Publication 970 (2005), Tax Benefits for Education

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Pub. 970, Tax Benefits for Education

2005 Tax Year

Publication 970 - Additional Material

Table of Contents

Appendices

The following appendices include an illustrated example of how to use the Form 8863 when claiming both the Hope and lifetime learning (education) credits at the same time and a chart reflecting some of the major differences between the many tax benefits for education that are outlined in this publication.

Appendix A—An Illustrated Example of Education Credits including a filled-in Form 8863 showing how to claim both the Hope credit and lifetime learning credit for 2005.
Appendix B—A chart summarizing some of the differences between the education tax benefits discussed in this publication. It is intended only as a guide. Look in this publication for more complete information.

Appendix A. Illustrated Example of Education Credits

Dave and Valerie Jones are married and file a joint tax return. For 2005, they claim exemptions for their two dependent children on their tax return. Their modified adjusted gross income is $90,000. Their tax, before credits, is $9,956. Their son, Sean, will receive his bachelor's degree in psychology from the state college in May 2006. Their daughter, Corey, enrolled full-time at that same college in August 2004 to begin working on her bachelor's degree in physical education. In July 2005, Dave and Valerie paid $2,200 in tuition costs for each child for the Fall 2005 semester. In December 2005, they also paid $2,600 of tuition for each child for the Spring 2006 semester that begins in January.

Dave and Valerie, their children, and the college meet all of the require-ments for the education credits. Because Sean is beyond the second (sophomore) year of his postsec- ondary education, his expenses do not qualify for the Hope credit. But, amounts paid for Sean's expenses in 2005 for academic periods beginning in 2005 and the first 3 months of 2006 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 2005, for academic periods beginning in 2005 and January 2006, qualify for the Hope credit.

Dave and Valerie figure their tentative education credits for 2005, $2,460, as shown in the completed Form 8863. They cannot claim the full amount because their modified adjusted gross income is more than $87,000. They carry the amount from line 17 of Form 8863 to line 50 of Form 1040, and they attach the Form 8863 to their return.

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Form 8863 for Dave and Valerie Jones

Appendix B. Highlights of Tax Benefits for Education for Tax Year 2005

This chart highlights some differences among the benefits discussed in this publication. See the text for definitions and details.Do not rely on this chart alone.

Caution:You generally cannot claim more than one benefit for the same education expense.

	Scholarships, Fellowships, Grants, and Tuition Reductions	Hope Credit	Lifetime Learning Credit	Student Loan Interest Deduction	Tuition and Fees Deduction
What is your benefit?	Amounts received may not be taxable	Credits can reduce amount of tax you must pay		Can deduct interest paid	Can deduct expenses
What is the annual limit?	None	$1,500 credit per student	$2,000 credit per family	$2,500 deduction	$4,000 deduction
What expenses qualify besides tuition and required enrollment fees?	Course-related expenses such as fees, books, supplies, and equipment	None	None	Books Supplies Equipment Room & board Transportation Other necessary expenses	None
What education qualifies?	Undergrad. & graduate K-12	1st 2 years of undergraduate (postsecondary)	Undergrad. & graduate Courses to acquire or improve job skills	Undergrad. & graduate	Undergrad. & graduate
What are some of the other conditions that apply?	Must be in degree or vocational program Payment of tuition and required fees must be allowed under the grant	Can be claimed for only 2 tax years Must be enrolled at least half-time in degree program No felony drug conviction(s)		Must have been at least half-time student in degree program	Cannot claim both deduction & education credit for same student in same year
In what income range do benefits phase out?	No phaseout	$43,000 - $53,000 $87,000 - $107,000 for joint returns		$50,000 - $65,000 $105,000 - $135,000 for joint returns	$65,000 - $80,000 $130,000 - $160,000 for joint returns

(Continued)

Appendix B. <emphasis>(Continued)</emphasis>

This chart highlights some differences among the benefits discussed in this publication. See the text for definitions and details.Do not rely on this chart alone.

Caution:You generally cannot claim more than one benefit for the same education expense.

