What Expenses Qualify?

The lifetime learning credit is based on qualified tuition and related 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 tuition and related expenses paid in 2001 for an academic period beginning in 2001 or in the first 3 months of 2002. See Prepaid expenses, later.

Qualified tuition and related expenses. In general, qualified tuition and related expenses are tuition and fees required for enrollment or attendance at an eligible educational institution (defined earlier).

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

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.

Prepaid expenses. If you paid qualified tuition and related expenses in 2001 for an academic period that begins in the first three months of 2002, you can use the prepaid amount in figuring your 2001 lifetime learning credit.

For example, if you paid $1,500 in December 2001 for qualified tuition for the winter 2002 semester beginning in January 2002, you can use that $1,500 in figuring your 2001 credit.

Payments with borrowed funds. You can claim a lifetime learning credit for qualified tuition and related 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.

Adjustments to Qualified Expenses

If you pay higher education expenses with certain tax-free funds, you cannot claim a credit for those amounts. You must reduce the qualified expenses by the amount of any tax-free educational assistance you received. Tax-free educational assistance could include:

• Scholarships,
• Pell grants,
• Employer-provided educational assistance,
• Veterans' educational assistance, and
• Any other nontaxable payments (other than gifts, bequests, or inheritances) received for education expenses.

Do not reduce the qualified expenses by amounts paid with the student's:

• Earnings,
• Loans,
• Gifts,
• Inheritances, and
• Personal savings.

Also, do not reduce the qualified expenses by any scholarship reported as income on the student's return or any scholarship which, by its terms, cannot be applied to qualified tuition and related expenses.

Expenses That Do Not Qualify

Qualified tuition and related expenses do not include the cost of:

• Insurance,
• Medical expenses (including student health fees),
• Room and board,
• Transportation, or
• Similar personal, living, or family expenses.

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

Qualified tuition and related 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, in the case of the lifetime learning credit, is taken by the student to acquire or improve job skills, these expenses can qualify.

No double benefit allowed. You cannot:

• Deduct higher education expenses on your income tax return and also claim a lifetime learning credit based on those same expenses,
• Claim a Hope credit and a lifetime learning credit based on the same qualified education expenses, or
• Claim a credit based on expenses paid with tax-free scholarship, grant, or employer-provided educational assistance. See Adjustments to Qualified Expenses, earlier.

Refunds. Qualified tuition and related expenses do not include expenses for which you receive a refund. If you paid expenses in 2001, and you received a refund of those expenses before you file your tax return for 2001, simply reduce the amount of the expenses paid by the amount of the refund received. If you receive the refund after you file your 2001 tax return, see When Must the Credit Be Repaid, later.

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