P 970

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Department of the Treasury Contents

Internal Revenue Service What’s New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Reminders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Publication 970 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Cat. No. 25221V
1. Scholarships, Fellowships, Grants, and
Tax Benefits
Tuition Reductions . . . . . . . . . . . . . . . . . . . . . . 5
Scholarships and Fellowships . . . . . . . . . . . . . . . . . 5
Other Types of Educational Assistance . . . . . . . . . . 7
for Education 2. Hope Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Can You Claim the Credit . . . . . . . . . . . . . . . . . . . 10
What Expenses Qualify . . . . . . . . . . . . . . . . . . . . 10
Who Is an Eligible Student . . . . . . . . . . . . . . . . . . 13
For use in preparing Who Can Claim a Dependent’s Expenses . . . . . . . 15
Figuring the Credit . . . . . . . . . . . . . . . . . . . . . . . . 15
2008 Returns Claiming the Credit . . . . . . . . . . . . . . . . . . . . . . . . 16
When Must the Credit Be Repaid
(Recaptured) . . . . . . . . . . . . . . . . . . . . . . . . 16
Illustrated Example . . . . . . . . . . . . . . . . . . . . . . . . 17
3. Lifetime Learning Credit . . . . . . . . . . . . . . . . . . . 19
Can You Claim the Credit . . . . . . . . . . . . . . . . . . . 20
Who Can Claim a Dependent’s Expenses . . . . . . . 23
Figuring the Credit . . . . . . . . . . . . . . . . . . . . . . . . 24
Claiming the Credit . . . . . . . . . . . . . . . . . . . . . . . . 25
When Must the Credit Be Repaid
(Recaptured) . . . . . . . . . . . . . . . . . . . . . . . . 25
4. Student Loan Interest Deduction . . . . . . . . . . . . 28
Student Loan Interest Defined . . . . . . . . . . . . . . . 28
Can You Claim the Deduction . . . . . . . . . . . . . . . . 31
Figuring the Deduction . . . . . . . . . . . . . . . . . . . . . 31
Claiming the Deduction . . . . . . . . . . . . . . . . . . . . 32
5. Student Loan Cancellations and
Repayment Assistance . . . . . . . . . . . . . . . . . . 34
Student Loan Cancellation . . . . . . . . . . . . . . . . . . 34
Student Loan Repayment Assistance . . . . . . . . . . 34
6. Tuition and Fees Deduction . . . . . . . . . . . . . . . . 36
Can You Claim the Deduction . . . . . . . . . . . . . . . . 36
Who Can Claim a Dependent’s Expenses . . . . . . . 39
Figuring the Deduction . . . . . . . . . . . . . . . . . . . . . 40
Claiming the Deduction . . . . . . . . . . . . . . . . . . . . 40
When Must the Deduction Be Repaid
(Recaptured) . . . . . . . . . . . . . . . . . . . . . . . . 40
7. Coverdell Education Savings Account
(ESA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
What Is a Coverdell ESA . . . . . . . . . . . . . . . . . . . 43
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Rollovers and Other Transfers . . . . . . . . . . . . . . . 47
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
8. Qualified Tuition Program (QTP) . . . . . . . . . . . . 54
Get forms and other information What Is a Qualified Tuition Program . . . . . . . . . . . 54
faster and easier by: How Much Can You Contribute . . . . . . . . . . . . . . . 54
Are Distributions Taxable . . . . . . . . . . . . . . . . . . . 55
Internet www.irs.gov Rollovers and Other Transfers . . . . . . . . . . . . . . . 57
Jan 06, 2009

9. Education Exception to Additional Tax maximum credit of $4,000 allowed on your return.
on Early IRA Distributions . . . . . . . . . . . . . . . . 58 See chapter 3 for more information.
Who Is Eligible . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Figuring the Amount Not Subject to the 10% • Definition of qualified expenses expanded. The
Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 definition of qualified education expenses for the ed-
Reporting Early Distributions . . . . . . . . . . . . . . . . 59 ucation credits and the tuition and fees deduction is
expanded for students in Midwestern disaster areas.
10. Education Savings Bond Program . . . . . . . . . . 60 See chapters 2, 3, and 6 for more information.
Who Can Cash In Bonds Tax Free . . . . . . . . . . . . 60
Figuring the Tax-Free Amount . . . . . . . . . . . . . . . 61
Claiming the Exclusion . . . . . . . . . . . . . . . . . . . . . 61 Student loan interest deduction. If you are married and
Illustrated Example . . . . . . . . . . . . . . . . . . . . . . . . 61 file a joint return, for 2008 the amount of your student loan
interest deduction is gradually reduced (phased out) if your
11. Employer-Provided Educational modified adjusted gross income (MAGI) is between
Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 $115,000 and $145,000. You cannot take a deduction if
12. Business Deduction for Work-Related your MAGI is $145,000 or more. This is an increase from
Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 the 2007 limits of $110,000 and $140,000. For more infor-
Qualifying Work-Related Education . . . . . . . . . . . 64 mation, see chapter 4.
What Expenses Can Be Deducted . . . . . . . . . . . . 67
How To Treat Reimbursements . . . . . . . . . . . . . . 69 Contribution of military death gratuity to Coverdell
Deducting Business Expenses . . . . . . . . . . . . . . . 70 ESA. Families of soldiers killed in the line of duty may
Recordkeeping . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 contribute, subject to certain limitations, up to 100 percent
Illustrated Example . . . . . . . . . . . . . . . . . . . . . . . . 71 of survivor benefits to education savings accounts. Under
certain conditions this applies retroactively to deaths from
13. How To Get Tax Help . . . . . . . . . . . . . . . . . . . . 73 injuries occurring on or after October 7, 2001. For more
Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 information, see chapter 7.
Appendix A—Illustrated Example of Education savings bond program. For 2008, the
Education Credits . . . . . . . . . . . . . . . . . . . . . 75
Appendix B—Highlights of Education Tax amount of your interest exclusion will be phased out (grad-
Benefits for Tax Year 2008 . . . . . . . . . . . . . . 77 ually reduced) if your filing status is married filing jointly or
qualifying widow(er) and your modified adjusted gross
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 income (MAGI) is between $100,650 and $130,650. You
cannot take the deduction if your MAGI is $130,650 or
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 more. For 2007, the limits that applied to you were $98,400
and $128,400.
For all other filing statuses, your interest exclusion for
What’s New 2008 is phased out if your MAGI is between $67,100 and
$82,100. You cannot take the deduction if your MAGI is
Hope and lifetime learning credits. For 2008, the $82,100 or more. For 2007, the limits that applied to you
amount of your Hope or lifetime learning credit is gradually were $65,600 and $80,600. For more information, see
reduced (phased out) if your modified adjusted gross in- chapter 10.
come (MAGI) is between $48,000 and $58,000 ($96,000
and $116,000 if you file a joint return). You cannot claim a Business deduction for work-related education. For
credit if your MAGI is $58,000 or more ($116,000 or more if 2008:
you file a joint return). This is an increase from the 2007
limits of $47,000 and $57,000 ($94,000 and $114,000 if • If you drive your car to and from school and qualify
filing a joint return). For more information, see chapters 2 to deduct transportation expenses, the amount you
and 3. can deduct for miles driven from January 1, 2008,
For 2008, the maximum amount of the Hope credit has through June 30, 2008, is 501/2 cents per mile. The
increased to $1,800 ($3,600 for a student in a Midwestern amount you can deduct for miles driven from July 1,
disaster area). This is an increase from the 2007 maximum 2008, through December 31, 2008, is 581/2 cents per
amount of $1,650. For more information, see chapter 2. mile. This is up from 481/2 cents per mile in 2007.
See chapter 12 for more information.
Students in Midwestern disaster areas. The following • If your adjusted gross income for 2008 is more than
rules apply only to students attending an eligible educa- $159,950 ($79,975 if you are married filing sepa-
tional institution in the Midwestern disaster areas in the rately), your itemized deductions may be limited.
states of Arkansas, Illinois, Indiana, Iowa, Missouri, Ne- See chapter 12 and the instructions for line 29 of
braska, and Wisconsin. See Table 3-2 near the end of Schedule A (Form 1040).
chapter 3 for a list of counties.
• Hope credit increased. The Hope credit for stu-
dents in Midwestern disaster areas is 100% of the
first $2,400 of qualified education expenses and Reminders
50% of the next $2,400 of qualified education ex-
penses for a maximum credit of $3,600 per student. Estimated tax. If you have taxable income from any of
See chapter 2 for more information. your education benefits and the payer does not withhold
• Lifetime learning credit increased. The lifetime enough income tax, you may need to make estimated tax
learning credit rate for students in Midwestern disas- payments. For more information, see Publication 505, Tax
ter areas is 40% of qualified expenses paid, with a Withholding and Estimated Tax.
Page 2 Publication 970 (2008)

Photographs of missing children. The Internal Reve- When you figure your taxes, you may want to
nue Service is a proud partner with the National Center for TIP compare these tax benefits so you can choose
Missing and Exploited Children. Photographs of missing the method(s) that give you the lowest tax liability.
children selected by the Center may appear in this publica- If you qualify, you may find that a combination of credit(s)
tion on pages that would otherwise be blank. You can help and deduction(s) gives you the lowest tax.
bring these children home by looking at the photographs
and calling 1-800-THE-LOST (1-800-843-5678) if you rec- Analyzing your tax withholding. After you estimate your
ognize a child. education tax benefits for the year, you may be able to
reduce the amount of your federal income tax withholding.
Also, you may want to recheck your withholding during the
year if your personal or financial situation changes. See
Introduction Publication 919, How Do I Adjust My Tax Withholding, for
This publication explains tax benefits that may be available more information.
to you if you are saving for or paying education costs for Glossary. In this publication, wherever appropriate, we
yourself or, in many cases, another student who is a have tried to use the same or similar terminology when
member of your immediate family. Most benefits apply only referring to the basic components of each education bene-
to higher education. fit. Some of the terms used are:
What is in this publication. Chapter 1 explains the tax • Qualified education expenses,
treatment of various types of educational assistance, in- • Eligible educational institution, and
cluding scholarships, fellowships, and tuition reductions.
Two tax credits for which you may be eligible are ex-
• Modified adjusted gross income.
plained in chapters 2 and 3. These benefits, which reduce Even though the same term, such as qualified education
the amount of your income tax, are: expenses, is used to label a basic component of many of
• The Hope credit, and the education benefits, the same expenses are not neces-
sarily allowed for each benefit. For example, the cost of
• The lifetime learning credit. room and board is a qualified education expense for the
qualified tuition program, but not for the education savings
Ten other types of benefits are explained in chapters 4 bond program.
through 12. With these benefits, you may be able to: Many of the terms used in the publication are defined in
• Deduct student loan interest; the glossary near the end of the publication. The glossary
is not intended to be a substitute for reading the chapter on
• Receive tax-free treatment of a canceled student a particular education benefit, but it will give you an over-
loan; view of how certain terms are used in discussing the
• Receive tax-free student loan repayment assistance; different benefits.
• Deduct tuition and fees for education; Comments and suggestions. We welcome your com-
ments about this publication and your suggestions for
• Establish and contribute to a Coverdell education future editions.
savings account (ESA), which features tax-free earn-
You can write to us at the following address:
ings;
• Participate in a qualified tuition program (QTP), Internal Revenue Service
which features tax-free earnings;
Individual Forms and Publications Branch
• Take early distributions from any type of individual SE:W:CAR:MP:T:I
retirement arrangement (IRA) for education costs 1111 Constitution Ave. NW, IR-6526
without paying the 10% additional tax on early distri- Washington, DC 20224
butions;
We respond to many letters by telephone. Therefore, it
• Cash in savings bonds for education costs without would be helpful if you would include your daytime phone
having to pay tax on the interest;
number, including the area code, in your correspondence.
• Receive tax-free educational benefits from your em- You can email us at *[email protected]. (The asterisk
ployer; and must be included in the address.) Please put “Publications
• Take a business deduction for work-related educa- Comment” on the subject line. Although we cannot re-
tion. spond individually to each email, we do appreciate your
feedback and will consider your comments as we revise
our tax products.
Note. You generally cannot claim more than one of the Ordering forms and publications. Visit www.irs.gov/
benefits described in the lists above for the same qualifying formspubs to download forms and publications, call
education expense. 1-800-829-3676, or write to the address below and receive
Comparison table. Some of the features of most of a response within 10 days after your request is received.
these benefits are highlighted in Appendix B, beginning on
page 77 of this publication. This general comparison table Internal Revenue Service
may guide you in determining which benefits you may be 1201 N. Mitsubishi Motorway
eligible for and which chapters you may want to read. Bloomington, IL 61705-6613
Publication 970 (2008) Page 3

Tax questions. If you have a tax question, check the ❏ 1040EZ Income Tax Return for Single and Joint
information available on www.irs.gov or call Filers With No Dependents
1-800-829-1040. We cannot answer tax questions sent to
❏ 1040NR U.S. Nonresident Alien Income Tax Return
either of the above addresses.
❏ 1040NR-EZ U.S. Income Tax Return for Certain
Useful Items Nonresident Aliens With No Dependents
You may want to see: ❏ 2106 Employee Business Expenses
Publication ❏ 2106-EZ Unreimbursed Employee Business
Expenses
❏ 463 Travel, Entertainment, Gift, and Car
Expenses ❏ 5329 Additional Taxes on Qualified Plans (Including
IRAs) and Other Tax-Favored Accounts
❏ 525 Taxable and Nontaxable Income
❏ 8815 Exclusion of Interest From Series EE and I
❏ 550 Investment Income and Expenses U.S. Savings Bonds Issued After 1989
❏ 553 Highlights of 2008 Tax Changes ❏ 8863 Education Credits (Hope and Lifetime
❏ 590 Individual Retirement Arrangements (IRAs) Learning Credits)
❏ 4492-B Information for Affected Taxpayers in the ❏ 8917 Tuition and Fees Deduction
Midwestern Disaster Areas ❏ Schedule A (Form 1040) Itemized Deductions
Form (and Instructions) See chapter 13, How To Get Tax Help, for information
❏ 1040 U.S. Individual Income Tax Return about getting these publications and forms.
❏ 1040A U.S. Individual Income Tax Return

Table 1-1. Tax Treatment of Scholarship

and Fellowship Payments1
1. Do not rely on this table alone. Refer to the text for
complete details.
Scholarships, AND you are... THEN your payment is...
Fellowships, Grants,
IF you use Not a
the payment A degree degree
for... candidate candidate Tax free2 Taxable
and Tuition Tuition X X
Reductions Fees X
X
X3
X
X X
Reminder Books X
X
X3
X
Individual retirement arrangements (IRAs). You can Supplies X X3

set up and make contributions to an IRA if you receive X X
taxable compensation. Under this rule, a taxable scholar- Equipment X X3
ship or fellowship is compensation only if it is shown in box X X
1 of your Form W-2, Wage and Tax Statement. For more
Room X X
information about IRAs, see Publication 590.
X X
Board X X
Introduction X X
Travel X X
This chapter discusses the tax treatment of various types
of educational assistance you may receive if you are study- X X
ing, teaching, or researching in the United States. The 1 Does not include payments received for past, present, or future services.
2 Payments used for any expenses indicated in this column are tax free only if the
educational assistance can be for a primary or secondary terms of the scholarship or fellowship do not prohibit the expense.
school, a college or university, or a vocational school. 3 If required of all students in the course.
Included are discussions of:

• Scholarships, Tax-Free Scholarships and
• Fellowships, Fellowships
• Need-based education grants, such as a Pell Grant, A scholarship or fellowship is tax free only if:
and • You are a candidate for a degree at an eligible edu-
• Qualified tuition reductions. cational institution, and
Many types of educational assistance are tax free if they • You use the scholarship or fellowship to pay quali-
meet the requirements discussed here. fied education expenses.
Special rules apply to U.S. citizens and resident aliens
who have received scholarships or fellowships for study- Candidate for a degree. You are a candidate for a de-
ing, teaching, or researching abroad. For information gree if you:
about these rules, see Publication 54, Tax Guide for U.S. 1. Attend a primary or secondary school or are pursuing
Citizens and Resident Aliens Abroad. a degree at a college or university, or
2. Attend an accredited educational institution that is
authorized to provide:
Scholarships and Fellowships a. A program that is acceptable for full credit toward
A scholarship is generally an amount paid or allowed to, or a bachelor’s or higher degree, or
for the benefit of, a student at an educational institution to b. A program of training to prepare students for gain-
aid in the pursuit of studies. The student may be either an ful employment in a recognized occupation.
undergraduate or a graduate.
A fellowship is generally an amount paid for the benefit
of an individual to aid in the pursuit of study or research. Eligible educational institution. An eligible educational
institution is one that maintains a regular faculty and curric-
Table 1-1 provides an overview of the tax treatment of ulum and normally has a regularly enrolled body of stu-
amounts received as a scholarship or fellowship (other dents in attendance at the place where it carries on its
than amounts received as payment for services). Gener- educational activities.
ally, whether the amount is tax free or taxable depends on
the expense paid with the amount and whether you are a Qualified education expenses. For purposes of tax-free
degree candidate. scholarships and fellowships, these are expenses for:
Chapter 1 Scholarships, Fellowships, Grants, and Tuition Reductions Page 5

• Tuition and fees required to enroll at or attend an Athletic Scholarships

eligible educational institution, and
An athletic scholarship is tax free if it meets the require-
• Course-related expenses, such as fees, books, sup- ments discussed above.
plies, and equipment that are required for the
courses at the eligible educational institution. These
items must be required of all students in your course Taxable Scholarships and
of instruction. Fellowships
However, in order for these to be qualified education ex- If your scholarship or fellowship does not meet the require-
penses, the terms of the scholarship or fellowship cannot ments described earlier, it is taxable. The following
require that it be used for other purposes, such as room amounts received may be taxable.
and board, or specify that it cannot be used for tuition or
course-related expenses. • Amounts used to pay expenses that do not qualify.
Expenses that do not qualify. Qualified education ex- • Payments for services.
penses do not include the cost of: • Scholarship prizes.
• Room and board, Each type is discussed below.
• Travel,
Amounts used to pay expenses that do not qualify. A
• Research, scholarship amount you use to pay any expense that does
• Clerical help, or not qualify is taxable, even if the expense is a fee that you
must pay to the institution as a condition of enrollment or
• Equipment and other expenses that are not required attendance.
for enrollment in or attendance at an eligible educa-
tional institution. Payment for services. Generally, you must include in
income the part of any scholarship, fellowship, or tuition
This is true even if the fee must be paid to the institution as reduction that represents payment for past, present, or
a condition of enrollment or attendance. Scholarship or future teaching, research, or other services. This applies
fellowship amounts used to pay these costs are taxable. even if all candidates for a degree must perform the serv-
ices to receive the degree.
Worksheet 1-1. You can use Worksheet 1-1 to figure the
tax-free and taxable parts of your scholarship or fellowship. Exceptions. You do not have to include in income the
part of any scholarship or fellowship that represents pay-
ment for teaching, research, or other services if you re-
ceive the amount under:
Worksheet 1-1. Taxable Scholarship and Fellowship

Income Keep for Your Records
1. Enter your scholarship or fellowship income for 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.

