| Publication 17, Your Federal Income Tax |
2006 Tax Year |
This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
Income limits increased. Beginning in 2006, the amount of your Hope or lifetime learning credit is gradually reduced (phased out) if your modified
adjusted gross income
(MAGI) is between $45,000 and $55,000 ($90,000 and $110,000 if you file a joint return). You cannot claim a credit if your
MAGI is $55,000 or more
($110,000 or more if you file a joint return). This is an increase from the 2005 limits of $43,000 and $53,000 ($87,000 and
$107,000 if filing a joint
return). For more information, see Effect of the Amount of Your Income on the Amount of Your Credit, later.
Katrina Emergency Tax Relief Act of 2005. This Act provides tax relief for persons affected by Hurricane Katrina. Under the Act, you may be able to claim an education
credit. See
Publication 4492.
This chapter discusses two tax credits (referred to here as education credits) available to persons who pay expenses for higher
education. They
are:
The chapter will do the following.
-
Give you general information that applies to both of the credits.
-
Give you specific information about each of the credits.
-
Help you choose which of the credits to claim.
-
Show you how to figure the credit you choose.
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 2006
tax return, you cannot, for that same child, also claim the lifetime learning credit for 2006.
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 2006, 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.
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Table 35-1.Comparison of Education Credits |
| Hope Credit |
Lifetime Learning Credit |
|
Up to $1,650 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 education 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
|
Differences between the Hope and lifetime learning credits.
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 35-1, above.
At the time this publication went to print, Congress was considering legislation that would reinstate the tuition and fees
deduction. If this
deduction is reinstated, you may be able to take a deduction for your education expenses instead of a credit. Choose the one
that will give you the
lower tax. To find out if this legislation was enacted, and for more details, go to
www.irs.gov, click on More Forms and
Publications , and then on What´s Hot in forms and publications , or see Publication 553, Highlights of 2006 Tax Changes.
Useful Items - You may want to see:
Information for Both the Hope and Lifetime Learning Credits
Several rules are common to both education credits. These are discussed below.
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.
-
You pay qualified education expenses of higher education.
-
You pay the education expenses for an eligible student.
-
The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.
Note.
Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent,
are considered paid by
you.
“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.
You may find Figure 35-A, on the next page, helpful in determining if you can claim an education credit on your tax return.
Figure 35-A. Can You Claim an Education Credit for 2006? Summary: This flowchart is used to determine if you qualify to claim an education credit for 2005.Start. This is the start of the flowchart.Decision (1). Did *you pay qualified education expenses in 2005 for an eligible student?
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IF YES continue to Decision (2)
|
|
IF NO continue to Process (a)
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Decision (2). Did the academic period for which you paid qualified education expenses begin in 2005 or the first 3 months of 2006?
|
IF YES continue to Decision (3)
|
|
IF NO continue to Process (a)
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Decision (3). Is the eligible student you, your spouse (if married filing jointly), or your dependent for whom you claim an exemption on
your tax
return?
|
IF YES continue to Decision (4)
|
|
IF NO continue to Process (a)
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Decision (4). Are you listed as a dependent on another person's tax return?
|
IF YES continue to Process (a)
|
|
IF NO continue to Decision (5)
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Decision (5). Is your filing status married filing separately?
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IF YES continue to Process (a)
|
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IF NO continue to Decision (6)
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Decision (6). Were you (or your spouse) a nonresident alien for any part of 2005 who did not elect to be treated as a resident alien for
tax
purposes?
|
IF YES continue to Process (a)
|
|
IF NO continue to Decision (7)
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Decision (7). Is your modified adjusted gross income (MAGI) less than $53,000 ($107,000 if married filing jointly)?
|
IF YES continue to Decision (8)
|
|
IF NO continue to Process (a)
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Decision (8). Do you have a tax liability (Form 1040, line 46 minus lines 47, 48, and 49) (Form 1040A, line 28 minus lines 29 and 30)?
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IF YES continue to Decision (9)
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|
IF NO continue to Process (a)
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Decision (9). Did you claim a lifetime learning credit or a tuition and fees deduction for the same student?
