Table of Contents
For 2012, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. They are the American opportunity credit (this chapter) and the lifetime learning credit ( chapter 3 ).
This chapter explains:
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Who can claim the American opportunity credit,
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What expenses qualify for the credit,
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Who is an eligible student,
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Who can claim a dependent's expenses,
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How to figure the credit,
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How to claim the credit, and
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When the credit must be repaid.
If you claim the American opportunity credit for any student, you can choose between using that student's adjusted qualified education expenses for the American opportunity credit or the lifetime learning credit. If you have the choice, the American opportunity credit will always be greater than the lifetime learning credit.
Table 2-1.Overview of the American Opportunity Credit
Maximum credit | Up to $2,500 credit per eligible student |
Limit on modified adjusted gross income (MAGI) | $180,000 if married filing jointly; $90,000 if single, head of household, or qualifying widow(er) |
Refundable or nonrefundable | 40% of credit may be refundable; the rest is nonrefundable |
Number of years of postsecondary education | Available ONLY if the student had not completed the first 4 years of postsecondary education before 2012 |
Number of tax years credit available | Available ONLY for 4 tax years per eligible student (including any year(s) Hope credit was claimed) |
Type of program required | Student must be pursuing a program leading to a degree or other recognized education credential |
Number of courses | Student must be enrolled at least half time for at least one academic period that begins during the tax year |
Felony drug conviction | As of the end of 2012, the student had not been convicted of a felony for possessing or distributing a controlled substance |
Qualified expenses | Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance |
Payments for academic periods | Payments made in 2012 for academic periods beginning in 2012 or beginning in the first 3 months of 2013 |
The following rules will help you determine if you are eligible to claim the American opportunity credit on your tax return.
Generally, you can claim the American opportunity credit if all three of the following requirements are met.
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You pay qualified education expenses of higher education.
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You pay the education expenses for an eligible student.
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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 Qualified Education Expenses . “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 2-1, Can You Claim the American Opportunity Credit for 2012 , later, helpful in determining if you can claim an American opportunity credit on your tax return.
You cannot claim the American opportunity credit for 2012 if any of the following apply.
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Your filing status is married filing separately.
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You are listed as a dependent on another person's tax return (such as your parents'). See Who Can Claim a Dependent's Expenses , later.
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Your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 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 .
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You (or your spouse) were a nonresident alien for any part of 2012 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.
The American opportunity credit is based on adjusted qualified education 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 adjusted qualified education expenses paid in 2012 for an academic period beginning in 2012 or beginning in the first three months of 2013.
For example, if you paid $1,500 in December 2012 for qualified tuition for the spring 2013 semester beginning January 2013, you can use that $1,500 in figuring your 2012 credit.
For purposes of the American opportunity credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.
Example 1.
Jefferson 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 is needed for his course of study, Jefferson's equipment rental fee is a qualified expense.
Example 2.
Grace and William, 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. William bought his books from a friend; Grace bought hers at College W's bookstore. Both are qualified education expenses for the American opportunity credit.
Example 3.
When Kelly 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 Kelly's enrollment and attendance at College X and is a qualified expense.
You cannot do any of the following.
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Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an American opportunity credit based on those same expenses.
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Claim an American opportunity credit in the same year that you are claiming a tuition and fees deduction for the same student.
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Claim an American opportunity credit for any student and use any of that student's expenses in figuring your lifetime learning credit.
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Figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP) using the same expenses you used to figure the American opportunity credit. See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program.
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Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. See Adjustments to Qualified Education Expenses, next.
For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. The result is the amount of adjusted qualified education expenses for each student.
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The tax-free parts of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions),
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Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions).
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Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ),
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Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and
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Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.
Generally, any scholarship or fellowship is treated as tax free. However, a scholarship or fellowship is not treated as tax free 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 of the following is true.
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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 chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions.
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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 chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions.
You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. For examples, see Coordination with Pell grants and other scholarships, later.
If you pay qualified education expenses in 2013 for an academic period that begins in the first 3 months of 2013 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2013 instead of reducing your expenses for 2012.
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Payment for services, such as wages,
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A loan,
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A gift,
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An inheritance, or
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A withdrawal from the student's personal savings.
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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 Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions.
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The use of the money is not restricted.
Example 1.
Joan 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 can be used to pay any of Joan's college expenses.
University X applies the $2,000 scholarship against Joan's $8,000 total bill, and Joan pays the $6,000 balance of her bill from University X with a combination of her student loan and her savings. Joan does not report any portion of the scholarship as income on her tax return.