• If you are a degree candidate at an eligible educational institution, go to line 2.
• If you are not a degree candidate at an eligible educational institution, stop here. The entire
amount is taxable. For information on how to report this amount on your tax return, see
Reporting Scholarships and Fellowships.
2. Enter the amount from line 1 that was for teaching, research, or any other services. (Do not include
amounts received for these items under the National Health Service Corps Scholarship Program or
the Armed Forces Health Professions Scholarship and Financial Assistance Program.) . . . . . . . . . . 2.
3. Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.
4. Enter the amount from line 3 that your scholarship or fellowship required you to use for other than
qualified education expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.
6. Enter the amount from line 5 that was used for qualified education expenses required for study at
an eligible educational institution. This amount is the tax-free part of your scholarship or fellowship
income* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.
8. Taxable part. Add lines 2, 4, and 7. See Reporting Scholarships and Fellowships for how to report
this amount on your tax return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.
* If you qualify for other education benefits (see chapters 2 through 12), you may have to reduce the amount of education expenses qualifying for a specific
benefit by the tax-free amount on this line.
Page 6 Chapter 1 Scholarships, Fellowships, Grants, and Tuition Reductions

• The National Health Service Corps Scholarship Pro- on Form W-2, enter “SCH” and the taxable amount in the
gram, or space to the left of line 7.
• The Armed Forces Health Professions Scholarship
and Financial Assistance Program, Form 1040. If you file Form 1040, report the taxable
amount on line 7. If the taxable amount was not reported
and you: on Form W-2, enter “SCH” and the taxable amount on the
• Are a candidate for a degree at an eligible educa- dotted line next to line 7.
tional institution, and Schedule SE (Form 1040). Include amounts you re-
• Use that part of the scholarship or fellowship to pay ceive under a scholarship as pay for your services as an
qualified education expenses. independent contractor in determining your net earnings
from self-employment. If your net earnings are $400 or
more, you will have to pay self-employment tax. Use
Example 1. You received a scholarship of $2,500. The
scholarship was not received under either of the excep- Schedule SE, Self-Employment Tax, to figure this tax.
tions mentioned above. As a condition for receiving the For more information on determining whether you are
scholarship, you must serve as a part-time teaching assis- an independent contractor or an employee, get Publication
tant. Of the $2,500 scholarship, $1,000 represents pay- 15-A, Employer’s Supplemental Tax Guide.
ment for teaching. The provider of your scholarship gives
you a Form W-2 showing $1,000 as income. You used all Form 1040NR. If you file Form 1040NR, report the taxable
the money for qualified education expenses. Assuming amount on line 12. You must generally report the amount
that all other conditions are met, $1,500 of your scholar- shown in Form(s) 1042-S, box 2. See the Instructions for
ship is tax free. The $1,000 you received for teaching is Form 1040NR for more information on reporting fellowship
taxable. and scholarship income on Form 1040NR.
Example 2. You are a candidate for a degree at a Form 1040NR-EZ. If you file Form 1040NR-EZ, report the
medical school. You receive a scholarship (not under ei- taxable amount on line 5. You must generally report the
ther of the exceptions mentioned above) for your medical amount shown in Form(s) 1042-S, box 2. See the Instruc-
education and training. The terms of your scholarship tions for Form 1040NR-EZ for more information on report-
require you to perform future services. A substantial pen- ing fellowship and scholarship income on Form
alty applies if you do not comply. The entire amount of your 1040NR-EZ.
grant is taxable as payment for services in the year it is
received.
Scholarship prizes. If you win a scholarship as a prize in Other Types of
a contest, the scholarship is fully taxable unless you meet
the requirements discussed earlier under Tax-Free Schol- Educational Assistance
arships and Fellowships.
The following discussions deal with common types of edu-
Reporting Scholarships and cational assistance other than scholarships and fellow-
ships.
Fellowships
Whether you must report your scholarship or fellowship Fulbright Grants
depends on whether you must file a return and whether
any part of your scholarship or fellowship is taxable. A Fulbright grant is generally treated as a scholarship or
If your only income is a completely tax-free scholarship fellowship in figuring how much of the grant is tax free.
or fellowship, you do not have to file a tax return and no Report only the taxable amount on your tax return. See
reporting is necessary. If all or part of your scholarship or Reporting Scholarships and Fellowships on this page.
fellowship is taxable and you are required to file a tax
return, report the taxable amount as explained below. You Pell Grants and Other Title IV
must report the taxable amount whether or not you re-
ceived a Form W-2. If you receive an incorrect Form W-2, Need-Based Education Grants
ask the payer for a corrected one. These need-based grants are treated as scholarships for
For information on whether you must file a return, see purposes of determining their tax treatment. They are tax
Publication 501, Exemptions, Standard Deduction, and free to the extent used for qualified education expenses
Filing Information, or your income tax form instructions.
during the period for which a grant is awarded. Report only
the taxable amount on your tax return. See Reporting
How To Report Scholarships and Fellowships on this page.
How you report any taxable scholarship or fellowship in-
come depends on which return you file.
Payment to Service Academy Cadets
Form 1040EZ. If you file Form 1040EZ, report the taxable An appointment to a United States military academy is not
amount on line 1. If the taxable amount was not reported a scholarship or fellowship. Payment you receive as a
on Form W-2, enter “SCH” and the taxable amount in the cadet or midshipman at an armed services academy is pay
space to the left of line 1. for personal services and will be reported to you in box 1 of
Form W-2. Include this pay in your income in the year you
Form 1040A. If you file Form 1040A, report the taxable receive it unless one of the exceptions, discussed earlier
amount on line 7. If the taxable amount was not reported under Payment for services, applies.
Chapter 1 Scholarships, Fellowships, Grants, and Tuition Reductions Page 7

Veterans’ Benefits Education Below the Graduate Level

Payments you receive for education, training, or subsis- If you receive a tuition reduction for education below the
tence under any law administered by the Department of graduate level (including primary, secondary, or high
Veterans Affairs (VA) are tax free. Do not include these school), it is a qualified tuition reduction, and therefore tax
payments as income on your federal tax return. free, only if your relationship to the educational institution
If you qualify for one or more of the education benefits providing the benefit is described below.
discussed in chapters 2 through 12, you may have to
reduce the amount of education expenses qualifying for a 1. You are an employee of the eligible educational insti-
specific benefit by part or all of your VA payments. This tution.
applies only to the part of your VA payments that is re- 2. You were an employee of the eligible educational
quired to be used for education expenses. institution, but you retired or left on disability.
3. You are a widow or widower of an individual who
Qualified Tuition Reduction died while an employee of the eligible educational
institution or who retired or left on disability.
If you are allowed to study tuition free or for a reduced rate
of tuition, you may not have to pay tax on this benefit. This 4. You are the dependent child or spouse of an individ-
is called a “tuition reduction.” You do not have to include a ual described in (1) through (3), above.
qualified tuition reduction in your income.
A tuition reduction is qualified only if you receive it from, Child of deceased parents. For purposes of the qualified
and use it at, an eligible educational institution. You do not tuition reduction, a child is a dependent child if the child is
have to use the tuition reduction at the eligible educational under age 25 and both parents have died.
institution from which you received it. In other words, if you Child of divorced parents. For purposes of the qualified
work for an eligible educational institution and the institu- tuition reduction, a dependent child of divorced parents is
tion arranges for you to take courses at another eligible treated as the dependent of both parents.
educational institution without paying any tuition, you may
not have to include the value of the free courses in your
income. Graduate Education
The rules for determining if a tuition reduction is quali-
fied, and therefore tax free, are different if the education A tuition reduction you receive for graduate education is
provided is below the graduate level or is graduate educa- qualified, and therefore tax free, if both of the following
tion. requirements are met.
You must include in your income any tuition reduction • It is provided by an eligible educational institution.
you receive that is payment for your services.
• You are a graduate student who performs teaching
Eligible educational institution. An eligible educational or research activities for the educational institution.
institution is one that maintains a regular faculty and curric-
ulum and normally has a regularly enrolled body of stu- You must include in income any other tuition reductions for
dents in attendance at the place where it carries on its graduate education that you receive.
educational activities.
Officers, owners, and highly compensated employees.
How To Report
Qualified tuition reductions apply to officers, owners, or Any tuition reduction that is taxable should be included as
highly compensated employees only if benefits are avail- wages in box 1 of your Form W-2. Report the amount from
able to employees on a nondiscriminatory basis. This Form W-2, box 1, on line 7 (Form 1040 or Form 1040A) or
means that the tuition reduction benefits must be available line 1 (Form 1040EZ).
on substantially the same basis to each member of a group
of employees. The group must be defined under a reason-
able classification set up by the employer. The classifica-
tion must not discriminate in favor of owners, officers, or
highly compensated employees.
Page 8 Chapter 1 Scholarships, Fellowships, Grants, and Tuition Reductions

This chapter explains:

2. • Who can claim the Hope credit,
• What expenses qualify for the credit,
Hope Credit • Who is an eligible student,
• Who can claim a dependent’s expenses,
What’s New • How to figure the credit,
• How to claim the credit, and
Income limits increased. The amount of your Hope • When the credit must be repaid.
credit for 2008 is gradually reduced (phased out) if your
modified adjusted gross income (MAGI) is between
$48,000 and $58,000 ($96,000 and $116,000 if you file a What is the tax benefit of the Hope credit. For the tax
joint return). You cannot claim a credit if your MAGI is year, you may be able to claim a Hope credit of up to
$58,000 or more ($116,000 or more if you file a joint $1,800 ($3,600 if a student in a Midwestern disaster area)
return). This is an increase from the 2007 limits of $47,000 for qualified education expenses paid for each eligible
and $57,000 ($94,000 and $114,000 if filing a joint return). student.
See Effect of the Amount of Your Income on the Amount of A tax credit reduces the amount of income tax you may
Your Credit, later, for more information. have to pay. Unlike a deduction, which reduces the amount
of income subject to tax, a credit directly reduces the tax
Maximum amount of Hope credit increased. Beginning itself. The Hope credit is a nonrefundable credit. This
in 2008, the maximum amount of the Hope credit has means that it can reduce your tax to zero, but if the credit is
increased to $1,800 ($3,600 if a student in a Midwestern more than your tax the excess will not be refunded to you.
disaster area). This is an increase from the 2007 maximum
amount of $1,650. The Hope credit you are allowed may be limited by the
The amount of the Hope credit (per eligible student) is amount of your income and the amount of your tax.
the sum of 100% of the first $1,200 ($2,400 if a student in a You may be able to take a tuition and fees deduc-
Midwestern disaster area) of qualified education expenses TIP tion for your education expenses instead of a
you paid for the eligible student and 50% of the next $1,200 Hope credit. You can choose the one that will give
($2,400 if a student in a Midwestern disaster area) of you the lower tax. See chapter 6 for details about the
qualified education expenses you paid for that student. deduction.
See Figuring the Credit, later, for more information.
Students in Midwestern disaster areas. The following Can you claim both education credits this year. For
rules apply only to students attending an eligible educa- each student, you can elect for any year only one of the
tional institution in the Midwestern disaster areas in the credits. For example, if you elect to take the Hope credit for
states of Arkansas, Illinois, Indiana, Iowa, Missouri, Ne- a child on your 2008 tax return, you cannot, for that same
braska, and Wisconsin. See Table 3-2 near the end of child, also claim the lifetime learning credit for 2008.
chapter 3 for a list of counties. If you are eligible to claim the Hope credit and you are
• The Hope credit for students in Midwestern disaster also eligible to claim the lifetime learning credit for the
areas is 100% of the first $2,400 of qualified educa- same student in the same year, you can choose to claim
tion expenses and 50% of the next $2,400 of quali- either credit, but not both. For 2008, if the total qualified
fied education expenses for a maximum credit of education expenses for a student are less than $9,000, it
$3,600 per student. will generally be to your benefit to claim the Hope credit.
• The definition of qualified education expenses for the If you pay qualified education expenses for more than
Hope credit is expanded for students in Midwestern one student in the same year, you can choose to take
disaster areas. See Students in Midwestern disaster credits on a per-student, per-year basis. This means that,
areas under Qualified Education Expenses, later in for example, you can claim the Hope credit for one student
this chapter for more information. and the lifetime learning credit for another student in the
same year.
Introduction Differences between the Hope and lifetime learning

credits. There are several differences between these two
There are two tax credits available to help you offset the credits. For example, you can claim the Hope credit based
costs of higher education by reducing the amount of your on the same student’s expenses for no more than 2 years.
income tax. They are the Hope credit and the lifetime However, there is no limit on the number of years for which
learning credit, also referred to as education credits. This you can claim a lifetime learning credit based on the same
chapter discusses the Hope credit. The lifetime learning student’s expenses. The differences between the two
credit is discussed in chapter 3. credits are summarized in Table 2-1 on the next page.
Chapter 2 Hope Credit Page 9

Table 2-1. Comparison of Education • You are listed as a dependent in the Exemptions
Credits section on another person’s tax return (such as your
parents’). See Who Can Claim a Dependent’s Ex-
penses, later.
Hope Credit Lifetime Learning Credit
Up to $1,800 ($3,600 if a Up to $2,000 credit ($4,000
• Your modified adjusted gross income (MAGI) is
student in a Midwestern if a student in a Midwestern $58,000 or more ($116,000 or more in the case of a
disaster area) credit per disaster area) per return joint return). MAGI is explained later under Effect of
eligible student the Amount of Your Income on the Amount of Your
Credit.
Available ONLY until the Available for all years of
first 2 years of post- postsecondary education • You (or your spouse) were a nonresident alien for
secondary education are and for courses to acquire any part of 2008 and the nonresident alien did not
completed or improve job skills elect to be treated as a resident alien for tax pur-
Available ONLY for 2 years Available for an unlimited poses. More information on nonresident aliens can
per eligible student number of years be found in Publication 519, U.S. Tax Guide for
Aliens.
Student must be pursuing Student does not need to
an undergraduate degree or be pursuing a degree or • You claim the lifetime learning credit or a tuition and
other recognized education other recognized education fees deduction for the same student in 2008.
credential credential
Student must be enrolled at Available for one or more
least half time for at least
one academic period
courses
What Expenses Qualify
beginning during the year
The Hope credit is based on qualified education expenses
No felony drug conviction Felony drug conviction rule you pay for yourself, your spouse, or a dependent for
on student’s record does not apply whom you claim an exemption on your tax return. Gener-
ally, the credit is allowed for qualified education expenses
paid in 2008 for an academic period beginning in 2008 or in
the first 3 months of 2009.
For example, if you paid $1,500 in December 2008 for
Can You Claim the Credit qualified tuition for the Spring 2009 semester beginning in
January 2009, you may be able to use that $1,500 in
The following rules will help you determine if you are figuring your 2008 credit.
eligible to claim the Hope credit on your tax return.
Academic period. An academic period includes a se-
mester, trimester, quarter, or other period of study (such as
Who Can Claim the Credit a summer school session) as reasonably determined by an
Generally, you can claim the Hope credit if all three of the educational institution. In the case of an educational insti-
following requirements are met. tution that uses credit hours or clock hours and does not
have academic terms, each payment period can be treated
• You pay qualified education expenses of higher edu- as an academic period.
cation.
Paid with borrowed funds. You can claim a Hope credit
• You pay the education expenses for an eligible stu- for qualified education expenses paid with the proceeds of
dent. a loan. Use the expenses to figure the Hope credit for the
• The eligible student is either yourself, your spouse, year in which the expenses are paid, not the year in which
or a dependent for whom you claim an exemption on the loan is repaid. Treat loan payments sent directly to the
educational institution as paid on the date the institution
your tax return.
credits the student’s account.
Student withdraws from class(es). You can claim a
Note. Qualified education expenses paid by a depen- Hope credit for qualified education expenses not refunded
dent for whom you claim an exemption, or by a third party when a student withdraws.
for that dependent, are considered paid by you.
“Qualified education expenses” are defined on this Qualified Education Expenses
page. “Eligible students” are defined later under Who Is an
Eligible Student. A “dependent for whom you claim an For purposes of the Hope credit, qualified education ex-
exemption” is defined later under Who Can Claim a De- penses are tuition and certain related expenses required
pendent’s Expenses. for enrollment or attendance at an eligible educational
institution.
You may find Figure 2-1, on the next page, helpful in
determining if you can claim a Hope credit on your tax Eligible educational institution. An eligible educational
return. institution is any college, university, vocational school, or
other postsecondary educational institution eligible to par-
ticipate in a student aid program administered by the U.S.
Who Cannot Claim the Credit Department of Education. It includes virtually all accredited
You cannot claim the Hope credit for 2008 if any of the public, nonprofit, and proprietary (privately owned
following apply. profit-making) postsecondary institutions. The educational
institution should be able to tell you if it is an eligible
• Your filing status is married filing separately. educational institution.
Page 10 Chapter 2 Hope Credit

Figure 2-1. Can You Claim the Hope Credit for 2008?
No
Did you pay qualified education expenses in 2008 for an eligible student?* 䊳
䊲 Yes
Did the academic period for which you paid qualified education No
䊳
expenses begin in 2008 or the first 3 months of 2009?
Yes
䊲
Is the eligible student you, your spouse (if married filing jointly), or your No
䊳
dependent for whom you claim an exemption on your tax return?
Yes
䊲
Yes
Are you listed as a dependent on another person’s tax return? 䊳
䊲 No
Yes
Is your filing status married filing separately? 䊳
䊲 No
Were you (or your spouse) a nonresident alien for any part of 2008 who Yes
䊳
did not elect to be treated as a resident alien for tax purposes?
䊲 No
Is your modified adjusted gross income (MAGI) less than $58,000 No
䊳
($116,000 if married filing jointly)?
䊲 Yes
Do you have a tax liability (Form 1040, line 46 minus lines 47, 48, and 49) No
䊳
(Form 1040A, line 28 minus lines 29 and 30)?
䊲 Yes
Are you claiming a lifetime learning credit or a tuition and fees Yes
䊳
deduction for the same student?
䊲 No
Did you use the same expenses to claim a deduction or credit, or to Yes
䊳
figure the tax-free portion of a Coverdell ESA or QTP distribution?
䊲 No
Yes
Were the same expenses paid with tax-free scholarship, fellowship, 䊳䊲
grant, or employer-provided educational assistance?
䊲 No
Yes You cannot
Did you, or someone else who paid these expenses on behalf of a
䊳 claim the Hope
student, receive a refund of all the expenses?
credit for
䊲 No 2008
You can claim

the Hope credit
for 2008
*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.