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IF YES continue to Process (a)
|
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IF NO continue to Decision (10)
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Decision (10). Did you use the same expenses to claim a deduction or credit, or to figure the tax-free portion of a Coverdell ESA or QTP
distribution?
|
IF YES continue to Process (a)
|
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IF NO continue to Decision (11)
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Decision (11). Were the same expenses paid with tax-free scholarship, fellowship, grant, or employer-provided educational assistance?
|
IF YES continue to Process (a)
|
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IF NO continue to Decision (12)
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Decision (12). Did you, or someone else who paid these expenses on behalf of a student, receive a refund of all the expenses?
|
IF YES continue to Process (a)
|
|
IF NO continue to Process (b)
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Process (a). You cannot claim an education credit for 2005.
Process (b). You can claim an education credit for 2005.
|
*Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent,
are considered
paid by you.
|
End. This is the end of the flowchart.
Who Cannot Claim a Credit
You cannot claim an education credit for 2006 if any of the following apply.
-
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 MAGI is $55,000 or more ($110,000 or more in the case of a joint return). MAGI 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 2006 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.
At the time this publication went to print, Congress was considering legislation that would reinstate the tuition and fees
deduction. If this
deduction is reinstated, you cannot take both an education credit and a deduction for your education expenses for 2006. Choose
the one that will give
you the lower tax. To find out if this legislation was enacted, and for more details, go to
www.irs.gov, click on More Forms and
Publications , and then on What´s Hot in forms and publications , or see Publication 553, Highlights of 2006 Tax Changes.
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 2006 for an academic period beginning
in 2006 or in the
first 3 months of 2007.
For example, if you paid $1,500 in December 2006 for qualified tuition for the Spring 2007 semester beginning in January 2007,
you may be able to
use that $1,500 in figuring your 2006 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.
Student withdraws from class(es).
You can claim an education credit for qualified education expenses not refunded when a student withdraws.
Qualified Education Expenses
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.
Certain educational institutions located outside the United States also participate in the U.S. Department of Education's
Federal Student Aid (FSA)
programs.
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.
No Double Benefit Allowed
You cannot do any of the following.
-
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 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, later.
At the time this publication went to print, Congress was considering legislation that would reinstate the tuition and fees
deduction. If this
deduction is reinstated, you cannot take both an education credit and a deduction for your education expenses for 2006. Choose
the one that will give
you the lower tax. To find out if this legislation was enacted, and for more details, go to
www.irs.gov, click on More Forms and
Publications , and then on What´s Hot in forms and publications , or see Publication 553, Highlights of 2006 Tax Changes.
Adjustments to Qualified Education Expenses
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 parts of scholarships and fellowships (see chapter 12 of this publication and chapter 1 of Publication 970),
-
Pell grants (see chapter 1 of Publication 970),
-
Employer-provided educational assistance (see chapter 10 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.
Refunds.
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 more
information, see Refunds in chapters 2 and 3 of Publication 970.
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.
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).
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.
Expenses That Do Not Qualify
Qualified education expenses do not include amounts paid for:
-
Insurance,
-
Medical expenses (including student health fees),
-
Room and board,
-
Transportation, or
-
Similar personal, living, or family expenses.
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.
Who Can Claim a Dependent's Expenses
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 Form 1040 (or Form 1040A), line 6c.
|
IF you...
|
THEN only...
|
|
claim an exemption on your tax return for a dependent who is an eligible student
|
you can claim an education 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 an education 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 2006, 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 2006 tax 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 2006 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.
Effect of the Amount of Your Income on the Amount of Your Credit
The amount of your education credit is phased out (gradually reduced) if your MAGI is between $45,000 and $55,000 ($90,000
and $110,000 if you file
a joint return). You cannot claim an education credit if your MAGI is $55,000 or more ($110,000 or more if you file a joint
return).
Modified adjusted gross income (MAGI).
For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return.
MAGI when using Form 1040A.
If you file Form 1040A, your MAGI is the AGI on line 22 of that form.
MAGI when using Form 1040.
If you file Form 1040, your MAGI is the AGI on line 38 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.
Phaseout.
If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit
using lines 7-13 of Form
8863.
When Must the Credit Be Repaid (Recaptured)
If, after you file your 2006 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 2006 as if
the assistance or refund was received in 2006. 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 2006 tax return does not change.
Information for Only the Hope Credit
You may be able to claim a Hope credit of up to $1,650 for qualified education expenses paid for each eligible student.