In figuring the amount of either education credit (American opportunity or lifetime learning), Joan must reduce her qualified education expenses by the amount of the scholarship ($2,000) because she excluded the entire scholarship from her income. The student loan is not tax-free educational assistance, so she does not need to reduce her qualified expenses by any part of the loan proceeds. Joan 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 Joan reports her entire scholarship as income on her tax return. Because Joan reported the entire $2,000 scholarship in her income, she does not need to reduce her qualified education expenses. Joan is treated as having paid $3,000 in qualified education expenses.
Example 1—No scholarship.
Bill Pass, age 28 and unmarried, enrolled full-time in 2012 as a first-year student at a local college to earn a degree in law enforcement. This was his first year of postsecondary education. During 2012, he paid $5,600 for his qualified education expenses and $4,400 for his room and board for the fall 2012 semester. He and the college meet all the requirements for the American opportunity credit. Bill's AGI and his MAGI, for purposes of figuring his credit, are $30,000. Bill takes the standard deduction of $5,950 and personal exemption of $3,800, reducing his AGI to taxable income of $20,250. His income tax liability, before credits, is $2,599 and Bill claims no credits other than the American opportunity credit. He figures his American opportunity credit based on qualified education expenses of $4,000, which results in a credit of $2,500 and tax after credits of $99.
Example 2—Scholarship excluded from income.
The facts are the same as in Example 1—No scholarship, except that Bill was awarded a $5,600 scholarship. Under the terms of his scholarship, it may be used to pay any educational expenses, including room and board. If Bill excludes the scholarship from income, he will be deemed (for purposes of computing his education credit) to have used the scholarship to pay for tuition, required fees, and course materials. His adjusted qualified education expenses will be zero and he will not have an education credit. Therefore, Bill's tax after credits would be $2,599.
Example 3—Scholarship partially included in income.
The facts are the same as in Example 2—Scholarship excluded from income. If, unlike Example 2, Bill includes $4,000 of the scholarship in income, he will be deemed to have used that amount to pay for room and board. The remaining $1,600 of the $5,600 scholarship will reduce his qualified education expenses and his adjusted qualified education expenses will be $4,000. Bill's AGI will increase to $34,000, his taxable income will increase to $24,250, and his tax before credits will increase to $3,199. Based on his adjusted qualified education expenses of $4,000, Bill would be able to claim an American opportunity tax credit of $2,500 and his tax after credits would be $699.
Qualified education expenses do not include amounts paid for:
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Insurance,
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Medical expenses (including student health fees),
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Room and board,
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Transportation, or
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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.
To claim the American opportunity 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.
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The student did not have expenses that were used to figure an American opportunity credit in any 4 earlier tax years. This includes any tax year(s) in which you claimed the Hope credit for the same student.
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The student had not completed the first 4 years of postsecondary education (generally, the freshman, sophomore, junior, and senior years of college) before 2012.
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For at least one academic period beginning in 2012, the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.
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The student has not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of 2012.
These requirements are also shown in Figure 2-2, Who is an Eligible Student for the American Opportunity Credit , later.
Example 1.
Mack graduated from high school in June 2011. In September, he enrolled in an undergraduate degree program at College U, and attended full-time for both the 2011 fall and 2012 spring semesters. For the 2012 fall semester, Mack was enrolled less than half-time. Because Mack was enrolled in an undergraduate degree program on at least a half-time basis for at least one academic period that began during 2011 and at least one academic period that began during 2012, he is an eligible student for tax years 2011 and 2012 (including the 2012 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 part-time basis for a few years, Shelly became a full-time student for the 2012 spring semester. College V classified Shelly as a second-semester senior (fourth year) for the 2012 spring semester and as a first-semester graduate student (fifth year) for the 2012 fall semester. Because College V did not classify Shelly as having completed the first 4 years of postsecondary education as of the beginning of 2012, Shelly is an eligible student for tax year 2012. Therefore, the qualified education expenses paid for the 2012 spring semester and the 2012 fall semester are taken into account in calculating the American opportunity credit for 2012.
Example 3.
During the 2011 fall semester, Larry was a high school student who took classes on a half-time basis at College X. Larry 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 Larry was not enrolled in a degree program at College X during 2011, Larry was not an eligible student for tax year 2011.
Example 4.
The facts are the same as in Example 3. During the 2012 spring semester, Larry again attended College X but not as part of a degree program. Larry graduated from high school in June 2012. For the 2012 fall semester, Larry enrolled as a full-time student in College X as part of a degree program, and College X awarded Larry credit for his prior coursework at College X. Because Larry was enrolled in a degree program at College X for the 2012 fall term on at least a half-time basis, Larry is an eligible student for all of tax year 2012. Therefore, the qualified education expenses paid for classes taken at College X during both the 2012 spring semester (during which Larry was not enrolled in a degree program) and the 2012 fall semester are taken into account in computing any American opportunity credit.