Certain educational institutions located outside the b. The actual amount charged if the student is resid-
United States also participate in the U.S. Department of ing in housing owned or operated by the eligible
Education’s Federal Student Aid (FSA) programs. educational institution.
Related expenses. Student-activity fees and expenses You will need to contact the eligible educational institu-
for course-related books, supplies, and equipment are tion for qualified room and board costs.
included in qualified education expenses only if the fees
and expenses must be paid to the institution as a condition
of enrollment or attendance. No Double Benefit Allowed
In the following examples, assume that each student is
an eligible student at an eligible educational institution. You cannot do any of the following.
• Deduct higher education expenses on your income
Example 1. Jackson is a sophomore in University V’s tax return (as, for example, a business expense) and
degree program in dentistry. This year, in addition to tui- also claim a Hope credit based on those same ex-
tion, he is required to pay a fee to the university for the penses.
rental of the dental equipment he will use in this program.
Because the equipment rental fee must be paid to Univer- • Claim a Hope credit in the same year that you are
sity V for enrollment and attendance, Jackson’s equipment claiming a tuition and fees deduction for the same
rental fee is a qualified expense. student.
• Claim a Hope credit and a lifetime learning credit
Example 2. Donna and Charles, both first-year stu- based on the same qualified education expenses.
dents at College W, are required to have certain books and
other reading materials to use in their mandatory first-year • Claim a Hope credit based on the same expenses
classes. The college has no policy about how students used to figure the tax-free portion of a distribution
should obtain these materials, but any student who from a Coverdell education savings account (ESA)
purchases them from College W’s bookstore will receive a or qualified tuition program (QTP). See Coordination
bill directly from the college. Charles bought his books from With Hope and Lifetime Learning Credits in chapter
a friend, so what he paid for them is not a qualified educa- 7 (Coverdell ESA) and chapter 8 (QTP).
tion expense. Donna bought hers at College W’s book- • Claim a credit based on qualified education ex-
store. Although Donna paid College W directly for her penses paid with a tax-free scholarship, grant, or
first-year books and materials, her payment is not a quali- employer-provided educational assistance. See Ad-
fied expense because the books and materials are not justments to Qualified Education Expenses, next.
required to be purchased from College W for enrollment or
attendance at the institution.
Adjustments to Qualified Education
Example 3. When Marci enrolled at College X for her Expenses
freshman year, she had to pay a separate student activity
fee in addition to her tuition. This activity fee is required of If you pay qualified education expenses with certain
all students, and is used solely to fund on-campus organi- tax-free funds, you cannot claim a credit for those
zations and activities run by students, such as the student amounts. You must reduce the qualified education ex-
newspaper and the student government. No portion of the penses by the amount of any tax-free educational assis-
fee covers personal expenses. Although labeled as a stu- tance and refund(s) you received.
dent activity fee, the fee is required for Marci’s enrollment
and attendance at College X. Therefore, it is a qualified Tax-free educational assistance. This includes:
expense. • The tax-free parts of scholarships and fellowships
Students in Midwestern disaster areas. The definition (see chapter 1),
of qualified education expenses is expanded for students • Pell grants (see chapter 1),
in these areas. In addition to tuition and fees required for
enrollment or attendance at an eligible educational institu- • Employer-provided educational assistance (see
tion, qualified education expenses for students in Midwest- chapter 11),
ern disaster areas include the following. • Veterans’ educational assistance (see chapter 1),
and
1. Books, supplies, and equipment required for enroll-
ment or attendance at an eligible educational institu- • Any other nontaxable (tax-free) payments (other
tion. than gifts or inheritances) received as educational
assistance.
2. For a special needs student, expenses that are nec-
essary for that person’s enrollment or attendance at
an eligible educational institution. Refunds. Qualified education expenses do not include
expenses for which you, or someone else who paid quali-
3. For a student who is at least a half-time student, the
fied education expenses on behalf of a student, receive a
reasonable costs of room and board, but only to the
extent that the costs are not more than the greater of refund. (For information on expenses paid by a dependent
the following two amounts. student or third party, see Who Can Claim a Dependent’s
Expenses, later in this chapter.)
a. The allowance for room and board, as determined If a refund of expenses paid in 2008 is received before
by the eligible educational institution, that was in- you file your tax return for 2008, simply reduce the amount
cluded in the cost of attendance (for federal finan- of the expenses paid by the amount of the refund received.
cial aid purposes) for a particular academic period If the refund is received after you file your 2008 tax return,
and living arrangement of the student. see When Must the Credit Be Repaid (Recaptured), later.

You are considered to receive a refund of expenses • Similar personal, living, or family expenses.
when an eligible educational institution refunds loan pro-
This is true even if the amount must be paid to the institu-
ceeds to the lender on behalf of the borrower. Depending
on when you are considered to receive the refund, follow tion as a condition of enrollment or attendance.
the above instructions or see When Must the Credit Be
Repaid (Recaptured), later. Sports, games, hobbies, and noncredit courses. Qual-
ified education expenses generally do not include ex-
Amounts that do not reduce qualified education expenses that relate to any course of instruction or other
penses. Do not reduce qualified education expenses by education that involves sports, games or hobbies, or any
amounts paid with funds the student receives as: noncredit course. However, if the course of instruction or
other education is part of the student’s degree program,
• Payment for services, such as wages, these expenses can qualify.
• A loan,
Comprehensive or bundled fees. Some eligible educa-
• A gift, tional institutions combine all of their fees for an academic
• An inheritance, or period into one amount. If you do not receive or do not
have access to an allocation showing how much you paid
• A withdrawal from the student’s personal savings. for qualified education expenses and how much you paid
for personal expenses, such as those listed above, contact
Do not reduce the qualified education expenses by any
the institution. The institution is required to make this
scholarship or fellowship reported as income on the stu-
allocation and provide you with the amount you paid (or
dent’s tax return in the following situations.
were billed) for qualified education expenses on Form
• The use of the money is restricted to costs of attend- 1098-T, Tuition Statement. See Figuring the Credit, later,
ance (such as room and board) other than qualified for more information about Form 1098-T.
education expenses.
• The use of the money is not restricted and is used to
pay education expenses that are not qualified (such Who Is an Eligible Student
as room and board).
To claim the Hope credit, the student for whom you pay
Example 1. Jackie paid $3,000 for tuition and $5,000 qualified education expenses must be an eligible student.
for room and board at University X. The university did not This is a student who meets all of the following require-
require her to pay any fees in addition to her tuition in order ments.
to enroll in or attend classes. To help pay these costs, she • The student did not have expenses that were used
was awarded a $2,000 scholarship and a $4,000 student to figure a Hope credit in any 2 earlier tax years.
loan.
The terms of the scholarship state that it may be used to • The student had not completed the first 2 years of
pay any of Jackie’s college expenses. Because she ap- postsecondary education (generally, the freshman
plied it toward her tuition, the scholarship is tax free. and sophomore years of college) before 2008.
Therefore, for purposes of figuring an education credit • For at least one academic period beginning in 2008,
(either Hope or lifetime learning), she must first use the the student was enrolled at least half-time in a pro-
$2,000 scholarship to reduce her tuition (her only qualified gram leading to a degree, certificate, or other recog-
education expense). The student loan is not tax-free edu- nized educational credential.
cational assistance, so she does not use it to reduce her
qualified expenses. Jackie is treated as having paid $1,000 • The student has not been convicted of any federal or
in qualified education expenses ($3,000 tuition – $2,000 state felony for possessing or distributing a con-
scholarship). trolled substance as of the end of 2008.
These requirements are also shown in Figure 2-2 on the
Example 2. The facts are the same as in Example 1, next page.
except that Jackie uses the $2,000 scholarship to pay
room and board, and, therefore, reports her entire scholar- Completion of first 2 years. A student who was awarded
ship as income on her tax return. In this case, the scholar- 2 years of academic credit for postsecondary work com-
ship is allocated to expenses other than qualified pleted before 2008 has completed the first 2 years of
education expenses. Jackie is treated as paying the entire postsecondary education. This student generally would
$3,000 tuition with other funds and can figure her educa- not be an eligible student for purposes of the Hope credit.
tion credit on the entire $3,000.
Exception. Any academic credit awarded solely on the
basis of the student’s performance on proficiency exami-
Expenses That Do Not Qualify nations is disregarded in determining whether the student
Qualified education expenses do not include amounts paid has completed 2 years of postsecondary education.
for:
Enrolled at least half-time. A student was enrolled at
• Insurance, least half-time if the student was taking at least half the
• Medical expenses (including student health fees), normal full-time work load for his or her course of study.
The standard for what is half of the normal full-time work
• Room and board (but see Students in Midwestern load is determined by each eligible educational institution.
disaster areas under Qualified Education Expenses, However, the standard may not be lower than any of those
earlier, for an exception), established by the U.S. Department of Education under the
• Transportation, or Higher Education Act of 1965.

Figure 2-2. Who Is an Eligible Student for the Hope Credit?

This chart is provided to help you quickly decide whether a student is eligible for the Hope credit.
See the text for more details.
Did the student complete the first 2 years of Yes

postsecondary education before the beginning 䊳
of the tax year?
No
䊲
Was the credit claimed in at least 2 prior tax Yes
䊳
years for this student?
No
䊲
Was the student enrolled at least half-time in a
program leading to a degree, certificate, or other No
䊳
recognized educational credential for at least one
academic period beginning during the tax year?
䊲
Yes
䊲
Is the student free of any federal or state
felony conviction for possessing or distributing No The student is not an
䊳
a controlled substance as of the end of the eligible student.
tax year?
Yes
The student is
an eligible student.
Example 1. Marty graduated from high school in June semester. College V classified Sharon as a sec-
2007. In September, he enrolled in an undergraduate de- ond-semester sophomore for the 2008 Spring semester
gree program at College U, and attended full time for both and as a first-semester junior for the 2008 Fall semester.
the 2007 Fall and 2008 Spring semesters. For the 2008 Because College V did not classify Sharon as having
Fall semester, Marty was enrolled less than half-time. completed the first two years of postsecondary education
Because Marty was enrolled in an undergraduate degree as of the beginning of 2008, Sharon is an eligible student
program on at least a half-time basis for at least one for tax year 2008. Therefore, the qualified education ex-
academic period that began during 2007 and at least one penses paid for the 2008 Spring semester and the 2008
academic period that began during 2008, he is an eligible Fall semester are taken into account in calculating any
student for tax years 2007 and 2008 (including the 2008 Hope credit for 2008.
Fall semester when he enrolled at College U on less than a
half-time basis). Example 3. During the 2007 Fall semester, Luis was a
high school student who took classes on a half-time basis
Example 2. After taking classes at College V on a at College X. Luis was not enrolled as part of a degree
half-time basis for the 2007 Spring and Fall semesters, program at College X because College X only admits
Sharon became a full-time student for the 2008 Spring students to a degree program if they have a high school

diploma or equivalent. Because Luis was not enrolled in a Qualified education expenses paid directly to an
degree program at College X during 2007, Luis was not an TIP eligible educational institution for your dependent
eligible student for tax year 2007. under a court-approved divorce decree are
treated as paid by your dependent.
Example 4. The facts are the same as in Example 3.
During the 2008 Spring semester, Luis again attended Expenses paid by you. If you claim an exemption for a
College X but not as part of a degree program. Luis dependent who is an eligible student, only you can include
any expenses you paid when figuring the amount of the
graduated from high school in June 2008. For the 2008 Fall Hope credit. If neither you nor anyone else claims an
semester, Luis enrolled as a full-time student in College X exemption for the dependent, only the dependent can
as part of a degree program, and College X awarded Luis include any expenses you paid when figuring the Hope
credit for his prior coursework at College X. Because Luis credit.
was enrolled in a degree program at College X for the 2008
Fall term on at least a half-time basis, Luis is an eligible Expenses paid by others. Someone other than you, your
student for all of tax year 2008. Therefore, the qualified spouse, or your dependent (such as a relative or former
education expenses paid for classes taken at College X spouse) may make a payment directly to an eligible educa-
during both the 2008 Spring semester (during which Luis tional institution to pay for an eligible student’s qualified
was not enrolled in a degree program) and the 2008 Fall education expenses. In this case, the student is treated as
receiving the payment from the other person and, in turn,
semester are taken into account in computing any Hope
paying the institution. If you claim an exemption on your tax
credit. return for the student, you are considered to have paid the
expenses.
Example 5. Diana graduated from high school in June
2006. In January 2007, Diana enrolled in a one-year post- Example. In 2008, Ms. Allen makes a payment directly
secondary certificate program on a full-time basis to obtain to an eligible educational institution for her grandson
a certificate as a travel agent. Diana completed the pro- Todd’s qualified education expenses. For purposes of
gram in December 2007, and was awarded a certificate. In claiming a Hope credit, Todd is treated as receiving the
January 2008, she enrolled in a one-year postsecondary money as a gift from his grandmother and, in turn, paying
certificate program on a full-time basis to obtain a certifi- his qualified education expenses himself.
cate as a computer programmer. Diana is an eligible stu- Unless an exemption for Todd is claimed on someone
dent for both tax years 2007 and 2008 because she meets else’s 2008 tax return, only Todd can use the payment to
the degree requirement, the work load requirement, and claim a Hope credit.
the year of study requirement for those years. If anyone, such as Todd’s parents, claims an exemption
for Todd on his or her 2008 tax return, whoever claims the
exemption may be able to use the expenses to claim a
Hope credit. If anyone else claims an exemption for Todd,
Who Can Claim a Todd cannot claim a Hope credit.
Dependent’s Expenses Tuition reduction. When an eligible educational institu-
tion provides a reduction in tuition to an employee of the
If there are qualified education expenses for your depen- institution (or spouse or dependent child of an employee),
dent for a year, either you or your dependent, but not both the amount of the reduction may or may not be taxable. If it
of you, can claim a Hope credit for your dependent’s is taxable, the employee is treated as receiving a payment
expenses for that year. of that amount and, in turn, paying it to the educational
For you to claim a Hope credit for your dependent’s institution on behalf of the student. For more information on
tuition reductions, see Qualified Tuition Reduction in chap-
expenses, you must also claim an exemption for your
ter 1.
dependent. You do this by listing your dependent’s name
and other required information on Form 1040 (or Form
1040A), line 6c.
Figuring the Credit
IF you... THEN only... The amount of the Hope credit (per eligible student) is the
claim an exemption on you can claim the Hope sum of:
your tax return for a credit based on that
dependent who is an dependent’s expenses. The 1. 100% of the first $1,200 ($2,400 if a student in a
eligible student dependent cannot claim the Midwestern disaster area) of qualified education ex-
credit. penses you paid for the eligible student, and
do not claim an exemption the dependent can claim the 2. 50% of the next $1,200 ($2,400 if a student in a
on your tax return for a Hope credit. You cannot Midwestern disaster area) of qualified education ex-
dependent who is an claim the credit based on this penses you paid for that student.
eligible student (even if dependent’s expenses.
entitled to the exemption) The maximum amount of Hope credit you can claim in
2008 is $1,800 ($3,600 if a student in a Midwestern disas-
ter area) times the number of eligible students. You can
claim the full $1,800 ($3,600) for each eligible student for
Expenses paid by dependent. If you claim an exemption whom you paid at least $2,400 ($3,600) of qualified educa-
on your tax return for an eligible student who is your tion expenses. However, the credit may be reduced based
dependent, treat any expenses paid (or deemed paid) by on your modified adjusted gross income (MAGI). See Ef-
your dependent as if you had paid them. Include these fect of the Amount of Your Income on the Amount of Your
expenses when figuring the amount of your Hope credit. Credit on the next page.

Example. Jon and Karen Frost are married and file a Worksheet 2-1. MAGI for the Hope Credit
joint tax return. For 2008, they claim an exemption for their
dependent daughter on their tax return. Their MAGI is 1. Enter your adjusted gross income
$70,000. Their daughter is in her sophomore (second) year (Form 1040, line 38) . . . . . . . . . . . . . . 1.
of studies at the local university (not in a Midwestern
disaster area). Jon and Karen paid qualified education 2. Enter your foreign earned
income exclusion and/or
expenses of $4,300 in 2008. housing exclusion (Form
Jon and Karen, their daughter, and the local university 2555, line 45, or Form
meet all of the requirements for the Hope credit. Jon and 2555-EZ, line 18) . . . . . 2.
Karen can claim a $1,800 Hope credit in 2008. This is 3. Enter your foreign
100% of the first $1,200 of qualified education expenses, housing deduction (Form
plus 50% of the next $1,200. 2555, line 50) . . . . . . . . 3.
4. Enter the amount of
Form 1098-T. To help you figure your Hope credit, you income from Puerto Rico
should receive Form 1098-T. Generally, an eligible educa- you are excluding . . . . . 4.
tional institution (such as a college or university) must send 5. Enter the amount of
Form 1098-T (or acceptable substitute) to each enrolled income from American
student by February 2, 2009. An institution may choose to Samoa you are excluding
report either payments received (box 1), or amounts billed (Form 4563,
(box 2), for qualified education expenses. However, the line 15) . . . . . . . . . . . . . 5.
amounts in boxes 1 and 2 of Form 1098-T may be different 6. Add the amounts on
than what you actually paid. When figuring the credit, use lines 2, 3, 4, and 5 . . . . . . . . . . . . . . . 6.
only the amounts you paid or were deemed to have paid in 7. Add the amounts on lines 1 and 6.
2008 for qualified education expenses. This is your modified adjusted
In addition, your Form 1098-T should give you other gross income. Enter this amount
information for that institution, such as adjustments made on Form 8863, line 9 . . . . . . . . . . . . . . 7.
for prior years, the amount of scholarships or grants, reim-
bursements or refunds, and whether you were enrolled at Phaseout. If your MAGI is within the range of incomes
least half-time or were a graduate student. where the credit must be reduced, you will figure your
The eligible educational institution may ask for a com- reduced credit using lines 7–13 of Form 8863. The same
pleted Form W-9S, Request for Student’s or Borrower’s method is shown in the following example.
Taxpayer Identification Number and Certification, or simi-
lar statement to obtain the student’s name, address, and Example. You are filing a joint return and your MAGI is
taxpayer identification number. $97,000. In 2008, you paid $5,000 of qualified education
expenses.
You figure a tentative Hope credit of $1,800 (100% of
Effect of the Amount of Your Income the first $1,200 of qualified education expenses, plus 50%
on the Amount of Your Credit of the next $1,200 of qualified education expenses).
Because your MAGI is within the range of incomes
The amount of your Hope credit is phased out (gradually where the credit must be reduced, you must multiply your
reduced) if your modified adjusted gross income (MAGI) is tentative credit ($1,800) by a fraction. The numerator of the
between $48,000 and $58,000 ($96,000 and $116,000 if fraction is $116,000 (the upper limit for those filing a joint
you file a joint return). You cannot claim a Hope credit if return) minus your MAGI. The denominator is $20,000, the
your MAGI is $58,000 or more ($116,000 or more if you file range of incomes for the phaseout ($96,000 to $116,000).
a joint return). The result is the amount of your phased out (reduced)
Hope credit ($1,710).
Modified adjusted gross income (MAGI). For most tax-
payers, MAGI is adjusted gross income (AGI) as figured on $1,800 × $116,000 − $97,000 = $1,710
$20,000
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,
Claiming the Credit
your MAGI is the AGI on line 38 of that form, modified by You claim the Hope credit by completing Parts I and III of
adding back any: Form 8863 and submitting it with your Form 1040 or
1040A. Enter the credit on Form 1040, line 50, or on Form
1. Foreign earned income exclusion, 1040A, line 31. A filled-in Form 8863 is shown at the end of
2. Foreign housing exclusion, this chapter.
3. Foreign housing deduction,
4. Exclusion of income for bona fide residents of Ameri-
can Samoa, and
When Must the Credit Be
5. Exclusion of income for bona fide residents of Puerto Repaid (Recaptured)
Rico.
If, after you file your 2008 tax return, you or someone else
You can use Worksheet 2-1, next, to figure your MAGI. receives tax-free educational assistance for, or a refund of,

an expense you used to figure a Hope credit on that return,

you may have to repay all or part of the credit. You must Illustrated Example
refigure your Hope credit for 2008 as if the assistance or
refund was received in 2008. Subtract the amount of the Jim Grant, a single taxpayer, enrolled full-time at a local
refigured credit from the amount of the credit you claimed. college (not in a Midwestern disaster area) to earn a
The result is the amount you must repay. You add the degree in computer science. This is the first year of his
repayment (recapture) to your tax liability for the year in postsecondary education. During 2008, he paid $2,600 for
which you receive the assistance or refund. See the in- his qualified 2008 tuition. He received Form 1098-T
structions for your tax return for that year to find out how to (shown below) from the college. He and the college meet
report the recapture amount. Your original 2008 tax return all of the requirements for the Hope credit. Jim’s MAGI is
does not change. $37,000. His income tax liability, before credits, is $3,700.
He figures his credit of $1,800 as shown on the Form 8863
Example. You paid $8,000 tuition and fees in Decem- on page 17.
ber 2008, and your child began college in January 2009.
You filed your 2008 tax return on February 15, 2009, and Note. In Appendix A at the end of this publication there
claimed a Hope credit of $1,800. After you filed your return, is an example illustrating the use of Form 8863 when both
your child dropped two courses and you received a refund the Hope credit and the lifetime learning credit are claimed
of $6,000. You must refigure your 2008 Hope credit using on the same tax return.
$2,000 of qualified education expenses instead of $8,000.
The refigured credit is $1,600. Include the difference of
$200 in the total on the “Tax” line of your 2009, Form 1040
or 1040A.
CORRECTED
FILER’S name, street address, city, state, ZIP code, and telephone number 1 Payments received for OMB No. 1545-1574
qualified tuition and
State University related expenses
Tuition
Metropolis, OH 72727 $ 2600
2 Amounts billed for
qualified tuition and
2008 Statement
related expenses
$ Form 1098-T
FILER’S federal identification no. STUDENT’S social security number 3 If this box is checked, your educational institution
has changed its reporting method for 2008 Copy B
98-1234567 000-00-4321
For Student
STUDENT’S name 4 Adjustments made for a 5 Scholarships or grants
prior year
Jim Grant
$ $ This is important
Street address (including apt. no.) 6 Adjustments to 7 Checked if the amount tax information
scholarships or grants in box 1 or 2 includes and is being
1010 Anywhere St. for a prior year amounts for an
academic period furnished to the
City, state, and ZIP code
beginning January - Internal Revenue
Hometown, OH 77777 $ March 2009 䊳
Service.
Service Provider/Acct. No. 8 Checked if at least 9 Checked if a 10 Ins. contract reimb./refund
(see instr.) X
half-time student graduate student $
Form 1098-T (keep for your records) Department of the Treasury - Internal Revenue Service