	Coverdell ESA ^*	Qualified Tuition Program (QTP) ^*	Educational Exception to Additional Tax on Early IRA Distributions ^*	Education Savings Bond Program ^*	Employer- Provided Educational Assistance ^*	Business Deduction for Work-Related Education
What is your benefit?	Earnings not taxed	Earnings not taxed	No 10% additional tax on early distribution	Interest not taxed	Employer benefits not taxed	Can deduct expenses
What is the annual limit?	$2,000 contribution per beneficiary	None	Amount of qualified education expenses	Amount of qualified education expenses	$5,250 exclusion	Amount of qualifying work-related education expenses
What expenses qualify besides tuition and required enrollment fees?	Books Supplies Equipment Expenses for special needs services Payments to QTP Higher education: Room & board if at least half-time student Elem/sec (K-12) education: Tutoring Room & board Uniforms Transportation Computer access Supplementary expenses	Books Supplies Equipment Room & board if at least half-time student Expenses for special needs services	Books Supplies Equipment Room & board if at least half-time student Expenses for special needs services	Payments to Coverdell ESA Payments to QTP	Books Supplies Equipment	Transportation Travel Other necessary expenses
What education qualifies?	Undergrad. & graduate K-12	Undergrad. & graduate	Undergrad. & graduate	Undergrad. & graduate	Undergrad. & graduate	Required by employer or law to keep present job, salary, status Maintain or improve job skills
What are some of the other conditions that apply?	Assets must be distributed at age 30 unless special needs beneficiary			Applies only to qualified series EE bonds issued after 1989 or series I bonds		Cannot be to meet minimum educational requirements of present trade/business Cannot qualify you for new trade/business
In what income range do benefits phase out?	$95,000 - $110,000 $190,000 - $220,000 for joint returns	No phaseout	No phaseout	$61,200 - $76,200 $91,850 - $121,850 for joint returns	No phaseout	May be subject to limit on itemized deductions

^* Any nontaxable distribution is limited to the amount that does not exceed qualified education expenses.

Glossary

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

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

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

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

Candidate for a degree: A student who meets either of the following requirements.

Attends a primary or secondary school or pursues a degree at a college or university, or
Attends an accredited educational institution that is authorized to provide:
1. A program that is acceptable for full credit toward a bachelor's or higher degree, or
2. A program of training to prepare students for gainful employment in a recognized occupation.

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

Eligible educational institution:

	•	Coverdell education savings account (ESA). Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Also included is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law.
	•	Education savings bond program. 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.
	•	Hope credit. See Education savings bond program in this category.
	•	IRA, early distributions from. See Education savings bond program in this category.
	•	Lifetime learning credit. See Education savings bond program in this category.
	•	Qualified tuition program (QTP). See Education savings bond program in this category.
	•	Scholarships and fellowships. An institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.
	•	Student loan, cancellation of. See Scholarships and fellowships in this category.

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

Eligible student:

•	Hope credit. A student who meets all of the following requirements for the tax year for which the credit is being determined.
	1.	Did not have expenses that were used to figure a Hope credit in any 2 earlier tax years.
	2.	Had not completed the first 2 years of postsecondary education.
	3.	For at least one academic period beginning in the tax year, was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.
	4.	Was free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year.
•	Lifetime learning credit. A student who is enrolled in one or more courses at an eligible educational institution.
•	Student loan interest deduction. A student who was enrolled at least half-time in a program leading to a postsecondary degree, certificate, or other recognized educational credential.

•

Tuition and fees deduction. A student who has either a high school diploma or a General Educational Development (GED) credential, and who is enrolled in one or more courses at an eligible educational institution.

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

Modified adjusted gross income (MAGI):

•	Coverdell education savings account (ESA). Adjusted gross income (AGI) as figured on the federal income tax return, modified by adding back any:
	1.	Foreign earned income exclusion,
	2.	Foreign housing exclusion,
	3.	Exclusion of income for bona fide residents of American Samoa, and
	4.	Exclusion of income from Puerto Rico.
•	Education savings bond program. Adjusted gross income (AGI) as figured on the federal income tax return without taking into account any savings bond interest exclusion and modified by adding back any:
	1.	Foreign earned income exclusion,
	2.	Foreign housing exclusion,
	3.	Foreign housing deduction,
	4.	Exclusion of income for bona fide residents of American Samoa,
	5.	Exclusion of income from Puerto Rico,
	6.	Exclusion for adoption benefits received under an employer's adoption assistance program,
	7.	Deduction for student loan interest, and
	8.	Deduction for tuition and fees.
•	Hope credit. See Coverdell education savings account (ESA) in this section.
•	Lifetime learning credit. See Coverdell education savings account (ESA) in this section.

