Qualified Education Expenses(p227)

Generally, qualified education expenses are amounts paid in 2012 for tuition and fees required for the student's enrollment or attendance at an eligible educational institution. It does not matter whether the expenses were paid in cash, by check, by credit or debit card, or with borrowed funds.

For course-related books, supplies, and equipment, only certain expenses qualify.

• American opportunity credit: Qualified education expenses include amounts spent on books, supplies, and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance.
• Lifetime learning credit: Qualified education expenses include amounts for books, supplies, and equipment only if required to be paid to the institution as a condition of enrollment or attendance.

Qualified education expenses include nonacademic fees, such as student activity fees, athletic fees, or other expenses unrelated to the academic course of instruction, only if the fee must be paid to the institution as a condition of enrollment or attendance. However, fees for personal expenses (described below) are never qualified education expenses.

Qualified education expenses for either credit do not include amounts paid for:

• Personal expenses. This means room and board, insurance, medical expenses (including student health fees), transportation, and other similar personal, living, or family expenses.
• Any course or other education involving sports, games, or hobbies, or any noncredit course, unless such course or other education is part of the student's degree program or (for the lifetime learning credit only) helps the student acquire or improve job skills.

You should receive Form 1098–T, Tuition Statement, from the institution reporting either payments received in 2012 (box 1) or amounts billed in 2012 (box 2). However, the amount in box 1 or 2 of Form 1098–T may be different from the amount you paid (or are treated as having paid). In completing Form 8863, use only the amounts you actually paid (plus any amounts you are treated as having paid) in 2012 (reduced, as necessary, as described in Adjustments to Qualified Education Expenses, later.

Qualified education expenses paid on behalf of the student by someone other than the student (such as a relative) are treated as paid by the student. Qualified education expenses paid (or treated as paid) by a student who is claimed as a dependent on your tax return are treated as paid by you.

If you or the student takes a deduction for higher education expenses, such as on Schedule A or C (Form 1040), you cannot use those expenses in your qualified education expenses when figuring your education credits.

Qualified education expenses paid in 2012 for an academic period that begins in the first 3 months of 2013 can be used in figuring an education credit for 2012 only. See Academic period, earlier. For example, if you pay $2,000 in December 2012 for qualified tuition for the 2013 winter quarter that begins in January 2013, you can use that $2,000 in figuring an education credit for 2012 only (if you meet all the other requirements).

You can claim an education credit for qualified education expenses paid with the proceeds of a loan. Use the expenses to figure the 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.

You can claim an education credit for qualified education expenses not refunded when a student withdraws.

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 more than one education 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 an education credit based on qualified education expenses paid with educational assistance, such as a tax-free scholarship, grant, or employer-provided educational assistance. See Adjustments to Qualified Education Expenses, next.

For each student, reduce the qualified education expenses paid in 2012 by or on behalf of that student under the following rules. The result is the amount of adjusted qualified education expenses for each student.

For tax-free educational assistance received in 2012, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. See Academic period, earlier.

Tax-free educational assistance includes:

Generally, any scholarship or fellowship is treated as tax-free educational assistance. However, a scholarship or fellowship is not treated as tax-free educational assistance to the extent the student includes it in gross income (if the student is required to file a tax return) for the year the scholarship or fellowship is received and either:

• The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. 970, chapter 1; or

• The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. 970, chapter 1.

Some tax-free educational assistance received after 2012 may be treated as a refund of qualified education expenses paid in 2012. This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2012 for qualified education expenses paid on behalf of a student in 2012 (or attributable to enrollment at an eligible educational institution during 2012).

If this tax-free educational assistance is received after 2012 but before you file your 2012 income tax return, see Refunds received after 2012 but before your income tax return is filed, later. If this tax-free educational assistance is received after 2012 and after you file your 2012 income tax return, see Refunds received after 2012 and after your income tax return is filed, later.

A refund of qualified education expenses may reduce qualified education expenses for the tax year or may require you to repay (recapture) the credit that you claimed in an earlier year. Some tax-free educational assistance received after 2012 may be treated as a refund. See Tax-free educational assistance, earlier

For each student, figure the adjusted qualified education expenses for 2012 by adding all the qualified education expenses paid in 2012 and subtracting any refunds of those expenses received from the eligible educational institution during 2012.

If anyone receives a refund after 2012 of qualified education expenses paid on behalf of a student in 2012 and the refund is received before you file your 2012 income tax return, reduce the amount of qualified education expenses for 2012 by the amount of the refund.

If anyone receives a refund after 2012 of qualified education expenses paid on behalf of a student in 2012 and the refund is received after you file your 2012 income tax return, you may need to repay some or all of the credit that you claimed. See Credit recapture, next.

If any tax-free educational assistance for the qualified education expenses paid in 2012, or any refund of your qualified education expenses paid in 2012, is received after you file your 2012 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2012 by reducing the expenses by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2012 and figure the amount by which your 2012 tax liability would have increased if you had claimed the refigured credit(s). Include that amount as an additional tax for the year the refund or tax-free assistance was received.

You paid $8,000 tuition and fees in December 2012 for your child's Spring semester beginning in January 2013. You filed your 2012 tax return on February 2, 2013, and claimed a lifetime learning credit of $1,600 ($8,000 qualified education expense paid x .20). You claimed no other tax credits. After you filed your return, your child withdrew from two courses and you received a refund of $1,400. You must refigure your 2012 lifetime learning credit using $6,600 ($8,000 qualified education expenses − $1,400 refund). The refigured credit is $1,320 and your tax liability increased by $280. You must include the difference of $280 ($1,600 credit originally claimed − $1,320 refigured credit) as additional tax on your 2013 income tax return. See the instructions for your 2013 income tax return to determine where to include this tax.

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, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses, as defined in Chapter 1 of Pub. 970.
• The use of the money is not restricted.

For examples, see chapter 2 in Pub. 970.