Education Credits OMB No. 1545-0074

Form 8863 (Hope and Lifetime Learning Credits) 2008
䊳 See instructions to find out if you are eligible to take the credits.
Department of the Treasury Attachment
Internal Revenue Service (99) 䊳 Attach to Form 1040 or Form 1040A. Sequence No. 50
Name(s) shown on return Your social security number
Jim Grant 000 00 4321
Caution: ● You cannot take the Hope credit and the lifetime learning credit for the same student in the same year.
● You cannot take both an education credit and the tuition and fees deduction (see Form 8917) for the same
student for the same year.
Part I Hope Credit. Caution: You cannot take the Hope credit for more than 2 tax years for the same student.
1 (a) Student’s name (b) Student’s (c) Qualified (d) Enter the
(as shown on page 1 expenses (see
social security smaller of the (e) Add (f) Enter one-half
of your tax return) instructions). Do
number (as not enter more amount in column (c) and of the amount in
First name shown on page 1 column (c) or column (d) column (e)
than $2,400* for
Last name of your tax return) each student. $1,200**
Jim
Grant 000 00 4321 2,400 1,200 3,600 1,800
*For each student who attended an eligible educational institution in a Midwestern disaster area, do not enter more than
$4,800.
**For each student who attended an eligible educational institution in a Midwestern disaster area, enter the smaller of the
amount in column (c) or $2,400.
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 䊳 2 1,800
Part II Lifetime Learning Credit
3 (a) Student’s name (as shown on page 1 of your tax return) (b) Student’s social security (c) Qualified
number (as shown on page expenses (see
First name Last name 1 of your tax return) instructions)
4 Add the amounts on line 3, column (c), and enter the total 4
5a Enter the smaller of line 4 or $10,000 5a
b For students who attended an eligible educational institution in a Midwestern disaster area, enter
the smaller of $10,000 or their qualified expenses included on line 4 (see special rules on page 3) 5b
c Subtract line 5b from line 5a 5c
6a Multiply line 5b by 40% (.40) 6a
b Multiply line 5c by 20% (.20) 6b
c Tentative lifetime learning credit. Add lines 6a and 6b and go to Part III 6c
Part III Allowable Education Credits
7 Tentative education credits. Add lines 2 and 6c 7 1,800
8 Enter: $116,000 if married filing jointly; $58,000 if single, head of household,
or qualifying widow(er) 8 58,000
9 Enter the amount from Form 1040, line 38,* or Form 1040A, line 22 9 37,000
10 Subtract line 9 from line 8. If zero or less, stop; you cannot take any
education credits 10 21,000
12 If line 10 is equal to or more than line 11, enter the amount from line 7 on 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) 12 ⫻ .
13 Multiply line 7 by line 12 䊳 13 1,800
14 Enter the amount from Form 1040, line 46, or Form 1040A, line 28 14 3,700
15 Enter the total, if any, of your credits from Form 1040, lines 47 through 49, or Form 1040A, lines 29 and 30 15 0
16 Subtract line 15 from line 14. If zero or less, stop; you cannot take any education credits 䊳 16 3,700
17 Education credits. Enter the smaller of line 13 or line 16 here and on Form 1040, line 50, or Form
1040A, line 31 䊳 17 1,800
* If you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from Puerto Rico, see Pub. 970 for the amount to enter.
For Paperwork Reduction Act Notice, see page 4. Cat. No. 25379M Form 8863 (2008)

• How to claim the credit, and

3. • When the credit must be repaid.
Lifetime Learning What is the tax benefit of the lifetime learning credit.
For the tax year, you may be able to claim a lifetime
Credit learning credit of up to $2,000 ($4,000 for students in
Midwestern disaster areas) for qualified education ex-
penses paid for all students enrolled in eligible educational
institutions. There is no limit on the number of years the
What’s New lifetime learning credit can be claimed for each student.
A tax credit reduces the amount of income tax you may
Income limits increased. The amount of your lifetime have to pay. Unlike a deduction, which reduces the amount
learning credit for 2008 is gradually reduced (phased out) if of income subject to tax, a credit directly reduces the tax
your modified adjusted gross income (MAGI) is between itself. The lifetime learning credit is a nonrefundable credit.
$48,000 and $58,000 ($96,000 and $116,000 if you file a This means that it can reduce your tax to zero, but if the
joint return). You cannot claim a credit if your MAGI is credit is more than your tax the excess will not be refunded
$58,000 or more ($116,000 or more if you file a joint to you.
return). This is an increase from the 2007 limits of $47,000 The lifetime learning credit you are allowed may be
and $57,000 ($94,000 and $114,000 if filing a joint return). limited by the amount of your income and the amount of
See Effect of the Amount of Your Income on the Amount of your tax.
Your Credit, later, for more information.
You may be able to take a tuition and fees deduc-
Students in Midwestern disaster areas. The following TIP tion for your education expenses instead of a
rules apply only to students attending an eligible educa- lifetime learning credit. You can choose the one
tional institution in the Midwestern disaster areas in the that will give you the lower tax. See chapter 6 for details
states of Arkansas, Illinois, Indiana, Iowa, Missouri, Ne- about the deduction.
braska, and Wisconsin. See Table 3-2 near the end of this
chapter for a list of counties. Can you claim both education credits this year. For
• The lifetime learning credit rate for students in Mid- each student, you can elect for any year only one of the
western disaster areas is 40%. credits. For example, if you elect to take the lifetime learn-
ing credit for a child on your 2008 tax return, you cannot,
• The definition of qualified education expenses for the for that same child, also claim the Hope credit for 2008.
lifetime learning credit is expanded for students in If you are eligible to claim the lifetime learning credit and
Midwestern disaster areas. See Students in Mid- you are also eligible to claim the Hope credit for the same
western disaster areas, under Qualified Education student in the same year, you can choose to claim either
Expenses, later in this chapter for more information. credit, but not both. For 2008, if the total qualified educa-
tion expenses for a student are more than $9,000, it will
generally be to your benefit to claim the lifetime learning
Introduction credit.
If you pay qualified education expenses for more than
There are two tax credits available to help you offset the one student in the same year, you can choose to take
costs of higher education by reducing the amount of your credits on a per-student, per-year basis. This means that,
income tax. They are the Hope credit and the lifetime for example, you can claim the Hope credit for one student
learning credit, also referred to as education credits. This and the lifetime learning credit for another student in the
chapter discusses the lifetime learning credit. The Hope same year.
credit is discussed in chapter 2.
This chapter explains: Differences between the lifetime learning and Hope
• Who can claim the lifetime learning credit, credits. There are several differences between these two
credits. For example, you can claim the Hope credit based
• What expenses qualify for the credit, on the same student’s expenses for no more than 2 years.
• Who is an eligible student, However, there is no limit on the number of years for which
you can claim a lifetime learning credit based on the same
• Who can claim a dependent’s expenses, student’s expenses. The differences between the two
• How to figure the credit, credits are summarized in Table 3-1.
Chapter 3 Lifetime Learning Credit Page 19

Table 3-1. Comparison of Education • You are listed as a dependent in the Exemptions
Credits section on another person’s tax return (such as your
parents’). See Who Can Claim a Dependent’s Ex-
penses, later.
Lifetime Learning Credit Hope Credit
Up to $2,000 credit ($4,000 Up to $1,800 credit ($3,600
• Your modified adjusted gross income (MAGI) is
if a student in a Midwestern if a student in a Midwestern $58,000 or more ($116,000 or more in the case of a
disaster area) per return disaster area) per eligible joint return). MAGI is explained later under Effect of
student the Amount of Your Income on the Amount of Your
Credit.
Available for all years of Available ONLY until the
postsecondary education first 2 years of post- • You (or your spouse) were a nonresident alien for
and for courses to acquire secondary education are any part of 2008 and the nonresident alien did not
or improve job skills completed elect to be treated as a resident alien for tax pur-
Available for an unlimited Available ONLY for 2 years poses. More information on nonresident aliens can
number of years per eligible student be found in Publication 519, U.S. Tax Guide for
Aliens.
Student does not need to Student must be pursuing
be pursuing a degree or an undergraduate degree or • You claim the Hope Credit or a tuition and fees
other recognized education other recognized education deduction for the same student in 2008.
credential credential
Available for one or more Student must be enrolled at
courses least half time for at least
one academic period What Expenses Qualify
beginning during the year
The lifetime learning credit is based on qualified education
Felony drug conviction rule No felony drug conviction expenses you pay for yourself, your spouse, or a depen-
does not apply on student’s record dent for whom you claim an exemption on your tax return.
Generally, the credit is allowed for qualified education
expenses paid in 2008 for an academic period beginning in
2008 or in the first 3 months of 2009.
Can You Claim the Credit For example, if you paid $1,500 in December 2008 for
qualified tuition for the Spring 2009 semester beginning in
The following rules will help you determine if you are January 2009, you may be able to use that $1,500 in
eligible to claim the lifetime learning credit on your tax figuring your 2008 credit.
return. Academic period. An academic period includes a se-
Who Can Claim the Credit a summer school session) as reasonably determined by an
educational institution. In the case of an educational insti-
Generally, you can claim the lifetime learning credit if all tution that uses credit hours or clock hours and does not
three of the following requirements are met. have academic terms, each payment period can be treated
as an academic period.
• You pay qualified education expenses of higher edu-
cation. Paid with borrowed funds. You can claim a lifetime
learning credit for qualified education expenses paid with
• You pay the education expenses for an eligible stu- the proceeds of a loan. You use the expenses to figure the
dent. lifetime learning credit for the year in which the expenses
• The eligible student is either yourself, your spouse, are paid, not the year in which the loan is repaid. Treat loan
or a dependent for whom you claim an exemption on payments sent directly to the educational institution as paid
your tax return. on the date the institution credits the student’s account.
Student withdraws from class(es). You can claim a
lifetime learning credit for qualified education expenses not
Note. Qualified education expenses paid by a depen-
refunded when a student withdraws.
dent for whom you claim an exemption, or by a third party
for that dependent, are considered paid by you.
“Qualified Education Expenses” are defined on this Qualified Education Expenses
page. “Eligible students” are defined later under Who Is an For purposes of the lifetime learning credit, qualified edu-
Eligible Student. A “dependent for whom you claim an cation expenses are tuition and certain related expenses
exemption” is defined later under Who Can Claim a De- required for enrollment in a course at an eligible educa-
pendent’s Expenses. tional institution. The course must be either part of a
You may find Figure 3-1, on the next page, helpful in postsecondary degree program or taken by the student to
determining if you can claim a lifetime learning credit on acquire or improve job skills.
your tax return.
Eligible educational institution. An eligible educational
institution is any college, university, vocational school, or
Who Cannot Claim the Credit other postsecondary educational institution eligible to par-
You cannot claim the lifetime learning credit for 2008 if any ticipate in a student aid program administered by the U.S.
of the following apply. Department of Education. It includes virtually all accredited
public, nonprofit, and proprietary (privately owned
• Your filing status is married filing separately. profit-making) postsecondary institutions. The educational
Page 20 Chapter 3 Lifetime Learning Credit

Figure 3-1. Can You Claim the Lifetime Learning Credit for 2008?
No
Did you pay qualified education expenses in 2008 for an eligible student?* 䊳
䊲 Yes
Did the academic period for which you paid qualified education No
䊳
expenses begin in 2008 or the first 3 months of 2009?
Yes
䊲
Is the eligible student you, your spouse (if married filing jointly), or your No
䊳
dependent for whom you claim an exemption on your tax return?
Yes
䊲
Yes
Are you listed as a dependent on another person’s tax return? 䊳
䊲 No
Yes
Is your filing status married filing separately? 䊳
䊲 No
Were you (or your spouse) a nonresident alien for any part of 2008 who Yes
䊳
did not elect to be treated as a resident alien for tax purposes?
䊲 No
Is your modified adjusted gross income (MAGI) less than $58,000 No
䊳
($116,000 if married filing jointly)?
䊲 Yes
Do you have a tax liability (Form 1040, line 46 minus lines 47, 48, and 49) No
䊳
(Form 1040A, line 28 minus lines 29 and 30)?
䊲 Yes
Yes
Are you claiming a Hope credit or a tuition and fees deduction for the 䊳
same student?
䊲 No
Did you use the same expenses to claim a deduction or credit, or to Yes
䊳
figure the tax-free portion of a Coverdell ESA or QTP distribution?
䊲 No
Yes
Were the same expenses paid with tax-free scholarship, fellowship, 䊳䊲
grant, or employer-provided educational assistance?
䊲 No You cannot
Did you, or someone else who paid these expenses on behalf of a Yes
䊳 claim the lifetime
student, receive a refund of all the expenses? learning credit for
䊲 No 2008
You can claim

the lifetime
learning credit
for 2008
*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.

institution should be able to tell you if it is an eligible employer-provided educational assistance. See Ad-
educational institution. justments to Qualified Education Expenses, later.
Certain educational institutions located outside the
United States also participate in the U.S. Department of
Education’s Federal Student Aid (FSA) programs. Adjustments to Qualified Education
Expenses
Related expenses. Student-activity fees and expenses
for course-related books, supplies, and equipment are If you pay qualified education expenses with certain
included in qualified education expenses only if the fees tax-free funds, you cannot claim a credit for those
and expenses must be paid to the institution as a condition amounts. You must reduce the qualified education ex-
of enrollment or attendance. For examples, see Related penses by the amount of any tax-free educational assis-
expenses in chapter 2 under Qualified Education Ex- tance and refund(s) you received.
penses. Tax-free educational assistance. This includes:
Students in Midwestern disaster areas. The definition • The tax-free part of scholarships and fellowships
of qualified education expenses is expanded for students (see chapter 1),
in these areas. In addition to tuition and fees required for • Pell grants (see chapter 1),
enrollment or attendance at an eligible educational institu-
tion, qualified education expenses for students in Midwest- • Employer-provided educational assistance (see
ern disaster areas include the following. chapter 11),
1. Books, supplies, and equipment required for enroll-

• Veterans’ educational assistance (see chapter 1),
and
ment or attendance at an eligible educational institu-
tion. • Any other nontaxable (tax-free) payments (other
than gifts or inheritances) received as educational
2. For a special needs student, expenses that are nec- assistance.
essary for that person’s enrollment or attendance at
an eligible educational institution.
Refunds. Qualified education expenses do not include
3. For a student who is at least a half-time student, the expenses for which you, or someone else who paid quali-
reasonable costs of room and board, but only to the fied education expenses on behalf of a student, receive a
extent that the costs are not more than the greater of refund. (For information on expenses paid by a dependent
the following two amounts. student or third party, see Who Can Claim a Dependent’s
a. The allowance for room and board, as determined Expenses, on the next page.)
by the eligible educational institution, that was in- If a refund of expenses paid in 2008 is received before
cluded in the cost of attendance (for federal finan- you file your tax return for 2008, simply reduce the amount
cial aid purposes) for a particular academic period of the expenses paid by the amount of the refund received.
and living arrangement of the student. If the refund is received after you file your 2008 tax return,
see When Must the Credit Be Repaid (Recaptured), later.
b. The actual amount charged if the student is resid- You are considered to receive a refund of expenses
ing in housing owned or operated by the eligible when an eligible educational institution refunds loan pro-
educational institution. ceeds to the lender on behalf of the borrower. Depending
on when you are considered to receive the refund, follow
You will need to contact the eligible educational institu- the above instructions or see When Must the Credit Be
tion for qualified room and board costs. Repaid (Recaptured), later.
Amounts that do not reduce qualified education ex-
No Double Benefit Allowed penses. Do not reduce qualified education expenses by
You cannot do any of the following: amounts paid with funds the student receives as:
• Deduct higher education expenses on your income • Payment for services, such as wages,
tax return (as, for example, a business expense) and • A loan,
also claim a lifetime learning credit based on those
same expenses. • A gift,
• Claim a lifetime learning credit in the same year that • An inheritance, or
you are claiming a tuition and fees deduction for the • A withdrawal from the student’s personal savings.
same student.
• Claim a lifetime learning credit and a Hope credit Do not reduce the qualified education expenses by any
based on the same qualified education expenses. scholarship or fellowship reported as income on the stu-
dent’s tax return in the following situations.
• Claim a lifetime learning credit based on the same • The use of the money is restricted to costs of attend-
expenses used to figure the tax-free portion of a
distribution from a Coverdell education savings ac- ance (such as room and board) other than qualified
count (ESA) or qualified tuition program (QTP). See education expenses.
Coordination With Hope and Lifetime Learning Cred- • The use of the money is not restricted and is used to
its in chapter 7 (Coverdell ESA) and chapter 8 pay education expenses that are not qualified (such
(QTP). as room and board).
• Claim a credit based on qualified education ex- For examples, see Adjustments to Qualified Education
penses paid with a tax-free scholarship, grant, or Expenses in chapter 2 .

Expenses That Do Not Qualify IF you... THEN only...

Qualified education expenses do not include amounts paid claim an exemption on your you can claim the lifetime
for: tax return for a dependent learning credit based on that
who is an eligible student dependent’s expenses. The
• Insurance, dependent cannot claim the
credit.
• Medical expenses (including student health fees),
do not claim an exemption the dependent can claim the
• Room and board (but see Students in Midwestern on your tax return for a lifetime learning credit. You
disaster areas under Qualified Education Expenses, dependent who is an cannot claim the credit
earlier, for an exception), eligible student (even if based on this dependent’s
entitled to the exemption) expenses.
• Transportation, or
• Similar personal, living, or family expenses.
This is true even if the amount must be paid to the institu- Expenses paid by dependent. If you claim an exemption
tion as a condition of enrollment or attendance. on your tax return for an eligible student who is your
dependent, treat any expenses paid (or deemed paid) by
Sports, games, hobbies, and noncredit courses. Qual- your dependent as if you had paid them. Include these
ified education expenses generally do not include ex- expenses when figuring the amount of your lifetime learn-
penses that relate to any course of instruction or other ing credit.
education that involves sports, games or hobbies, or any Qualified education expenses paid directly to an
noncredit course. However, if the course of instruction or TIP eligible educational institution for your dependent
other education is part of the student’s degree program or under a court-approved divorce decree are
is taken by the student to acquire or improve job skills, treated as paid by your dependent.
these expenses can qualify.
Comprehensive or bundled fees. Some eligible educa- Expenses paid by you. If you claim an exemption for a
tional institutions combine all of their fees for an academic dependent who is an eligible student, only you can include
period into one amount. If you do not receive or do not any expenses you paid when figuring the amount of the
have access to an allocation showing how much you paid lifetime learning credit. If neither you nor anyone else
for qualified education expenses and how much you paid claims an exemption for the dependent, only the depen-
for personal expenses, such as those listed above, contact dent can include any expenses you paid when figuring the
the institution. The institution is required to make this lifetime learning credit.
allocation and provide you with the amount you paid (or
were billed) for qualified education expenses on Form Expenses paid by others. Someone other than you, your
1098-T, Tuition Statement. See Figuring the Credit, later, spouse, or your dependent (such as a relative or former
for more information about Form 1098-T. spouse) may make a payment directly to an eligible educa-
tional institution to pay for an eligible student’s qualified
education expenses. In this case, the student is treated as
Who Is an Eligible Student receiving the payment from the other person and, in turn,
paying the institution. If you claim an exemption on your tax
For purposes of the lifetime learning credit, an eligible return for the student, you are considered to have paid the
student is a student who is enrolled in one or more courses expenses.
at an eligible educational institution (as defined under
Qualified Education Expenses, earlier). Example. In 2008, Ms. Allen makes a payment directly
to an eligible educational institution for her grandson
Todd’s qualified education expenses. For purposes of
Who Can Claim a claiming a lifetime learning credit, Todd is treated as re-
ceiving the money as a gift from his grandmother and, in
Dependent’s Expenses turn, paying his qualified education expenses himself.
Unless an exemption for Todd is claimed on someone
If there are qualified education expenses for your depen- else’s 2008 tax return, only Todd can use the payment to
dent for a year, either you or your dependent, but not both claim a lifetime learning credit.
of you, can claim a lifetime learning credit for your depen-
dent’s expenses for that year. If anyone, such as Todd’s parents, claims an exemption
For you to claim a lifetime learning credit for your depen- for Todd on his or her 2008 tax return, whoever claims the
dent’s expenses, you must also claim an exemption for exemption may be able to use the expenses to claim a
your dependent. You do this by listing your dependent’s lifetime learning credit. If anyone else claims an exemption
name and other required information on Form 1040 (or for Todd, Todd cannot claim a lifetime learning credit.
Form 1040A), line 6c.
Tuition reduction. When an eligible educational institu-
tion 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 chap-
ter 1.

