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 2000 for an academic period beginning in 2000 (but 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 2000 for an academic period that begins in the first three months of 2001, you can use the prepaid amount in figuring your 2000 lifetime learning credit.

For example, if you paid $1,500 in December 2000 for qualified tuition for the winter 2001 semester beginning in January 2001, you can use that $1,500 in figuring your 2000 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 educational 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.

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