Example 5.
Dee graduated from high school in June 2011. In January 2012, Dee enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a travel agent. Dee completed the program in December 2012, and was awarded a certificate. In January 2013, she enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a computer programmer. Dee is an eligible student for both tax years 2012 and 2013 because she meets the degree requirement, the work load requirement, and the year of study requirement for those years.
If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim an American opportunity credit for your dependent's expenses for that year.
For you to claim an American opportunity 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 the American opportunity credit based on that dependent's expenses. The dependent cannot claim the 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 the American opportunity credit. You cannot claim the credit based on this dependent's expenses. |
Example.
In 2012, Ms. Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. For purposes of claiming an American opportunity credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself.
Unless an exemption for Todd is claimed on someone else's 2012 tax return, only Todd can use the payment to claim an American opportunity credit.
If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2012 tax return, whoever claims the exemption may be able to use the expenses to claim an American opportunity credit. If anyone else claims an exemption for Todd, Todd cannot claim an American opportunity credit.
The amount of the American opportunity credit (per eligible student) is the sum of:
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100% of the first $2,000 of qualified education expenses you paid for the eligible student, and
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25% of the next $2,000 of qualified education expenses you paid for that student.
The maximum amount of American opportunity credit you can claim in 2012 is $2,500 multiplied by the number of eligible students. You can claim the full $2,500 for each eligible student for whom you paid at least $4,000 of adjusted 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 , later.
Example.
Jack and Kay Ford are married and file a joint tax return. For 2012, they claim an exemption for their dependent daughter on their tax return. Their MAGI is $70,000. Their daughter is in her junior (third) year of studies at the local university. Jack and Kay paid qualified education expenses of $4,300 in 2012.
Jack and Kay, their daughter, and the local university meet all of the requirements for the American opportunity credit. Jack and Kay can claim a $2,500 American opportunity credit in 2012. This is 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000.
The amount of your American opportunity credit is phased out (gradually reduced) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). You cannot claim an American opportunity credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return).
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Foreign earned income exclusion,
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Foreign housing exclusion,
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Foreign housing deduction,
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Exclusion of income by bona fide residents of American Samoa, and
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Exclusion of income by bona fide residents of Puerto Rico.
Worksheet 2-1.MAGI for the American Opportunity Credit
1. | Enter your adjusted gross income (Form 1040, line 38) |
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2. | Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18) | 2. | |||||
3. | Enter your foreign housing deduction (Form 2555, line 50) | 3. | |||||
4. | Enter the amount of income from Puerto Rico you are excluding | 4. | |||||
5. | Enter the amount of income from American Samoa you are excluding (Form 4563, line 15) | 5. | |||||
6. | Add the amounts on lines 2, 3, 4, and 5 |
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7. | Add the amounts on lines 1 and 6. This is your modified adjusted gross income. Enter here and on Form 8863, line 3 |
7. |
Example.
You are filing a joint return and your MAGI is $165,000. In 2012, you paid $5,000 of qualified education expenses.
You figure a tentative American opportunity credit of $2,500 (100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000 of qualified education expenses).
Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($2,500) by a fraction. The numerator of the fraction is $180,000 (the upper limit for those filing a joint return) minus your MAGI. The denominator is $20,000, the range of incomes for the phaseout ($160,000 to $180,000). The result is the amount of your phased out (reduced) American opportunity credit ($1,875).
Forty percent of the American opportunity credit is refundable for most taxpayers. However, if you were under age 24 at the end of 2012 and the conditions listed below apply to you, you cannot claim any part of the American opportunity credit as a refundable credit on your tax return. Instead, your allowed credit (figured on Form 8863, Part II) will be used to reduce your tax as a nonrefundable credit only.
You do not qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you.
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You were:
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Under age 18 at the end of 2012, or
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Age 18 at the end of 2012 and your earned income (defined below) was less than one-half of your support (defined below), or
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Over age 18 and under age 24 at the end of 2012 and a full-time student (defined below) and your earned income (defined below) was less than one-half of your support (defined below).
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At least one of your parents was alive at the end of 2012.
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You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2012.
You claim the American opportunity credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. Enter the nonrefundable part of the credit on Form 1040, line 49, or on Form 1040A, line 31. Enter the refundable part of the credit on Form 1040, line 66, or on Form 1040A, line 40. A filled-in Form 8863 is shown at the end of this publication.
Note.
In Appendix A. at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return.
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