MAGI when using Form 1040A. If you file Form

Figuring the Credit 1040A, your MAGI is the AGI on line 22 of that form.
MAGI when using Form 1040. If you file Form 1040,
The amount of the lifetime learning credit is 20% of the first your MAGI is the AGI on line 38 of that form, modified by
$10,000 of qualified education expenses you paid for all
eligible students. The maximum amount of lifetime learn- adding back any:
ing credit you can claim for 2008 is $2,000 (20% × 1. Foreign earned income exclusion,
$10,000). However, that amount may be reduced based on
your modified adjusted gross income (MAGI). See Effect of 2. Foreign housing exclusion,
the Amount of Your Income on the Amount of Your Credit 3. Foreign housing deduction,
on this page.
Students in Midwestern disaster areas. For students can Samoa, and
in Midwestern disaster areas, the credit rate is modified to
40% of qualified expenses paid, with a maximum lifetime 5. Exclusion of income for bona fide residents of Puerto
learning credit allowed on your return of $4,000. If you are Rico.
claiming a lifetime learning credit for both students in a You can use Worksheet 3-1 to figure your MAGI.
Midwestern disaster area and other students, the qualified
education expenses taken into account for other students
cannot exceed $10,000 reduced by the qualified education Worksheet 3-1. MAGI for the Lifetime
expenses of the students in the Midwestern disaster areas. Learning Credit
Example. Bruce and Toni Harper are married and file a 1. Enter your adjusted gross income
joint tax return. For 2008, their MAGI is $75,000. Toni is (Form 1040, line 38) . . . . . . . . . . . . . . 1.
attending a local college (an eligible educational institu- 2. Enter your foreign earned
tion) to earn credits toward a degree in nursing. The col- income exclusion and/or
lege is not in a Midwestern disaster area. She already has housing exclusion (Form
a bachelor’s degree in history and wants to become a 2555, line 45, or Form
nurse. In August 2008, Toni paid $6,000 of qualified edu- 2555-EZ, line 18) . . . . . 2.
cation expenses for her Fall 2008 semester. Bruce and 3. Enter your foreign
Toni can claim a $1,200 (20% × $6,000) lifetime learning housing deduction (Form
credit on their 2008 joint tax return. 2555, line 50) . . . . . . . . 3.
Form 1098-T. To help you figure your lifetime learning 4. Enter the amount of
credit, you should receive Form 1098-T. Generally, an income from Puerto Rico
eligible educational institution (such as a college or univer- you are excluding . . . . . 4.
sity) must send Form 1098-T (or acceptable substitute) to 5. Enter the amount of
each enrolled student by February 2, 2009. An institution income from American
may choose to report either payments received (box 1), or Samoa you are excluding
amounts billed (box 2), for qualified education expenses. (Form 4563, line 15) . . . 5.
However, the amounts in boxes 1 and 2 of Form 1098-T 6. Add the amounts on
may be different than what you actually paid. When figur- lines 2, 3, 4, and 5 . . . . . . . . . . . . . . . . 6.
ing the credit, use only the amounts you paid or were
7. Add the amounts on lines 1 and 6.
deemed to have paid in 2008 for qualified education ex- This is your modified adjusted
penses. gross income. Enter this amount
In addition, your Form 1098-T should give you other on Form 8863, line 9 . . . . . . . . . . . . . . 7.
information for that institution, such as adjustments made
bursements or refunds, and whether you were enrolled at Phaseout. If your MAGI is within the range of incomes
least half-time or were a graduate student.
The eligible educational institution may ask for a com- where the credit must be reduced, you will figure your
pleted Form W-9S, Request for Student’s or Borrower’s reduced credit using lines 7–13 of Form 8863. The same
Taxpayer Identification Number and Certification, or simi- method is shown in the following example.
lar statement to obtain the student’s name, address, and
taxpayer identification number. Example. You are filing a joint return with a MAGI of
$106,000. In 2008, you paid $6,600 of qualified education
expenses.
Effect of the Amount of Your Income You figure the tentative lifetime learning credit (20% of
on the Amount of Your Credit the first $10,000 of qualified education expenses you paid
for all eligible students). The result is a $1,320 (20% x
The amount of your lifetime learning credit is phased out $6,600) tentative credit.
(gradually reduced) if your modified adjusted gross income
(MAGI) is between $48,000 and $58,000 ($96,000 and Because your MAGI is within the range of incomes
$116,000 if you file a joint return). You cannot claim a where the credit must be reduced, you must multiply your
lifetime learning credit if your MAGI is $58,000 or more tentative credit ($1,320) by a fraction. The numerator of the
($116,000 or more if you file a joint return). fraction is $116,000 (the upper limit for those filing a joint
return) minus your MAGI. The denominator is $20,000, the
Modified adjusted gross income (MAGI). For most tax- range of incomes for the phaseout ($96,000 to $116,000).
payers, MAGI is adjusted gross income (AGI) as figured on The result is the amount of your phased out (reduced)
their federal income tax return. lifetime learning credit ($660).

$1,320 × $116,000 − $106,000 = $660 You filed your 2008 tax return on February 15, 2009, and
$20,000 claimed a lifetime learning credit of $1,860. After you filed
your return, your child dropped two courses and you re-
ceived a refund of $2,900. You must refigure your 2008
lifetime learning credit using $6,400 of qualified education
Claiming the Credit expenses instead of $9,300. The refigured credit is $1,280.
Include the difference of $580 in the total on the “Tax” line
You claim the lifetime learning credit by completing Parts II of your 2009 Form 1040 or 1040A.
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. A filled-in Form 8863 is shown at the end of
this chapter. Illustrated Example
Judy Green, a single taxpayer, is taking courses at a
community college (not in a Midwestern disaster area) to
When Must the Credit Be be recertified to teach in public schools. Her MAGI is
Repaid (Recaptured) $27,000. Her tax, before credits, is $2,200. In July 2008
she pays $700 for the Summer 2008 semester; in August
2008 she pays $1,900 for the Fall 2008 semester; and in
If, after you file your 2008 tax return, you or someone else December 2008 she pays another $1,900 for the Spring
receives tax-free educational assistance for, or a refund of, semester beginning January 2009. Judy and the college
an expense you used to figure a lifetime learning credit on meet all the requirements for the lifetime learning credit.
that return, you may have to repay all or part of the credit. She can use all of the $4,500 tuition she paid in 2008 when
You must refigure your lifetime learning credit for 2008 as if figuring her credit for her 2008 tax return. She figures her
the assistance or refund was received in 2008. Subtract credit as shown on the filled-in Form 8863 on the next
the amount of the refigured credit from the amount of the page.
credit you claimed. The result is the amount you must
repay. You add the repayment (recapture) to your tax Note. In Appendix A at the end of this publication, there
liability for the year in which you receive the assistance or is an example illustrating the use of Form 8863 when both
refund. See the instructions for your tax return for that year the Hope credit and the lifetime learning credit are claimed
to find out how to report the recapture amount. Your origi- on the same tax return.
nal 2008 tax return does not change.
Example. You paid $9,300 tuition and fees in Decem-

ber 2008, and your child began college in January 2009.


Judy Green 000 00 7777
than $2,400* for
$4,800.
credit for another student, go to Part II; otherwise, go to Part III 䊳 2
Judy Green 000 00 7777 4,500
4 Add the amounts on line 3, column (c), and enter the total 4 4,500
5a Enter the smaller of line 4 or $10,000 5a 4,500
c Subtract line 5b from line 5a 5c 4,500
b Multiply line 5c by 20% (.20) 6b 900
c Tentative lifetime learning credit. Add lines 6a and 6b and go to Part III 6c 900
7 Tentative education credits. Add lines 2 and 6c 7 900
(rounded to at least three places) 12 ⫻ .
13 Multiply line 7 by line 12 䊳 13 900
1040A, line 31 䊳 17 900

Table 3-2. Table 1 from Publication 4492-B

Students attending an eligible educational institution in the counties listed below may qualify for the special Midwestern disaster area
rules for the Hope or lifetime learning credit or the tuition and fees deduction.
Applicable
Disaster Date* State Affected Counties — Midwestern Disaster Areas
05/02/2008 Arkansas Arkansas, Benton, Cleburne, Conway, Crittenden, Grant, Lonoke, Mississippi, Phillips, Pulaski,
Saline, and Van Buren.
06/01/2008 Illinois Adams, Calhoun, Clark, Coles, Crawford, Cumberland, Douglas, Edgar, Hancock, Henderson,
Jasper, Jersey, Lake, Lawrence, Mercer, Rock Island, Whiteside, and Winnebago.
06/06/2008 Indiana Adams, Bartholomew, Brown, Clay, Daviess, Dearborn, Decatur, Gibson, Grant, Greene,
Hamilton, Hancock, Hendricks, Henry, Huntington, Jackson, Jefferson, Jennings, Johnson, Knox,
Lawrence, Madison, Marion, Monroe, Morgan, Owen, Parke, Pike, Posey, Putnam, Randolph,
Ripley, Rush, Shelby, Sullivan, Tippecanoe, Vermillion, Vigo, Washington, and Wayne.
05/25/2008 Iowa Adair, Adams, Allamakee, Appanoose, Audubon, Benton, Black Hawk, Boone, Bremer, Buchanan,
Butler, Cass, Cedar, Cerro Gordo, Chickasaw, Clarke, Clayton, Clinton, Crawford, Dallas, Davis,
Decatur, Delaware, Des Moines, Dubuque, Fayette, Floyd, Franklin, Fremont, Greene, Grundy,
Guthrie, Hamilton, Hancock, Hardin, Harrison, Henry, Howard, Humboldt, Iowa, Jackson, Jasper,
Johnson, Jones, Keokuk, Kossuth, Lee, Linn, Louisa, Lucas, Madison, Mahaska, Marion, Marshall,
Mills, Mitchell, Monona, Monroe, Montgomery, Muscatine, Page, Polk, Pottawattamie, Poweshiek,
Ringgold, Scott, Story, Tama, Union, Van Buren, Wapello, Warren, Washington, Webster,
Winnebago, Winneshiek, Worth, and Wright.
05/10/2008 Missouri Barry, Jasper, and Newton.
06/01/2008 Missouri Adair, Andrew, Callaway, Cass, Chariton, Clark, Gentry, Greene, Harrison, Holt, Johnson, Lewis,
Lincoln, Linn, Livingston, Macon, Marion, Monroe, Nodaway, Pike, Putnam, Ralls, St. Charles,
Stone, Taney, Vernon, and Webster.
05/22/2008 Nebraska Buffalo, Butler, Colfax, Custer, Dawson, Douglas, Gage, Hamilton, Holt, Jefferson, Kearney,
Lancaster, Platte, Richardson, Sarpy, and Saunders.
06/05/2008 Wisconsin Adams, Calumet, Crawford, Columbia, Dane, Dodge, Fond du Lac, Grant, Green, Green Lake,
Iowa, Jefferson, Juneau, Kenosha, La Crosse, Manitowoc, Marquette, Milwaukee, Monroe,
Ozaukee, Racine, Richland, Rock, Sauk, Sheboygan, Vernon, Walworth, Washington, Waukesha,
and Winnebago.
* In some cases, the date will be later due to the continuation of the severe storms, tornadoes, or flooding that began on the above
date. For more details, go to www.fema.gov

Table 4-1. Student Loan Interest Deduction

at a Glance
4. Do not rely on this table alone. Refer to the
text for complete details.
Student Loan Interest Feature Description
Deduction Maximum
benefit
You can reduce your income subject to
tax by up to $2,500.
Loan Your student loan:
qualifications • must have been taken out solely to
What’s New pay qualified education expenses, and
• cannot be from a related person or
made under a qualified employer plan.
Income limits increased. If you are married and file a
joint return, the amount of your student loan interest de- Student The student must be:
qualifications • you, your spouse, or your dependent,
duction for 2008 is gradually reduced (phased out) if your and
modified adjusted gross income (MAGI) is between • enrolled at least half-time in a degree
$115,000 and $145,000. You cannot take a deduction if program.
your MAGI is $145,000 or more. This is an increase from
Time limit on You can deduct interest paid during the
the 2007 limits of $110,000 and $140,000. See Effect of deduction remaining period of your student loan.
the Amount of Your Income on the Amount of Your Deduc-
tion, later, for more information. Phaseout The amount of your deduction depends
on your income level.
Introduction Qualified Student Loan

Generally, personal interest you pay, other than certain This is a loan you took out solely to pay qualified education
mortgage interest, is not deductible on your tax return. expenses (defined later) that were:
However, if your modified adjusted gross income (MAGI) is
less than $70,000 ($145,000 if filing a joint return) there is a • For you, your spouse, or a person who was your
special deduction allowed for paying interest on a student dependent when you took out the loan,
loan (also known as an education loan) used for higher • Paid or incurred within a reasonable period of time
education. For most taxpayers, MAGI is the adjusted gross before or after you took out the loan, and
income as figured on their federal income tax return before • For education provided during an academic period
subtracting any deduction for student loan interest. This for an eligible student.
deduction can reduce the amount of your income subject
to tax by up to $2,500 in 2008. Loans from the following sources are not qualified stu-
The student loan interest deduction is taken as an dent loans.
adjustment to income. This means you can claim this • A related person.
deduction even if you do not itemize deductions on Sched-
ule A (Form 1040).
• A qualified employer plan.
This chapter explains:
Your dependent. Generally, your dependent is someone
• What type of loan interest you can deduct, who is either a:
• Whether you can claim the deduction, • Qualifying child, or
• What expenses you must have paid with the student • Qualifying relative.
loan, You can find more information about dependents in Publi-
• Who is an eligible student, cation 501, Exemptions, Standard Deduction, and Filing
Information.
• How to figure the deduction, and
Exceptions. For purposes of the student loan interest
• How to claim the deduction. deduction, there are the following exceptions to the gen-
eral rules for dependents.
Table 4-1 summarizes the features of the student loan
interest deduction. • An individual can be your dependent even if you are
the dependent of another taxpayer.
• An individual can be your dependent even if the
Student Loan Interest Defined individual files a joint return with a spouse.
• An individual can be your dependent even if the
Student loan interest is interest you paid during the year on individual had gross income that was equal to or
a qualified student loan. It includes both required and more than the exemption amount for the year
voluntary interest payments. ($3,500 for 2008).
Page 28 Chapter 4 Student Loan Interest Deduction

Reasonable period of time. Qualified education ex- • Books, supplies, and equipment.
penses are treated as paid or incurred within a reasonable
period of time before or after you take out the loan if they
• Other necessary expenses (such as transportation).
are paid with the proceeds of student loans that are part of The cost of room and board qualifies only to the extent
a federal postsecondary education loan program. that it is not more than the greater of:
Even if not paid with the proceeds of that type of loan,
the expenses are treated as paid or incurred within a • The allowance for room and board, as determined
reasonable period of time if both of the following require- by the eligible educational institution, that was in-
ments are met. cluded in the cost of attendance (for federal financial
aid purposes) for a particular academic period and
• The expenses relate to a specific academic period, living arrangement of the student, or
and
• The loan proceeds are disbursed within a period that • The actual amount charged if the student is residing
in housing owned or operated by the eligible educa-
begins 90 days before the start of that academic tional institution.
period and ends 90 days after the end of that aca-
demic period.
If neither of the above situations applies, the reasonable institution is any college, university, vocational school, or
period of time usually is determined based on all the other postsecondary educational institution eligible to par-
relevant facts and circumstances. ticipate in a student aid program administered by the U.S.
Department of Education. It includes virtually all accredited
Academic period. An academic period includes a se- public, nonprofit, and proprietary (privately owned
mester, trimester, quarter, or other period of study (such as profit-making) postsecondary institutions.
a summer school session) as reasonably determined by an Certain educational institutions located outside the
educational institution. In the case of an educational insti- United States also participate in the U.S. Department of
tution that uses credit hours or clock hours and does not Education’s Federal Student Aid (FSA) programs.
have academic terms, each payment period can be treated
as an academic period. For purposes of the student loan interest deduction, an
eligible educational institution also includes an institution
Eligible student. This is a student who was enrolled at conducting an internship or residency program leading to a
least half-time in a program leading to a degree, certificate, degree or certificate from an institution of higher education,
or other recognized educational credential. a hospital, or a health care facility that offers postgraduate
training.
Enrolled at least half-time. A student was enrolled at
least half-time if the student was taking at least half the An educational institution must meet the above criteria
normal full-time work load for his or her course of study. only during the academic period(s) for which the student
The standard for what is half of the normal full-time work loan was incurred. The deductibility of interest on the loan
load is determined by each eligible educational institution. is not affected by the institution’s subsequent loss of eligi-
However, the standard may not be lower than any of those bility.
established by the U.S. Department of Education under the The educational institution should be able to tell
Higher Education Act of 1965. TIP you if it is an eligible educational institution.
Related person. You cannot deduct interest on a loan
you get from a related person. Related persons include:
• Your spouse,
• Your brothers and sisters, Adjustments to Qualified Education
• Your half brothers and half sisters,
Expenses
• Your ancestors (parents, grandparents, etc.), You must reduce your qualified education expenses by the
total amount paid for them with the following tax-free items.
• Your lineal descendants (children, grandchildren,
etc.), and • Employer-provided educational assistance. See
chapter 11.
• Certain corporations, partnerships, trusts, and ex-
empt organizations. • Tax-free distribution of earnings from a Coverdell
education savings account (ESA). See chapter 7.
Qualified employer plan. You cannot deduct interest on • Tax-free distribution of earnings from a qualified tui-
a loan made under a qualified employer plan or under a tion program (QTP). See chapter 8.
contract purchased under such a plan. • U.S. savings bond interest that you exclude from
income because it is used to pay qualified education
Qualified Education Expenses expenses. See chapter 10.
For purposes of the student loan interest deduction, these