Who Is an 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.
-
The student did not have expenses that were used to figure a Hope credit in any 2 earlier tax years.
-
The student had not completed the first 2 years of postsecondary education (generally, the freshman and sophomore years of
college) before
2006.
-
For at least one academic period beginning in 2006, the student was enrolled at least half-time in a program leading to a
degree,
certificate, or other recognized educational credential.
-
The student was free of any federal or state felony conviction for possessing or distributing a controlled substance as of
the end of
2006.
Completion of first 2 years.
A student who was awarded 2 years of academic credit for postsecondary work completed before 2006 has completed the
first 2 years of postsecondary
education. This student generally would not be an eligible student for purposes of the Hope credit.
Exception.
Any academic credit awarded solely on the basis of the student's performance on proficiency examinations is disregarded
in determining whether the
student has completed 2 years of postsecondary education.
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.
Example 1.
Marty graduated from high school in June 2005. In September, he enrolled in an undergraduate degree program at College U,
and attended full time
for both the 2005 Fall and 2006 Spring semesters. For the 2006 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 2005 and at
least one academic period
that began during 2006, he is an eligible student for tax years 2005 and 2006 (including the 2006 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 2005 Spring and Fall semesters, Sharon became a full-time student
for the 2006
Spring semester. College V classified Sharon as a second-semester sophomore for the 2006 Spring semester and as a first-semester
junior for the 2006
Fall semester. Because College V did not classify Sharon as having completed the first two years of postsecondary education
as of the beginning of
2006, Sharon is an eligible student for tax year 2006. Therefore, the qualified education expenses paid for the 2006 Spring
semester and the 2006 Fall
semester are taken into account in calculating any Hope credit for 2006.
Example 3.
During the 2005 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 2005, Luis was not an eligible student for tax year 2005.
Example 4.
The facts are the same as in Example 3. During the 2006 Spring semester, Luis again attended College X but not as part of a degree
program. Luis graduated from high school in June 2006. For the 2006 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 2006 Fall term on at least a half-time basis, Luis is an eligible student for all of tax year 2006. Therefore, the
qualified education
expenses paid for classes taken at College X during both the 2006 Spring semester (during which Luis was not enrolled in a
degree program) and the
2006 Fall semester are taken into account in computing any Hope credit.
Example 5.
Diana graduated from high school in June 2004. In January 2005, 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 2005, and was awarded a certificate. In
January 2006, 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 2005 and 2006 because she meets the degree requirement, the work load requirement, and the year of study
requirement for those
years.
The amount of the Hope credit (per eligible student) is the sum of:
-
100% of the first $1,100 of qualified education expenses you paid for the eligible student, and
-
50% of the next $1,100 of qualified education expenses you paid for that student.
The maximum amount of Hope credit you can claim in 2006 is $1,650 times the number of eligible students. You can claim the
full $1,650 for each
eligible student for whom you paid at least $2,200 of qualified education expenses. However, the credit may be reduced based
on your 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 2006, 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 2006.
Jon and Karen, their daughter, and the local university meet all of the requirements for the Hope credit. Jon and Karen can
claim a $1,650 Hope
credit in 2006. This is 100% of the first $1,100 of qualified education expenses, plus 50% of the next $1,100.
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 send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2007.
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 50, or on Form 1040A, line 31. An
illustrated example using Form 8863 appears at the end of this chapter.
Information for Only the Lifetime Learning Credit
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.
Who Is an Eligible Student
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 2006 is $2,000 (20% × $10,000). However, that amount may be reduced
based on your
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 2006, 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 2006,
Toni paid $6,000 of qualified education expenses for her Fall 2006 semester. Bruce and Toni can claim a $1,200 (20% × $6,000)
lifetime learning
credit on their 2006 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 send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2007.
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 50, or Form 1040A, line 31. An
illustrated example using Form 8863 is shown at the end of this chapter.