•	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 or tuition and fees deduction, modified by adding back any:
	1.	Foreign earned income exclusion,
	2.	Foreign housing exclusion,
	3.	Foreign housing deduction,
	4.	Exclusion of income for bona fide residents of American Samoa, and
	5.	Exclusion of income from Puerto Rico.
•	Tuition and fees deduction. Adjusted gross income (AGI) as figured on the federal income tax return without taking into account any tuition and fees deduction, modified by adding back any:
	1.	Foreign earned income exclusion,
	2.	Foreign housing exclusion,
	3.	Foreign housing deduction,
	4.	Exclusion of income for bona fide residents of American Samoa, and
	5.	Exclusion of income from Puerto Rico.

Phaseout: The amount of credit or deduction allowed is reduced when modified adjusted gross income (MAGI) is within a certain range of incomes.

Qualified education expenses: See pertinent chapter for specific items.

	•	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. Also includes contribution to qualified tuition program (QTP).
	•	Education savings bond program. Tuition and fees required to enroll at or attend an eligible educational institution. Also includes contributions to a qualified tuition program (QTP) or

		Coverdell education savings account (ESA). Does not include expenses for room and board. Does not include expenses for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program.
	•	Hope credit. Tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Student-activity fees and expenses for course-related books, supplies, and equipment are included only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance. Does not include expenses for room and board. Does not include expenses for courses involving sports, games, or hobbies (including noncredit courses) that are not part of the student's postsecondary degree program.
	•	IRA, early distributions from. Tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution, plus certain limited costs of room and board for students who are enrolled at least half time. Also includes expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance.
	•	Lifetime learning credit. Same as for Hope credit, except that courses may be taken either as part of a postsecondary degree program or taken by the student to acquire or improve job skills.
	•	Qualified tuition program (QTP). Tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution, plus certain limited costs of room and board for students who are enrolled at least half time.
	•	Scholarships and fellowships. Expenses for tuition and fees required to enroll at or attend an eligible educational institution, and course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. Course- related items must be required of all students in the course of instruction.
	•	Student loan interest deduction. Total costs of attending an eligible educational institution, including graduate school (however, limitations may apply to the cost of room and board allowed).
	•	Tuition and fees deduction. See Hope credit in this category.

Recapture: To include as income on your return an amount allowed as a credit or deduction in a prior year.

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

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

Tax Publications for Individual Taxpayers See How To Get Tax Help for a variety of ways to get publications, including by computer, phone, and mail.