• The tax-free part of scholarships and fellowships.
See chapter 1.
expenses are the total costs of attending an eligible educa-
tional institution, including graduate school. They include • Veterans’ educational assistance. See chapter 1.
amounts paid for the following items.
• Any other nontaxable (tax-free) payments (other
• Tuition and fees. than gifts or inheritances) received as educational
assistance.
• Room and board.
Chapter 4 Student Loan Interest Deduction Page 29
Include As Interest Voluntary interest payments. These are payments

made on a qualified student loan during a period when
In addition to simple interest on the loan, if all other require- interest payments are not required, such as when the
ments are met, the items discussed below can be student borrower has been granted a deferment or the loan has not
loan interest. yet entered repayment status.
Loan origination fee. In general, this is a one-time fee Example. The payments on Roger’s student loan were
charged by the lender when a loan is made. To be deducti- scheduled to begin in June 2007, 6 months after he gradu-
ble as interest, a loan origination fee must be for the use of ated from college. He began making payments as re-
money rather than for property or services (such as com- quired. In September 2008, Roger enrolled in graduate
mitment fees or processing costs) provided by the lender. school on a full-time basis. He applied for and was granted
A loan origination fee treated as interest accrues over the deferment of his loan payments while in graduate school.
term of the loan. Wanting to pay down his student loan as much as possible,
Loan origination fees were not required to be reported he made loan payments in October and November 2008.
on Form 1098-E, Student Loan Interest Statement, for Even though these were voluntary (not required) pay-
loans made before September 1, 2004. If loan origination ments, Roger can deduct the interest paid in October and
fees are not included in the amount reported on your Form November.
1098-E, you can use any reasonable method to allocate
the loan origination fees over the term of the loan. The
method shown in the example below allocates equal por- Allocating Payments Between Interest and
tions of the loan origination fee to each payment required Principal
under the terms of the loan. A method that results in the
double deduction of the same portion of a loan origination The allocation of payments between interest and principal
fee would not be reasonable. for tax purposes may not be the same as the allocation
shown on the Form 1098-E or other statement you receive
Example. In August 2004, Bill took out a student loan from the lender or loan servicer. To make the allocation for
for $16,000 to pay the tuition for his senior year of college. tax purposes, a payment generally applies first to stated
The lender charged a 3% loan origination fee ($480) that interest that remains unpaid as of the date the payment is
was withheld from the funds Bill received. Bill began mak- due, second to any loan origination fees allocable to the
ing payments on his student loan in 2008. Because the payment, third to any capitalized interest that remains
loan origination fee was not included in his 2008 Form unpaid as of the date the payment is due, and fourth to the
1098-E, Bill can use any reasonable method to allocate outstanding principal.
that fee over the term of the loan. Bill’s loan is payable in
120 equal monthly payments. He allocates the $480 fee Example. In August 2007, Peg took out a $10,000 stu-
equally over the total number of payments ($480 ÷ 120 dent loan to pay the tuition for her senior year of college.
months = $4 per month). Bill made 7 payments in 2008, so The lender charged a 3% loan origination fee ($300) that
he paid $28 ($4 × 7) of interest attributable to the loan was withheld from the funds Peg received. The interest
origination fee. To determine his student loan interest (5% simple) on this loan accrued while she completed her
deduction, he will add the $28 to the amount of other senior year and for 6 months after she graduated. At the
interest reported to him on Form 1098-E. end of that period, the lender determined the amount to be
Capitalized interest. This is unpaid interest on a student repaid by capitalizing all accrued but unpaid interest ($625
loan that is added by the lender to the outstanding principal interest accrued from August 2007 through October 2008)
balance of the loan. Capitalized interest is treated as inter- and adding it to the outstanding principal balance of the
est for tax purposes and is deductible as payments of loan. The loan is payable over 60 months, with a payment
principal are made on the loan. No deduction for capital- of $200.51 due on the first of each month, beginning
ized interest is allowed in a year in which no loan payments November 2008.
were made. Peg did not receive a Form 1098-E for 2008 from her
lender because the amount of interest she paid did not
Interest on revolving lines of credit. This interest, which require the lender to issue an information return. However,
includes interest on credit card debt, is student loan inter- she did receive an account statement from the lender that
est if the borrower uses the line of credit (credit card) only showed the following 2008 payments on her outstanding
to pay qualified education expenses. See Qualified Educa- loan of $10,625 ($10,000 principal + $625 accrued but
tion Expenses, earlier. unpaid interest).
Interest on refinanced student loans. This includes in- Payment Date Payment Stated Interest Principal
terest on both: November 2008 $200.51 $44.27 $156.24
• Consolidated loans—loans used to refinance more December 2008 $200.51 $43.62 $156.89
than one student loan of the same borrower, and Totals $401.02 $87.89 $313.13
• Collapsed loans—two or more loans of the same To determine the amount of interest that could be de-
borrower that are treated by both the lender and the ducted on the loan for 2008, Peg starts with the total
borrower as one loan. amount of stated interest she paid, $87.89. Next, she uses
a reasonable method to allocate the loan origination fee
If you refinance a qualified student loan for more over the term of the loan ($300 ÷ 60 months = $5 per
!
CAUTION
than your original loan and you use the additional
amount for any purpose other than qualified edu-
month). A total of $10 ($5 of each of the two principal
payments) should be treated as interest for tax purposes.
cation expenses, you cannot deduct any interest paid on Peg then applies the unpaid capitalized interest ($625) to
the refinanced loan. the two principal payments in the order in which they were

made, and determines that the remaining amount of princi- Example 2. During 2008, Jo paid $1,100 interest on her
pal of both payments is treated as interest for tax pur- qualified student loan. Only she is legally obligated to
poses. Assuming that Peg qualifies to take the student make the payments. Jo’s parents claimed an exemption for
loan interest deduction, she can deduct $401.02 ($87.89 + her on their 2008 tax return. In this case, neither Jo nor her
$10 + $303.13). parents may deduct the student loan interest Jo paid in
2008.
For 2009, Peg will continue to allocate $5 of the loan
origination fee to the principal portion of each monthly
payment she makes and treat that amount as interest for Interest paid by others. If you are the person legally
tax purposes. She also will apply the remaining amount of obligated to make interest payments and someone else
capitalized interest ($625 − $303.13 = $321.87) to the makes a payment of interest on your behalf, you are
principal payments in the order in which they are made treated as receiving the payments from the other person
until the balance is zero, and treat those amounts as and, in turn, paying the interest.
interest for tax purposes.
Example 1. Darla obtained a qualified student loan to
attend college. After Darla’s graduation from college, she
Do Not Include As Interest worked as an intern for a nonprofit organization. As part of
You cannot claim a student loan interest deduction for any the internship program, the nonprofit organization made an
of the following items. interest payment on behalf of Darla. This payment was
treated as additional compensation and reported in box 1
• Interest you paid on a loan if, under the terms of the of her Form W-2. Assuming all other qualifications are met,
loan, you are not legally obligated to make interest Darla can deduct this payment of interest on her tax return.
payments.
• Loan origination fees that are payments for property Example 2. Ethan obtained a qualified student loan to
or services provided by the lender, such as commit- attend college. After graduating from college, the first
ment fees or processing costs. monthly payment on his loan was due in December. As a
gift, Ethan’s mother made this payment for him. No one is
• Interest you paid on a loan to the extent payments claiming a dependency exemption for Ethan on his or her
were made through your participation in the National tax return. Assuming all other qualifications are met, Ethan
Health Service Corps Loan Repayment Program can deduct this payment of interest on his tax return.
(the “NHSC Loan Repayment Program”) or certain
other loan repayment assistance programs. For
more information, see Student Loan Repayment As- No Double Benefit Allowed
sistance in chapter 5. You cannot deduct as interest on a student loan any
amount that is an allowable deduction under any other
provision of the tax law (for example, as home mortgage
When Must Interest Be Paid interest).
You can deduct all interest you paid during the year on
your student loan, including voluntary payments, until the
loan is paid off. Figuring the Deduction
Your student loan interest deduction for 2008 is generally
the smaller of:
Can You Claim the Deduction • $2,500, or
Generally, you can claim the deduction if all of the following • The interest you paid in 2008.
requirements are met. However, the amount determined above may be gradually
• Your filing status is any filing status except married reduced (phased out) or eliminated based on your filing
filing separately. status and modified adjusted gross income (MAGI) as
explained below. You can use Worksheet 4-1 (at the end of
• No one else is claiming an exemption for you on his this chapter) to figure both your MAGI and your deduction.
or her tax return.
• You are legally obligated to pay interest on a quali- Form 1098-E. To help you figure your student loan inter-
fied student loan. est deduction, you should receive Form 1098-E. Gener-
ally, an institution (such as a bank or governmental
• You paid interest on a qualified student loan. agency) that received interest payments of $600 or more
during 2008 on one or more qualified student loans must
Claiming an exemption for you. Another taxpayer is send Form 1098-E (or acceptable substitute) to each bor-
claiming an exemption for you if he or she lists your name rower by February 2, 2009.
and other required information on his or her Form 1040 (or For qualified student loans taken out before September
Form 1040A), line 6c, or Form 1040NR, line 7c. 1, 2004, the institution is required to include on Form
1098-E only payments of stated interest. Other interest
Example 1. During 2008, Josh paid $600 interest on his payments, such as certain loan origination fees and capi-
qualified student loan. Only he is legally obligated to make talized interest, may not appear on the form you receive.
the payments. No one claimed an exemption for Josh for However, if you pay qualifying interest that is not included
2008. Assuming all other requirements are met, Josh can on Form 1098-E, you can also deduct those amounts. See
deduct the $600 of interest he paid on his 2008 Form 1040 Allocating Payments Between Interest and Principal, ear-
or 1040A. lier.

The lender may ask for a completed Form W-9S, Re- 3. Foreign housing deduction,
quest for Student’s or Borrower’s Taxpayer Identification
Number and Certification, or similar statement to obtain the
can Samoa, and
borrower’s name, address, and taxpayer identification
number. The form may also be used by the borrower to 5. Exclusion of income for bona fide residents of Puerto
certify that the student loan was incurred solely to pay for Rico.
qualified education expenses.
MAGI when using Form 1040NR. If you file Form
Effect of the Amount of Your Income 1040NR, your MAGI is the AGI on line 36 of that form
figured without taking into account any amount on line 32
on the Amount of Your Deduction (Student loan interest deduction) or line 33 (Domestic
production activities deduction).
The amount of your student loan interest deduction is
phased out (gradually reduced) if your modified adjusted MAGI when using Form 1040NR-EZ. If you file Form
gross income (MAGI) is between $55,000 and $70,000 1040NR-EZ, your MAGI is the AGI on line 10 of that form
($115,000 and $145,000 if you file a joint return). You figured without taking into account any amount on line 9
cannot take a student loan interest deduction if your MAGI (Student loan interest deduction).
is $70,000 or more ($145,000 or more if you file a joint
return). Phaseout. If your MAGI is within the range of incomes
where the credit must be reduced, you must figure your
Modified adjusted gross income (MAGI). For most tax- reduced deduction. To figure the phaseout, multiply your
payers, MAGI is adjusted gross income (AGI) as figured on interest deduction (before the phaseout) by a fraction. The
their federal income tax return before subtracting any de- numerator is your MAGI minus $55,000 ($115,000 in the
duction for student loan interest. However, as discussed case of a joint return). The denominator is $15,000
below, there may be other modifications. ($30,000 in the case of a joint return). Subtract the result
Table 4-2 shows how the amount of your MAGI can from your deduction (before the phaseout) to give you the
affect your student loan interest deduction. amount you can deduct.
Table 4-2. Effect of MAGI on Student Loan Example 1. During 2008 you paid $800 interest on a
Interest Deduction qualified student loan. Your 2008 MAGI is $140,000 and
you are filing a joint return. You must reduce your deduc-
IF your THEN your student tion by $667, figured as follows.
filing loan interest
status is... AND your MAGI is... deduction is... $140,000 − $115,000
$800 × $30,000 = $667
single, not more than not affected by the
head of $55,000 phaseout. Your reduced student loan interest deduction is $133
household,
or more than $55,000 reduced because of ($800 − $667).
qualifying but less than the phaseout.
widow(er) $70,000 Example 2. The facts are the same as in Example 1
$70,000 or more eliminated by the except that you paid $2,750 interest. Your maximum de-
phaseout. duction for 2008 is $2,500. You must reduce your maxi-
married not more than not affected by the mum deduction by $2,083, figured as follows.
filing joint $115,000 phaseout.
return $2,500 × $140,000 − $115,000 = $2,083
more than $115,000 reduced because of $30,000
but less than the phaseout.
$145,000 In this example, your reduced student loan interest deduc-
$145,000 or more eliminated by the
tion is $417 ($2,500 − $2,083).
phaseout.
Which Worksheet To Use
MAGI when using Form 1040A. If you file Form Generally, you figure the deduction using the Student Loan
1040A, your MAGI is the AGI on line 22 of that form figured Interest Deduction Worksheet in the Form 1040 or Form
without taking into account any amount on line 18 (Student 1040A instructions. However, if you are filing Form 2555,
loan interest deduction) and line 19 (Tuition and fees 2555-EZ, or 4563, or you are excluding income from
deduction). sources within Puerto Rico, you must complete Worksheet
MAGI when using Form 1040. If you file Form 1040, 4-1.
your MAGI is the AGI on line 38 of that form figured without
taking into account any amount on line 33 (Student loan
interest deduction), line 34 (Tuition and fees deduction), or
line 35 (Domestic production activities deduction), and
Claiming the Deduction
modified by adding back any: The student loan interest deduction is an adjustment to
income. To claim the deduction, enter the allowable
1. Foreign earned income exclusion, amount on line 33 (Form 1040), line 18 (Form 1040A), line
2. Foreign housing exclusion, 32 (Form 1040NR), or line 9 (Form 1040NR-EZ).

Worksheet 4-1. Student Loan Interest Deduction Worksheet Keep for Your Records
Use this worksheet instead of the worksheet in the Form 1040 instructions if you are filing Form 2555,
2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico. You must complete
Form 1040, lines 7 through 32, plus any amount to be entered on the dotted line next to line 36, before
using this worksheet.
1. Enter the total interest you paid in 2008 on qualified student loans. Do not enter
more than $2,500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.
2. Enter the amount from Form 1040, line 22 . . . . . . . . . . . . . . . . . . . . . 2.
3. Enter the total of the amounts from Form 1040,
lines 23 through 32 . . . . . . . . . . . . . . . . . . . . . . . 3.
4. Enter the total of any amounts entered on the
dotted line next to Form 1040, line 36 . . . . . . . . . 4.
5. Add lines 3 and 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.
6. Subtract line 5 from line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.
7. Enter any foreign earned income exclusion and/or housing
exclusion (Form 2555, line 45, or Form 2555-EZ, line 18) . . . . . . . . . . 7.
8. Enter any foreign housing deduction (Form 2555, line 50) . . . . . . . . . 8.
9. Enter the amount of income from Puerto Rico you are excluding . . . . 9.
10. Enter the amount of income from American Samoa
you are excluding (Form 4563, line 15) . . . . . . . . . . . . . . . . . . . . . . . 10.
11. Add lines 6 through 10. This is your modified adjusted gross income . . . . . . . . . . . . . . . . . 11.
12. Enter the amount shown below for your filing status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.
• Single, head of household, or qualifying widow(er) — $55,000
• Married filing jointly — $115,000
13. Is the amount on line 11 more than the amount on line 12?
M No. Skip lines 13 and 14, enter -0- on line 15, and go to line 16.
M Yes. Subtract line 12 from line 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.
14. Divide line 13 by $15,000 ($30,000 if married filing jointly). Enter the result as a decimal
(rounded to at least three places). If the result is 1.000 or more, enter 1.000 . . . . . . . . . . . . . . 14. .
15. Multiply line 1 by line 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.
16. Student loan interest deduction. Subtract line 15 from line 1. Enter the result here
and on Form 1040, line 33. Do not include this amount in figuring any other
deduction on your return (such as on Schedule A, C, E, etc.) . . . . . . . . . . . . . . . . . . . . . . . . . 16.

a. As part of an agreement with an entity described
5.
in (1) or (2) under which the funds to make the
loan were provided to the educational institution,
or
Student Loan b. Under a program of the educational institution that

is designed to encourage its students to serve in
Cancellations and occupations with unmet needs or in areas with
unmet needs where the services required of the
Repayment students are for or under the direction of a gov-
ernmental unit or a tax-exempt section 501(c)(3)
Assistance organization.
In satisfying the service requirement in item 3b,

What’s New !
CAUTION
the student must not provide services for the
lender organization.
Law school loan repayment assistance programs.
You can consider a loan made under a law school Loan Section 501(c)(3) organization. This is any corpora-
Repayment Assistance Program (LRAP) to be a qualifying tion, community chest, fund, or foundation organized and
loan for purposes of tax-free student loan cancellation. See operated exclusively for one or more of the following pur-
Student Loan Repayment Assistance below. poses.
• Charitable.
Introduction • Religious.
If you fulfill certain requirements, two types of student loan • Educational.
assistance may be tax free. The types of assistance dis- • Scientific.
cussed in this chapter are:
• Literary.
• Student loan cancellation, and • Testing for public safety.
• Student loan repayment assistance. • Fostering national or international amateur sports
competition (but only if none of its activities involve
providing athletic facilities or equipment).
Student Loan Cancellation • The prevention of cruelty to children or animals.
Generally, if you are responsible for making loan pay-
ments, and the loan is canceled (forgiven), you must in- Eligible educational institution. This is an educational
clude the amount that was forgiven in your gross income institution that maintains a regular faculty and curriculum
for tax purposes. However, if your student loan is can- and normally has a regularly enrolled body of students in
celed, you may not have to include any amount in income. attendance at the place where it carries on its educational
This section describes the requirements for tax-free treat- activities.
ment of canceled student loans.
Refinanced Loan
Qualifying Loans
If you refinanced a student loan with another loan from an
To qualify for tax-free treatment, your loan must contain a eligible educational institution or a tax-exempt organiza-
provision that all or part of the debt will be canceled if you tion, that loan may also be considered as made by a
work: qualified lender. It is considered made by a qualified lender
if it meets the requirements of item 3b under Qualified
• For a certain period of time, lenders beginning in the previous column.
• In certain professions, and
• For any of a broad class of employers.
Student Loan
The loan must have been made by a qualified lender to
assist the borrower in attending an eligible educational Repayment Assistance
institution.
Loan repayment assistance programs (LRAP) provide
Qualified lenders. These include the following. help in repaying student loans for those who work in public
service occupations or in areas with unmet needs. Exam-
1. The government—federal, state, or local, or an in- ples of such occupations are health care professionals in
strumentality, agency, or subdivision thereof. underserved areas, attorneys in legal-aid offices and pros-
ecutor’s or public defender’s offices, and classroom teach-
2. A tax-exempt public benefit corporation that has as- ers in subject areas with shortages.
sumed control of a state, county, or municipal hospi-
An LRAP loan refinances your original student loan(s).
tal and whose employees are considered public
After you work for a certain minimum period of time in a
employees under state law.
qualifying position, all or part of your student loan indebted-
3. An eligible educational institution, if the loan is made: ness is forgiven.
Page 34 Chapter 5 Student Loan Cancellations and Repayment Assistance

The amount of your loan that is forgiven is tax-free if the If your repayment assistance is from a source other than
LRAP meets certain criteria. Repayment assistance re- those listed, contact the program administrator to see if the
ceived under the following programs has been determined LRAP qualifies for tax-free assistance. The program must
to be tax free. meet the qualifications listed earlier in this chapter under
Qualifying Loans.
• National Health Service Corps (NHSC) Loan Repay-
ment Program.
You cannot deduct the interest you paid on a
• State programs eligible for funds under the Public
Health Service Act.
!
CAUTION
student loan to the extent payments were made
through your participation in the above programs.
• Law school LRAP.
Chapter 5 Student Loan Cancellations and Repayment Assistance Page 35

