's expenses in 2003 for academic periods beginning in 2003 and the first 3 months of 2004 qualify for the lifetime learning credit. Corey is in her first two (freshman and sophomore) years of postsecondary education, and expenses paid for her in 2003, for academic periods beginning in 2003 and January 2004, qualify for the Hope credit.

Dave and Valerie figure their tentative education credits for 2003, $2,460, as shown in the completed Form 8863. They cannot claim the full amount because their modified adjusted gross income is more than $83,000. They carry the amount from line 18 of Form 8863, $2,091, to line 47 of Form 1040, and they attach the Form 8863 to their return.