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. 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 you are allowed may be limited by the amount of your income and the amount of your tax.

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

If you are eligible to claim the lifetime learning credit and you are also eligible to claim the Hope 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 more than $7,500, it will generally be to your benefit to claim the lifetime learning 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.

There are several differences between these two credits. 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 3–1.

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.

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 payments sent directly to the educational institution as paid on the date the institution credits the student's account.

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.

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. For examples, see Related expenses in chapter 2 under Qualified Education Expenses.

This includes:

Qualified education expenses do not include expenses for which you, or someone else who paid qualified education expenses on behalf of a student, receive a refund. (For information on expenses paid by a dependent student or third party, see Who Can Claim a Dependent's Expenses, later in this chapter.)

If a refund of expenses paid in 2003 is received before you file your tax return for 2003, simply reduce the amount of the expenses paid by the amount of the refund received. If the refund is received after you file your 2003 tax return, see When Must the Credit Be Repaid (Recaptured), later.

You are considered to receive a refund of expenses when an eligible educational institution refunds loan proceeds to the lender on behalf of the borrower. Depending on when you are considered to receive the refund, follow the above instructions or see When Must the Credit Be Repaid (Recaptured), later.

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

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.

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

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 or is taken by the student to acquire or improve job skills, these expenses can qualify.

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 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.

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.

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, the dependent can include any expenses you paid when figuring the lifetime learning credit.

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.

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.

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 send Form 1098–T (or acceptable substitute) to each enrolled student by February 2, 2004. An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. In addition, your 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 you were enrolled at least half-time or were 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.

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

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

If you file Form 1040, your MAGI is the AGI on line 35 of that form, modified by adding back any:

You can use Worksheet 3–1 (on the next page) to figure your MAGI.

If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 8–14 of Form 8863. The same method is shown in the following example.