Dave and Valerie Jones are married and file a joint tax return. For 2006, they claim exemptions for their two dependent children
on their tax
return. Their modified adjusted gross income is $93,000. Their tax, before credits, is $9,956. Their son, Sean, will receive
his bachelor's degree in
psychology from the state college in May 2007. Their daughter, Corey, enrolled full-time at that same college in August 2005,
to begin working on her
bachelor's degree in physical education. In July 2006, Dave and Valerie paid $2,200 in tuition costs for each child for the
Fall 2006 semester. In
December 2006, they also paid $2,600 of tuition for each child for the Spring 2007 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 2006 for
academic periods beginning in 2006 and the first 3 months of 2007 qualify for the lifetime learning credit. Corey is in her
first 2 (freshman and
sophomore) years of postsecondary education, and expenses paid for her in 2006, for academic periods beginning in 2006 and
January 2007, qualify for
the Hope credit.
Dave and Valerie figure their tentative education credits for 2006, $2,610, as shown in the
completed Form 8863. They cannot claim the full amount because their modified adjusted gross income is more than $90,000.
They carry the amount from
line 17 of Form 8863, $2,219, to line 50 of Form 1040, and they attach the Form 8863 to their return.
Form 8863 Education Credits (Hope and Lifetime Learning Credits) 2005. Summary: This is an example of Form 8863 (2005) as pertains to the description in the text. The line items completed are:
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“Name(s) shown on return” field contains Dave and Valerie Jones
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“Your social security number” field contains 987-00-6543
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Under
“Part I: Hope Credit”:
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“1a. Student's name (as shown on page 1 of your tax return:”
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“First name” field contains Corey
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“Last name” field contains Jones
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“1b. Student's social security number (as shown on page 1 of your tax return)” field contains 137-00-9642
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“1c. Qualified expenses (see instructions). Do not enter more than $2,200 for each student.” field contains 2,200
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“1d. Enter the smaller of the amount in column (c) or $1,100” field contains 1,100
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“1e. Add column (c) and column (d)” field contains 3,300
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“1f. Enter one-half of the amount in column (e)” field contains 1,650
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“2. Tentative Hope credit. Add the amounts on line 1, column (f). If you are taking the lifetime learning credit for another
student, go to
Part II; otherwise, go to Part III” field contains 1,650
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Under
“Part II: Lifetime Learning Credit”:
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“3a. Student's name (as shown on page 1 of your tax return)”
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“First name” field contains Sean
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“Last name” field contains Jones
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“3b. Student's social security number (as shown on page 1 of your tax return)” field contains 246-00-9731
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“3c. Qualified expenses (see instructions)” field contains 4,800
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“4. Add the amounts on line 3, column (c), and enter the total” field contains 4,800
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“5a. Enter the smaller of line 4 or $10,000” field contains 4,800
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“5c. Subtract line 5b from line 5” field contains 4,800
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“6b. Multiply line 5c by 20% (.20)” field contains 960
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“6c. Tentative lifetime learning credit. Add lines 6a and 6b and go to Part III” field contains 960
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Under
“Part III: Allowable Education Credits”:
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“7. Tentative education credits. Add lines 2and 6” field contains 2,610
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“8. Enter: $110,000 if married filing jointly; $55,000 if single, head of household, or qualifying widow(er)” field contains
110,000
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“9. Enter the amount from Form 1040, line 38, or Form 1040A, line 22 (Footnote: See Publication 970 for the amount to enter
if you are filing
Form 2555, 2555-EZ, or 4563 or you are excluding income from Puerto Rico)” field contains 93,000
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“10. Subtract line 9 from line 8. If zero or less, stop; you cannot take any education credits” field contains 17,000
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“11. Enter: $20,000 if married filing jointly; $10,000 if single, head of household, or qualifying widow(er)” field contains
20,000
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“12. If line 10 is equal to or more than line 11, enter the amount from line 7on line 13 and go to line 14. If line 10 is less
than line 11,
divide line 10 by line 11. Enter the result as a decimal (rounded to at least three places)” field contains .850
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“13. Multiply line 7 by line 12” field contains 2,219
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“14. Enter the amount from Form 1040, line 46, or Form 1040A, line 28” field contains 9,956
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“15. Enter the total, if any, of your credits from Form 1040, lines 47 through 49, or Form 1040A, lines 29 and 30” field contains
0
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“16. Subtract line 15 from line 14. If zero or less, stop; you cannot take any education credits” field contains 9,956
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“17. Education credits. Enter the smaller of line 13 or line 16 here and on Form 1040, line 50, or Form 1040A, line 31” field contains
2,219
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