Table 6-1. Tuition and Fees Deduction at a

6. Glance
Do not rely on this table alone. Refer to the
Tuition and Fees

text for complete details.
Deduction Question
What is the
Answer
You can reduce your income subject
maximum to tax by up to $4,000.
What’s New benefit?
Where is the As an adjustment to income on Form
Students in Midwestern disaster areas. The definition deduction taken? 1040 or Form 1040A.
of qualified education expenses for the tuition and fees For whom must A student enrolled in an eligible
deduction is expanded for students attending an eligible the expenses be educational institution who is either:
educational institution in Midwestern disaster areas in the paid? • you,
states of Arkansas, Illinois, Indiana, Iowa, Missouri, Ne- • your spouse, or
braska, and Wisconsin. See Table 3-2 near the end of
• your dependent for whom you
chapter 3 for a list of counties. See Students in Midwestern
claim an exemption.
disaster areas, under Qualified Education Expenses, later
in this chapter for more information. What tuition and Tuition and fees required for
fees are enrollment or attendance at an
deductible? eligible postsecondary educational
Introduction institution, but not including personal,
living, or family expenses, such as
You may be able to deduct qualified education expenses room and board.
paid during the year for yourself, your spouse, or your
dependent. You cannot claim this deduction if your filing
status is married filing separately or if another person can 3. The eligible student is yourself, your spouse, or your
claim an exemption for you as a dependent on his or her dependent for whom you claim an exemption on your
tax return. The qualified expenses must be for higher tax return.
education, as explained later under Qualified Education
Expenses. “Qualified Education Expenses” are defined on the next
page. “Eligible students” are defined later under Who Is an
What is the tax benefit of the tuition and fees deduc- Eligible Student. A “dependent for whom you claim an
tion. The tuition and fees deduction can reduce the exemption” is defined later under Who Can Claim a De-
amount of your income subject to tax by up to $4,000. pendent’s Expenses.
This deduction is taken as an adjustment to income.
This means you can claim this deduction even if you do not
itemize deductions on Schedule A (Form 1040). This de-
Who Cannot Claim the Deduction
duction may be beneficial to you if you cannot take either You cannot claim the tuition and fees deduction if any of
the Hope or lifetime learning credit because your income is the following apply.
too high.
Table 6-1 summarizes the features of the tuition and • Your filing status is married filing separately.
fees deduction. • Another person can claim an exemption for you as a
You may be able to take the Hope or lifetime dependent on his or her tax return. You cannot take
TIP learning credit for your education expenses in- the deduction even if the other person does not
stead of a tuition and fees deduction. You can actually claim that exemption.
choose the one that will give you the lower tax. See • Your modified adjusted gross income (MAGI) is
chapters 2 and 3 for details about the credits. more than $80,000 ($160,000 if filing a joint return).
• You were a nonresident alien for any part of the year
and did not elect to be treated as a resident alien for
Can You Claim the Deduction tax purposes. More information on nonresident
aliens can be found in Publication 519, U.S. Tax
The following rules will help you determine if you can claim Guide for Aliens.
the tuition and fees deduction. • You or anyone else claims a Hope or lifetime learn-
ing credit in 2008 with respect to expenses of the
Who Can Claim the Deduction student for whom the qualified education expenses
were paid.
Generally, you can claim the tuition and fees deduction if
all three of the following requirements are met.
1. You pay qualified education expenses of higher edu-
cation. What Expenses Qualify
2. You pay the education expenses for an eligible stu- The tuition and fees deduction is based on qualified educa-
dent. tion expenses you pay for yourself, your spouse, or your
Page 36 Chapter 6 Tuition and Fees Deduction

dependent for whom you claim an exemption on your tax classes. The college has no policy about how students
return. Generally, the deduction is allowed for qualified should obtain these materials, but any student who
education expenses paid in 2008 in connection with enroll- purchases them from College W’s bookstore will receive a
ment at an institution of higher education during 2008 or for bill directly from the college. Charles bought his books from
an academic period beginning in 2008 or in the first 3 a friend, so what he paid for them is not a qualified educa-
months of 2009. tion expense. Donna bought hers at College W’s book-
For example, if you paid $1,500 in December 2008 for store. Although Donna paid College W directly for her
qualified tuition for the Spring 2009 semester beginning in first-year books and materials, her payment is not a quali-
January 2009, you may be able to use that $1,500 in fied education expense because the books and materials
figuring your 2008 deduction. are not required to be purchased from College W for
Academic period. An academic period includes a se- enrollment or attendance at the institution.
a summer school session) as reasonably determined by an Example 3. When Marci enrolled at College X for her
educational institution. In the case of an educational insti- freshman year, she had to pay a separate student activity
tution that uses credit hours or clock hours and does not fee in addition to her tuition. This activity fee is required of
have academic terms, each payment period can be treated all students, and is used solely to fund on-campus organi-
as an academic period. zations and activities run by students, such as the student
newspaper and the student government. No portion of the
Paid with borrowed funds. You can claim a tuition and fee covers personal expenses. Although labeled as a stu-
fees deduction for qualified education expenses paid with dent activity fee, the fee is required for Marci’s enrollment
the proceeds of a loan. You use the expenses to figure the and attendance at College X. Therefore, it is a qualified
deduction for the year in which the expenses are paid, not expense.
the year in which the loan is repaid. Treat loan payments
sent directly to the educational institution as paid on the Students in Midwestern disaster areas. The definition
date the institution credits the student’s account. of qualified education expenses is expanded for students
in these areas. In addition to tuition and fees required for
Student withdraws from class(es). You can claim a enrollment or attendance at an eligible educational institu-
tuition and fees deduction for qualified education expenses tion, qualified education expenses for students in Midwest-
not refunded when a student withdraws.
ern disaster areas include the following.
Qualified Education Expenses 1. Books, supplies, and equipment required for enroll-
ment or attendance at an eligible educational institu-
For purposes of the tuition and fees deduction, qualified tion.
education expenses are tuition and certain related ex-
penses required for enrollment or attendance at an eligible 2. For a special needs student, expenses that are nec-
educational institution. essary for that person’s enrollment or attendance at
an eligible educational institution.
institution is any college, university, vocational school, or 3. For a student who is at least a half-time student, the
other postsecondary educational institution eligible to par- reasonable costs of room and board, but only to the
ticipate in a student aid program administered by the U.S. extent that the costs are not more than the greater of
Department of Education. It includes virtually all accredited the following two amounts.
public, nonprofit, and proprietary (privately owned a. The allowance for room and board, as determined
profit-making) postsecondary institutions. The educational by the eligible educational institution, that was in-
institution should be able to tell you if it is an eligible cluded in the cost of attendance (for federal finan-
educational institution. cial aid purposes) for a particular academic period
Certain educational institutions located outside the and living arrangement of the student.
Education’s Federal Student Aid (FSA) programs. b. The actual amount charged if the student is resid-
ing in housing owned or operated by the eligible
Related expenses. Student-activity fees and expenses educational institution.
for course-related books, supplies, and equipment are
included in qualified education expenses only if the fees You will need to contact the eligible educational institu-
and expenses must be paid to the institution as a condition tion for qualified room and board costs.
of enrollment or attendance.
In the following examples, assume that each student is
an eligible student and each college or university an eligi- No Double Benefit Allowed
ble educational institution. You cannot do any of the following.
Example 1. Jackson is a sophomore in University V’s • Deduct qualified education expenses you deduct
degree program in dentistry. This year, in addition to tui- under any other provision of the law, for example, as
tion, he is required to pay a fee to the university for the a business expense.
rental of the dental equipment he will use in this program. • Deduct qualified education expenses for a student
Because the equipment rental fee must be paid to Univer- on your income tax return if you or anyone else
sity V for enrollment and attendance, Jackson’s equipment claims a Hope or lifetime learning credit for that
rental fee is a qualified expense. same student in the same year.
Example 2. Donna and Charles, both first-year stu- • Deduct qualified education expenses that have been
dents at College W, are required to have certain books and used to figure the tax-free portion of a distribution
other reading materials to use in their mandatory first-year from a Coverdell education savings account (ESA)
Chapter 6 Tuition and Fees Deduction Page 37

or a qualified tuition program (QTP). For a QTP, this • A withdrawal from the student’s personal savings.
applies only to the amount of tax-free earnings that
were distributed, not to the recovery of contributions Do not reduce the qualified education expenses by any
to the program. See Figuring the Taxable Portion of scholarship or fellowship reported as income on the stu-
a Distribution in chapter 7 (Coverdell ESA) and in dent’s tax return in the following situations.
chapter 8 (QTP). • The use of the money is restricted to costs of attend-
• Deduct qualified education expenses that have been ance (such as room and board) other than qualified
paid with tax-free interest on U.S. savings bonds education expenses.
(Form 8815). See Figuring the Tax-Free Amount in • The use of the money is not restricted and is used to
chapter 10. pay education expenses that are not qualified (such
• Deduct qualified education expenses that have been as room and board).
paid with tax-free scholarship, grant, or employer-
provided educational assistance. See the following Example 1. In 2008, Jackie paid $3,000 for tuition and
section on Adjustments to Qualified Education Ex- $5,000 for room and board at University X. The university
penses. 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
Adjustments to Qualified Education costs, she was awarded a $2,000 scholarship and a
Expenses $4,000 student loan.
The terms of the scholarship state that it may be used to
If you pay qualified education expenses with certain pay any of Jackie’s college expenses. Because she ap-
tax-free funds, you cannot claim a deduction for those plied it toward her tuition, the scholarship is tax free.
amounts. You must reduce the qualified education ex- Therefore, for purposes of figuring the tuition and fees
penses by the amount of any tax-free educational assis- deduction, she must first use the $2,000 scholarship to
tance and refund(s) you received. reduce her tuition (her only qualified education expense).
The student loan is not tax-free educational assistance, so
Tax-free educational assistance. This includes: she does not use it to reduce her qualified expenses.
• The tax-free part of scholarships and fellowships Jackie is treated as having paid $1,000 in qualified educa-
(see chapter 1), tion expenses ($3,000 tuition – $2,000 scholarship) in
2008.
• Pell grants (see chapter 1),
• Employer-provided educational assistance (see Example 2. The facts are the same as in Example 1,
chapter 11), except that Jackie uses the $2,000 scholarship to pay
room and board and, therefore, reports her entire scholar-
• Veterans’ educational assistance (see chapter 1), ship as income on her tax return. In this case, the scholar-
and ship is allocated to expenses other than qualified
• Any other nontaxable (tax-free) payments (other education expenses. Jackie is treated as paying the entire
than gifts or inheritances) received as educational $3,000 tuition with other funds, and can figure her tuition
assistance. and fees deduction on the entire $3,000.
Refunds. Qualified education expenses do not include Expenses That Do Not Qualify
expenses for which you, or someone else who paid quali- Qualified education expenses do not include amounts paid
fied education expenses on behalf of a student, receive a for:
refund. (For information on expenses paid by a dependent
student or third party, see Who Can Claim a Dependent’s • Insurance,
Expenses, later.) • Medical expenses (including student health fees),
If a refund of expenses paid in 2008 is received before
you file your tax return for 2008, simply reduce the amount • Room and board (see Students in Midwestern disas-
of the expenses paid by the amount of the refund received. ter areas under Qualified Education Expenses ear-
If the refund is received after you file your 2008 tax return, lier, for an exception),
see When Must the Deduction Be Repaid (Recaptured), at • Transportation, or
the end of this chapter.
You are considered to receive a refund of expenses
• Similar personal, living, or family expenses.
when an eligible educational institution refunds loan pro- This is true even if the amount must be paid to the institu-
ceeds to the lender on behalf of the borrower. Follow the tion as a condition of enrollment or attendance.
above instructions according to when you are considered
to receive the refund. Sports, games, hobbies, and noncredit courses. Qual-
ified education expenses generally do not include ex-
Amounts that do not reduce qualified education expenses that relate to any course of instruction or other
penses. Do not reduce qualified education expenses by education that involves sports, games or hobbies, or any
amounts paid with funds the student receives as: noncredit course. However, if the course of instruction or
other education is part of the student’s degree program,
• Payment for services, such as wages,
these expenses can qualify.
• A loan,
Comprehensive or bundled fees. Some eligible educa-
• A gift,
tional institutions combine all of their fees for an academic
• An inheritance, or period into one amount. If you do not receive, or do not

have access to, an allocation showing how much you paid Expenses paid by dependent. If your dependent pays
for qualified education expenses and how much you paid qualified education expenses and you can claim an ex-
for personal expenses, such as those listed above, contact emption for your dependent on your tax return, no one can
the institution. The institution is required to make this take a tuition and fees deduction for those expenses.
allocation and provide you with the amount you paid (or Neither you nor your dependent can deduct the expenses.
were billed) for qualified education expenses on Form For purposes of the tuition and fees deduction, you are not
1098-T, Tuition Statement. See Figuring the Deduction, treated as paying any expenses actually paid by a depen-
later, for more information about Form 1098-T. dent for whom you or anyone other than the dependent
can claim an exemption. This rule applies even if you do
not claim an exemption for your dependent on your tax
return.
Who Is an Eligible Student However, if your dependent pays qualified education
expenses and no one can claim an exemption for your
For purposes of the tuition and fees deduction, an eligible dependent on his or her tax return, your dependent can
student is a student who is enrolled in one or more courses take a tuition and fees deduction for those expenses, even
at an eligible educational institution (as defined under if they are paid with the proceeds of a student loan.
Qualified Education Expenses, earlier). The student must
have either a high school diploma or a General Educa- Expenses paid by you. If you claim an exemption for a
tional Development (GED) credential. dependent who is an eligible student, only you can include
any expenses you paid when figuring your tuition and fees
deduction. If neither you nor anyone else can claim an
Who Can Claim a exemption for a dependent who is an eligible student, the
dependent can include any expenses you paid when figur-
Dependent’s Expenses ing the amount of his or her tuition and fees deduction.
Generally, in order to claim the tuition and fees deduction Expenses paid under divorce decree. Qualified educa-
for qualified education expenses for a dependent, you tion expenses paid directly to an eligible educational insti-
must: tution for a student under a court-approved divorce decree
are treated as paid by the student. Only the student would
1. Have paid the expenses, and be eligible to take a tuition and fees deduction for that
payment, and then only if no one else could claim an
2. Claim an exemption for the student as a dependent. exemption for the student.
For you to be able to deduct qualified education ex-
penses for your dependent, you must claim an exemption Expenses paid by others. Someone other than you, your
for that individual. You do this by listing your dependent’s spouse, or your dependent (such as a relative or former
name and other required information on Form 1040, line spouse) may make a payment directly to an eligible educa-
6c. tional 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,
IF your dependent paying the institution. If you claim, or can claim, an exemp-
is an eligible
student and you... AND... THEN... tion on your tax return for the student, you are not consid-
ered to have paid the expenses and you cannot deduct
claim an exemption you paid all only you can deduct them. If the student is not a dependent, only the student
for your dependent qualified education the qualified education
expenses for your expenses that you can deduct payments made directly to the institution for his
dependent paid. Your dependent or her expenses. If the student is your dependent, no one
cannot take a can deduct the payments.
deduction.
claim an exemption your dependent no one is allowed to Example. In 2008, Ms. Baker makes a payment directly
for your dependent paid all qualified take a deduction. to an eligible educational institution for her grandson Dan’s
education qualified education expenses. For purposes of deducting
expenses tuition and fees, Dan is treated as receiving the money as a
do not claim an you paid all no one is allowed to gift from his grandmother and, in turn, paying his own
exemption for your qualified education take a deduction. qualified education expenses.
dependent, but are expenses If an exemption cannot be claimed for Dan on anyone
eligible to
else’s tax return, only Dan can claim a tuition and fees
do not claim an your dependent no one is allowed to deduction for his grandmother’s payment. If someone else
exemption for your paid all qualified take a deduction. can claim an exemption for Dan, no one will be allowed a
dependent, but are education
eligible to expenses deduction for Ms. Baker’s payment.
are not eligible to you paid all only your dependent Tuition reduction. When an eligible educational institu-
claim an exemption qualified education can deduct the
for your dependent expenses amount you paid. The tion provides a reduction in tuition to an employee of the
amount you paid is institution (or spouse or dependent child of an employee),
treated as a gift to the amount of the reduction may or may not be taxable. If it
your dependent. is taxable, the employee is treated as receiving a payment
are not eligible to your dependent only your dependent of that amount and, in turn, paying it to the educational
claim an exemption paid all qualified can take a deduction. institution on behalf of the student. For more information on
for your dependent education tuition reductions, see Qualified Tuition Reduction in chap-
expenses ter 1.

Table 6-2. Effect of MAGI on Maximum

Figuring the Deduction Tuition and Fees Deduction
The maximum tuition and fees deduction in 2008 is $4,000, THEN your
$2,000, or $0, depending on the amount of your modified IF your maximum tuition
adjusted gross income (MAGI). See Effect of the Amount filing AND your MAGI and fees deduction
of Your Income on the Amount of Your Deduction, below. status is... is... is...
Form 1098-T. To help you figure your tuition and fees single, not more than $4,000.
deduction, you should receive Form 1098-T. Generally, an head of $65,000
eligible educational institution (such as a college or univer- household,
or more than $65,000 $2,000.
sity) must send Form 1098-T (or acceptable substitute) to but not more than
each enrolled student by February 2, 2009. An institution qualifying
widow(er) $80,000
may choose to report either payments received (box 1), or
amounts billed (box 2), for qualified education expenses. more than $80,000 $0.
However, the amount in boxes 1 and 2 of Form 1098-T
may be different than what you actually paid. When figur- married not more than $4,000.
ing the deduction, use only the amounts you paid in 2008 filing joint $130,000
for qualified education expenses. return
more than $130,000 $2,000.
In addition, your Form 1098-T should give you other but not more than
information for that institution, such as adjustments made $160,000
bursements or refunds, and whether you were enrolled at more than $160,000 $0.
least half-time or were a graduate student.
The eligible educational institution may ask for a com-
pleted Form W-9S, Request for Student’s or Borrower’s
Taxpayer Identification Number and Certification, or simi- Claiming the Deduction
lar statement to obtain the student’s name, address, and
taxpayer identification number. You claim a tuition and fees deduction by completing Form
8917 and submitting it with your Form 1040 or Form
1040A. Enter the deduction on Form 1040, line 34, or Form
Effect of the Amount of Your Income 1040A, line 19. A filled-in Form 8917 is shown at the end of
on the Amount of Your Deduction this chapter.
If your modified adjusted gross income (MAGI) is not more
than $65,000 ($130,000 if you are married filing jointly),
your maximum tuition and fees deduction is $4,000. If your When Must the Deduction Be
MAGI is larger than $65,000 ($130,000), but is not more
than $80,000 ($160,000 if you are married filing jointly),
Repaid (Recaptured)
your maximum deduction is $2,000. No tuition and fees If, after you file your 2008 tax return, you or someone else
deduction is allowed if your MAGI is larger than $80,000 receives tax-free educational assistance for, or a refund of,
($160,000). an expense you used to figure a tuition and fees deduction
on that return, you may have to repay all or part of the
Modified adjusted gross income (MAGI). For most tax- deduction. This applies to assistance and refunds received
payers, MAGI is adjusted gross income (AGI) as figured on by the individual claiming the deduction, and, in the case of
their federal income tax return before subtracting any de- a student who claims the deduction, refunds received by
duction for tuition and fees. However, as discussed below, anyone else who paid such expenses for the student.
there may be other modifications. You must include the assistance or refund in income in
MAGI when using Form 1040. If you file Form 1040, the year you receive it to the extent that the deduction of
your MAGI is the AGI on line 38 of that form, figured the refunded amount reduced your tax in 2008. Refigure
without taking into account any amount on line 34 (Tuition your tuition and fees deduction for 2008 as if the tax-free
and fees deduction) or line 35 (Domestic production activi- assistance or refund was received in 2008. Subtract the
ties deduction), and modified by adding back any: amount of the refigured deduction from the amount of the
deduction you claimed on your 2008 tax return. The result
1. Foreign earned income exclusion, is the amount you must include in income (recapture). Add
the recapture amount to your income for the year in which
2. Foreign housing exclusion, you received the assistance or refund by entering it on the
3. Foreign housing deduction, “Other income” line of Form 1040. Form 1040A cannot be
used. Your 2008 tax return does not change.
can Samoa, and Example. You paid $3,000 tuition and fees in Decem-
5. Exclusion of income for bona fide residents of Puerto ber 2008, and your child began college in January 2009.
Rico. You filed your 2008 tax return on February 15, 2009, and
claimed a tuition and fees deduction of $3,000. After you
Table 6-2 shows how the amount of your MAGI can filed your return, your child dropped two courses and you
affect your tuition and fees deduction. received a refund of $1,400. You must refigure your 2008
You can use Worksheet 6-1 on the next page to figure tuition and fees deduction using $1,600 of qualified educa-
your MAGI. tion expenses instead of $3,000. The refigured deduction

Worksheet 6-1. MAGI for the Tuition and Fees Deduction Keep for Your Records
Use this worksheet if you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from
sources within Puerto Rico. Before using this worksheet, you must complete Form 1040, lines 7
through 33 and figure any amount to be entered on the dotted line next to line 36.
1. Enter the amount from Form 1040, line 22 . . . . . . . . . . . . . . . . . . . . 1.