General Guides
1	Your Rights as a Taxpayer
17	Your Federal Income Tax (For Individuals)
334	Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ
509	Tax Calendars for 2006
553	Highlights of 2005 Tax Changes
910	Guide to Free Tax Services
Specialized Publication
3	Armed Forces' Tax Guide
54	Tax Guide for United States Citizens and Residents Aliens Abroa
225	Farmer's Tax Guide
463	Travel, Entertainment, Gift, and Car Expenses
501	Exemptions, Standard Deduction, and Filing Information
502	Medical and Dental Expenses
503	Child and Dependent Care Expenses
504	Divorced or Separated Individuals
505	Tax Withholding and Estimated Tax
508	Tax Benefits for Work-Related Education
514	Foreign Tax Credit for Individuals
516	United States Government Civilian Employees Stationed Abroad
517	Social Security and Other Information for Members of the Clergy and Religious Workers
519	United States Tax Guide for Aliens
520	Scholarships and Fellowships
521	Moving Expenses
523	Selling Your Home
524	Credit for the Elderly or the Disabled
525	Taxable and Nontaxable Income
526	Charitable Contributions
527	Residential Rental Property
529	Miscellaneous Deductions
530	Tax Information for First-Time Homeowners
531	Reporting Tip Income
534	Depreciating Property Placed in Service Before 1987
536	Net Operating Losses for Individuals, Estates, and Trusts
537	Installment Sales
541	Partnerships
544	Sales and Other Dispositions of Assets
547	Casualties, Disasters, and Thefts
550	Investment Income and Expenses
551	Basis of Assets
552	Recordkeeping for Individuals
554	Older Americans' Tax Guide
555	Community Property
556	Examination of Returns, Appeal Rights, and Claims for Refund
559	Survivors, Executors, and Administrators
561	Determining the Value of Donated Property
564	Mutual Fund Distributions
570	Tax Guide for Individuals With Income From United States Possessions
571	Tax-Sheltered Annuity Plans (403(b) Plans)
575	Pension and Annuity Income
584	Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property)
587	Business Use of Your Home (Including Use by Day-care Providers)
590	Individual Retirement Arrangements
593	Tax Highlights for United States Citizens and Residents Going Abroad
594	The Internal Revenue Service Collection Process
596	Earned Income Credit
721	Tax Guide to United States Civil Service Retirement Benefits
901	United States Tax Treaties
907	Tax Highlights for Persons with Disabilities
908	Bankruptcy Tax Guide
915	Social Security and Equivalent Railroad Retirement Benefits
919	How Do I Adjust My Tax Withholding?
925	Passive Activity and At-Risk Rules
926	Household Employer's Tax Guide
929	Tax Rules for Children and Dependents
936	Home Mortgage Interest Deduction
946	How To Depreciate Property
947	Practice Before the Internal Revenue Service and Power of Attorney
950	Introduction to Estate and Gift Taxes
967	Internal Revenue Service Will Figure Your Tax
969	Medical Savings Accounts
970	Tax Benefits for Education
971	Innocent Spouse Relief
972	Child Tax Credit (For Individuals Sent Here From the Form 1040 or 1040A Instructions)
1542	Per Diem Rates
1544	Reporting Cash Payments of Over $10,000
1546	The Taxpayer Advocate Service of the Internal Revenue Service
Spanish Language Publications
1SP	Derechos del Contribuyente
579SP	Cómo Preparar la Declaración de Impuesto Federal
594SP	Qué es lo que Debemos Saber sobre el Proceso de Cobro del IRS
596SP	Crédito por Ingreso del Trabajo
850	English-Spanish Glossary of Words and Phrases Used in Publications Issued by the Internal Revenue Service
1544SP	Informe de Pagos en Efectivo en Exceso de $10,000 (Recibidos en una Ocupación o Negocio)

Commonly Used Tax Forms See How To Get Tax Help for a variety of ways to get forms, including by computer, phone, and mail.

Form Number and Form Title
1040	United States Individual Income Tax Return
Schedule A & B	Itemized Deductions & Interest and Ordinary Dividends
Schedule C	Profit or Loss From Business
Schedule C-EZ	Net Profit From Business
Schedule D	Capital Gains and Losses
Schedule D-1	Continuation Sheet for Schedule D
Schedule E	Supplemental Income and Loss
Schedule EIC	Earned Income Credit
Schedule F	Profit or Loss From Farming
Schedule H	Household Employment Taxes
Schedule J	Income Averaging For Farmers and Fishermen
Schedule R	Credit for the Elderly or the Disabled
Schedule SE	Self-Employment Tax
1040A	United States Individual Income Tax Return
Schedule 1	Interest and Ordinary Dividends for Form 1040A Filers
Schedule 2	Child and Dependent Care Expenses for Form 1040A Filers
Schedule 3	Credit for the Elderly or the Disabled for Form 1040A Filers
1040EZ	Income Tax Return for Single and Joint Filers With No Dependents
1040-ES	Estimated Tax for Individuals
Form Number and Form Title
1040X	Amended United States Individual Income Tax Return
2106	Employee Business Expenses
2106-EZ	Unreimbursed Employee Business Expenses
2210	Underpayment of Estimated Tax by Individuals, Estates, and Trusts
2441	Child and Dependent Care Expenses
2848	Power of Attorney and Declaration of Representative
3903	Moving Expenses
4562	Depreciation and Amortization
4868	Application for Automatic Extension of Time To File United States Individual Income Tax Return
4952	Investment Interest Expense Deduction
5329	Additional Taxes on Qualified Plans (including Individual Retirement Arrangements) and Other Tax-Favored Accounts
6251	Alternative Minimum Tax--Individuals
8283	Non-cash Charitable Contributions
8582	Passive Activity Loss Limitations
8606	Nondeductible Individual Retirement Arrangements
8812	Additional Child Tax Credit
8822	Change of Address
8829	Expenses for Business Use of Your Home
8863	Education Credits
9465	Installment Agreement Request

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