2. Enter the total from Form 1040, lines 23
through 33 . . . . . . . . . . . . . . . . . . . . . . . . . 2.
3. Enter the total of any amounts entered on the
dotted line next to Form 1040, line 36 . . . . . . 3.
4. Add lines 2 and 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.
5. Subtract line 4 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.
6. Enter your foreign earned income exclusion and/or housing
exclusion (Form 2555, line 45, or Form 2555-EZ, line 18) . . . . . . . . . 6.
7. Enter your foreign housing deduction (Form 2555, line 50) . . . . . . . . 7.
8. Enter the amount of income from Puerto Rico you are excluding . . . . 8.
9. Enter the amount of income from American Samoa you are
excluding (Form 4563, line 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.
10. Add lines 5 through 9. This is your modified adjusted gross income . . . . . . . . . . . . . . . . . . 10.
Note. If the amount on line 10 is more than $80,000 ($160,000 if married filing jointly),
you cannot take the deduction for tuition and fees.
is $1,600. You must include the difference of $1,400 on the $3,600 for his qualified 2008 tuition. Both he and the
“Other income” line of your 2009 Form 1040. college meet all of the requirements for the tuition and fees
deduction. Tim’s total income (Form 1040, line 22) and
MAGI are $26,000. His income tax liability, before credits,
Illustrated Example is $2,160. He figures his deduction of $3,600 as shown,
later, on Form 8917.
Tim Pfister, a single taxpayer, enrolled full-time at a local
college to earn a degree in engineering. This is the first
year of his postsecondary education. During 2008, he paid

Tuition and Fees Deduction

OMB No. 1545-0074
Form 8917 䊳 See Instructions. 2008
Department of the Treasury 䊳 Attach to Form 1040 or Form 1040A. Attachment
Internal Revenue Service Sequence No. 63
You cannot take both an education credit from Form 8863 and the tuition and fees deduction from this form for the
same student for the same tax year.
CAUTION
Before you begin: ✔ To see if you qualify for this deduction, see Who Can Take the Deduction in the instructions below.
✔ If you file Form 1040, figure any write-in adjustments to be entered on the dotted line next to Form
1040, line 36. See the 2008 Form 1040 instructions for line 36.
Tim Pfister 000 00 5432 3,600
4 Enter the total from either:

● Form 1040, lines 23 through 33, plus any write-in adjustments
entered on the dotted line next to Form 1040, line 36, or
● Form 1040A, lines 16 through 18 4 -0-
5 Subtract line 4 from line 3.* If the result is more than $80,000 ($160,000 if married filing jointly)
5 26,000
STOP You cannot take the deduction for tuition and fees
*If you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from Puerto Rico, use
Worksheet 6-1 in Pub. 970 to figure the amount to enter.
6 Tuition and fees deduction. Is the amount on line 5 more than $65,000 ($130,000 if married
filing jointly)?
其
Yes. Enter the smaller of line 2, or $2,000.
6 3,600
X No. Enter the smaller of line 2, or $4,000.
Also enter this amount on Form 1040, line 34, or Form 1040A, line 19.
Section references are to the Internal Revenue Code unless otherwise Who Can Take the Deduction
noted.
You may be able to take the deduction if you, your spouse, or a
General Instructions dependent you claim on your tax return was a student enrolled at or
attending an eligible educational institution. The deduction is based
What’s New on the amount of qualified education expenses you paid for the
Students in Midwestern disaster areas. The definition of qualified student in 2008 for academic periods beginning in 2008 and the first 3
education expenses is expanded for students attending an eligible months of 2009.
educational institution in the Midwestern disaster areas in the states of
Qualified education expenses must be reduced by any
Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, and Wisconsin.
expenses paid directly or indirectly using tax-free
See Table 2-1 in chapter 2 of Pub. 970 for the eligible counties. See
educational assistance. See Tax-free educational
Students in Midwestern disaster areas, later, for information about this
CAUTION assistance and refunds of qualified education expenses
expanded definition of qualified education expenses.
on page 2.
Purpose of Form Generally, in order to claim the deduction for qualified education
expenses for a dependent, you must have paid the expenses in 2008
Use Form 8917 to figure and take the deduction for tuition and fees and must claim an exemption for the student as a dependent on
expenses paid in 2008. your 2008 tax return (line 6c of Form 1040 or 1040A). For additional
This deduction is based on qualified education expenses paid to information, see chapter 6 of Pub. 970.
an eligible postsecondary educational institution. See What Expenses You cannot claim the tuition and fees deduction if any of the
Qualify, on page 2, for more information. following apply.
You may be able to take the Hope credit or lifetime ● Your filing status is married filing separately.
learning credit for your education expenses instead of the
TIP tuition and fees deduction. Figure your tax both ways and ● Another person can claim an exemption for you as a dependent
choose the one that gives you the lower tax. See Form on his or her tax return. You cannot take the deduction even if the
8863, Education Credits, and Pub. 970, Tax Benefits for Education, other person does not actually claim that exemption.
for more information about the Hope and lifetime learning credits. ● Your modified adjusted gross income (MAGI), as figured on line 5,
is more than $80,000 ($160,000 if filing a joint return).
For Paperwork Reduction Act Notice, see back of form. Cat. No. 37728P Form 8917 (2008)

Table 7-1. Coverdell ESA at a Glance

7. Do not rely on this table alone. It provides
only general highlights. See the text for
definitions of terms in bold type and for
Coverdell Education
more complete explanations.
Savings Account Question

What is a Coverdell
Answer
A savings account that is set up
(ESA) ESA? to pay the qualified education
expenses of a designated
beneficiary.
What’s New Where can it be

established?
It can be opened in the United
States at any bank or other
IRS-approved entity that offers
Contribution of military death gratuity to Coverdell Coverdell ESAs.
ESA. The families of soldiers killed in the line of duty may Who can have a Any beneficiary who is under
contribute, subject to certain limitations, up to 100 percent Coverdell ESA? age 18 or is a special needs
of survivor benefits to education savings accounts. See beneficiary.
Military death gratuity under Rollovers and Other Trans- Who can contribute to a Generally, any individual
fers, later, for more information. Coverdell ESA? (including the beneficiary) whose
modified adjusted gross
Withdrawal of economic stimulus payment from a income for the year is less than
Coverdell ESA. If your economic stimulus payment was $110,000 ($220,000 in the case
directly deposited to your ESA and you withdraw the pay- of a joint return).
ment by the later of June 1, 2009, or the due date of your
Are distributions tax Yes, if the distributions are not
return (including extensions), the amount withdrawn will free? more than the beneficiary’s
not be taxed and no additional tax or penalty will apply. See adjusted qualified education
Tax-Free Distributions, later. expenses for the year.
Introduction When the account is established, the designated benefi-

If your modified adjusted gross income (MAGI) is less than ciary must be under age 18 or a special needs beneficiary.
$110,000 ($220,000 if filing a joint return), you may be able To be treated as a Coverdell ESA, the account must be
to establish a Coverdell ESA to finance the qualified edu- designated as a Coverdell ESA when it is created.
cation expenses of a designated beneficiary. For most
taxpayers, MAGI is the adjusted gross income as figured The document creating and governing the account must
on their federal income tax return. be in writing and must satisfy the following requirements.
There is no limit on the number of separate Coverdell 1. The trustee or custodian must be a bank or an entity
ESAs that can be established for a designated beneficiary. approved by the IRS.
However, total contributions for the beneficiary in any year
cannot be more than $2,000, no matter how many ac- 2. The document must provide that the trustee or custo-
counts have been established. See Contributions, later. dian can only accept a contribution that meets all of
the following conditions.
This benefit applies not only to higher education
TIP expenses, but also to elementary and secondary a. The contribution is in cash.
education expenses.
b. The contribution is made before the beneficiary
reaches age 18, unless the beneficiary is a spe-
What is the tax benefit of the Coverdell ESA. Contribu- cial needs beneficiary.
tions to a Coverdell ESA are not deductible, but amounts c. The contribution would not result in total contribu-
deposited in the account grow tax free until distributed. tions for the year (not including rollover contribu-
If, for a year, distributions from an account are not more tions) being more than $2,000.
than a designated beneficiary’s qualified education ex-
penses at an eligible educational institution, the benefi- 3. Money in the account cannot be invested in life insur-
ciary will not owe tax on the distributions. See Tax-Free ance contracts.
Distributions, later.
4. Money in the account cannot be combined with other
Table 7-1 summarizes the main features of the Cover- property except in a common trust fund or common
dell ESA.
investment fund.
5. The balance in the account generally must be distrib-
What Is a Coverdell ESA uted within 30 days after the earlier of the following
events.
A Coverdell ESA is a trust or custodial account created or a. The beneficiary reaches age 30, unless the bene-
organized in the United States only for the purpose of
ficiary is a special needs beneficiary.
paying the qualified education expenses of the designated
beneficiary of the account. b. The beneficiary’s death.
Chapter 7 Coverdell Education Savings Account (ESA) Page 43

As of this printing, regulations defining a “special The expense for room and board qualifies only to
!
CAUTION
needs beneficiary” have not been released. If
available, the definition will be included in Publi-
the extent that it is not more than the greater of the
following two amounts.
cation 553, Highlights of 2008 Tax Changes, available in
early 2009. a. The allowance for room and board, as determined
by the school, that was included in the cost of
attendance (for federal financial aid purposes) for
Qualified Education Expenses a particular academic period and living arrange-
ment of the student.
Generally, these are expenses required for the enrollment
or attendance of the designated beneficiary at an eligible b. The actual amount charged if the student is resid-
educational institution. For purposes of Coverdell ESAs, ing in housing owned or operated by the school.
the expenses can be either qualified higher education
expenses or qualified elementary and secondary educa- 4. Any contribution to a qualified tuition program (QTP)
tion expenses. must be on behalf of the designated beneficiary of
the Coverdell ESA. In the case of a change in benefi-
Designated beneficiary. This is the individual named in ciary, this is a qualified expense only if the new
the document creating the trust or custodial account to beneficiary is a family member of that designated
receive the benefit of the funds in the account. beneficiary. (See chapter 8, Qualified Tuition Pro-
gram (QTP).)
Eligible Educational Institution Half-time student. A student is enrolled “at least

half-time” if he or she is enrolled for at least half the
For purposes of Coverdell ESAs, an eligible educational full-time academic work load for the course of study the
institution can be either an eligible postsecondary school student is pursuing, as determined under the standards of
or an eligible elementary or secondary school. the school where the student is enrolled.
Eligible postsecondary school. This is any college, uni-
versity, vocational school, or other postsecondary educa- Qualified Elementary and
tional institution eligible to participate in a student aid Secondary Education Expenses
program administered by the U.S. Department of Educa-
tion. It includes virtually all accredited public, nonprofit, and These are expenses related to enrollment or attendance at
proprietary (privately owned profit-making) postsecondary an eligible elementary or secondary school. As shown in
institutions. The educational institution should be able to the following list, to be qualified, some of the expenses
tell you if it is an eligible educational institution. must be required or provided by the school. There are
Certain educational institutions located outside the special rules for computer-related expenses.
United States also participate in the U.S. Department of 1. The following expenses must be incurred by a desig-
Education’s Federal Student Aid (FSA) programs. nated beneficiary in connection with enrollment or
attendance at an eligible elementary or secondary
Eligible elementary or secondary school. This is any school.
public, private, or religious school that provides elementary
or secondary education (kindergarten through grade 12), a. Tuition and fees.
as determined under state law. b. Books, supplies, and equipment.
c. Academic tutoring.
Qualified Higher Education Expenses
d. Special needs services for a special needs benefi-
These are expenses related to enrollment or attendance at ciary. (See Caution earlier.)
an eligible postsecondary school. As shown in the follow-
ing list, to be qualified, some of the expenses must be 2. The following expenses must be required or provided
required by the school and some must be incurred by by an eligible elementary or secondary school in con-
students who are enrolled at least half-time. Contributions nection with attendance or enrollment at the school.
to qualified tuition programs can be qualified education
expenses (see item 4 in the following list). a. Room and board.
b. Uniforms.
1. The following expenses must be required for enroll-
ment or attendance of a designated beneficiary at an c. Transportation.
eligible postsecondary school. d. Supplementary items and services (including ex-
a. Tuition and fees. tended day programs).
b. Books, supplies, and equipment. 3. The purchase of computer technology, equipment, or
Internet access and related services is a qualified
2. Expenses for special needs services needed by a elementary and secondary education expense if it is
special needs beneficiary must be incurred in con- to be used by the beneficiary and the beneficiary’s
nection with enrollment or attendance at an eligible family during any of the years the beneficiary is in
postsecondary school. (See Caution earlier.) elementary or secondary school. (This does not in-
3. Expenses for room and board must be incurred by clude expenses for computer software designed for
students who are enrolled at least half-time (defined sports, games, or hobbies unless the software is
below). predominantly educational in nature.)
Page 44 Chapter 7 Coverdell Education Savings Account (ESA)

Table 7-2. Coverdell ESA Contributions at a

Contributions Glance
Do not rely on this table alone. It provides
Any individual (including the designated beneficiary) can only general highlights. See the text for more
contribute to a Coverdell ESA if the individual’s modified complete explanations.
adjusted gross income (MAGI) (defined later under Contri-
bution Limits) for the year is less than $110,000. For Question Answer
individuals filing joint returns, that amount is $220,000.
Organizations, such as corporations and trusts, can Are contributions No.
also contribute to Coverdell ESAs. There is no requirement deductible?
that an organization’s income be below a certain level. Why should someone Earnings on the account
Contributions must meet all of the following require- contribute to a Coverdell grow tax free until
ments. ESA? distributed.
What is the annual $2,000 for each designated
1. They must be in cash. contribution limit per beneficiary.
2. They cannot be made after the beneficiary reaches designated beneficiary?
age 18, unless the beneficiary is a special needs What if more than one The annual contribution limit
beneficiary, and Coverdell ESA has been is $2,000 for each
opened for the same beneficiary, no matter how
3. They must be made by the due date of the contribu- designated beneficiary? many Coverdell ESAs are
tor’s tax return (not including extensions). set up for that beneficiary.
Contributions can be made to one or several Coverdell What if more than one The annual contribution limit
ESAs for the same designated beneficiary provided that individual makes is $2,000 per beneficiary, no
the total contributions are not more than the contribution contributions for the same matter how many individuals
limits (defined later) for a year. designated beneficiary? contribute.
Contributions can be made, without penalty, to both a Can contributions other than No.
Coverdell ESA and a QTP in the same year for the same cash be made to a
beneficiary. Coverdell ESA?
Table 7-2 summarizes many of the features of contribut- When must contributions No contributions can be
ing to a Coverdell ESA. stop? made to a beneficiary’s
Coverdell ESA after he or
When contributions considered made. Contributions she reaches age 18, unless
made to a Coverdell ESA for the preceding tax year are the beneficiary is a special
considered to have been made on the last day of the needs beneficiary.
preceding year. They must be made by the due date (not
including extensions) for filing your return for the preceding
year. Example. When Maria Luna was born in 2007, three
For example, if you make a contribution to a Coverdell separate Coverdell ESAs were set up for her, one by her
ESA in February 2009, and you designate it as a contribu- parents, one by her grandfather, and one by her aunt. In
tion for 2008, you are considered to have made that contri- 2008, the total of all contributions to Maria’s three Cover-
bution on December 31, 2008. dell ESAs cannot be more than $2,000. For example, if her
grandfather contributed $2,000 to one of her Coverdell
ESAs, no one else could contribute to any of her three
Contribution Limits accounts. Or, if her parents contributed $1,000 and her
aunt $600, her grandfather or someone else could contrib-
There are two yearly limits: ute no more than $400. These contributions could be put
1. One on the total amount that can be contributed for into any of Maria’s Coverdell ESA accounts.
each designated beneficiary in any year, and Limit for each contributor. Generally, you can contribute
2. One on the amount that any individual can contribute up to $2,000 for each designated beneficiary for 2008. This
for any one designated beneficiary for a year. is the most you can contribute for the benefit of any one
beneficiary for the year, regardless of the number of Cov-
erdell ESAs set up for the beneficiary.
Limit for each designated beneficiary. For 2008, the
total of all contributions to all Coverdell ESAs set up for the Example. The facts are the same as in the previous
benefit of any one designated beneficiary cannot be more example except that Maria Luna’s older brother, Edgar,
than $2,000. This includes contributions (other than rollo- also has a Coverdell ESA. If their grandfather contributed
vers) to all the beneficiary’s Coverdell ESAs from all $2,000 to Maria’s Coverdell ESA in 2008, he could also
sources. Rollovers are discussed under Rollovers and contribute $2,000 to Edgar’s Coverdell ESA.
Other Transfers, later.

Reduced limit. Your contribution limit may be reduced. amount you can contribute for each beneficiary. You can
If your modified adjusted gross income (MAGI) (defined use Worksheet 7-2 to figure the limit on your contributions.
below) is between $95,000 and $110,000 (between
$190,000 and $220,000 if filing a joint return), the $2,000 Worksheet 7-2. Coverdell ESA Contribution
limit for each designated beneficiary is gradually reduced Limit
(see Figuring the limit, later). If your MAGI is $110,000 or
more ($220,000 or more if filing a joint return), you cannot 1. Maximum contribution . . . . . . . . . . . . . . 1. $ 2,000
contribute to anyone’s Coverdell ESA.
2. Enter your modified adjusted gross
Modified adjusted gross income (MAGI). For most tax- income (MAGI) for purposes of figuring the
payers, MAGI is adjusted gross income (AGI) as figured on contribution limit to a Coverdell ESA (see
their federal income tax return. definition or Worksheet 7-1 earlier) . . . . . 2.
MAGI when using Form 1040A. If you file Form 3. Enter $190,000 if married filing jointly;
1040A, your MAGI is the AGI on line 22 of that form. $95,000 for all other filers . . . . . . . . . . . . 3.
4. Subtract line 3 from line 2. If zero or less,
MAGI when using Form 1040. If you file Form 1040, enter -0- on line 4, skip lines 5 through 7,
your MAGI is the AGI on line 38 of that form, modified by and enter $2,000 on line 8 . . . . . . . . . . . 4.
adding back any:
5. Enter $30,000 if married filing jointly;
1. Foreign earned income exclusion, $15,000 for all other filers . . . . . . . . . . . . 5.
Note. If the amount on line 4 is greater
2. Foreign housing exclusion, than or equal to the amount on line 5,
stop here. You are not allowed to
3. Foreign housing deduction, contribute to a Coverdell ESA for 2008.
4. Exclusion of income for bona fide residents of Ameri- 6. Divide line 4 by line 5 and enter the result
can Samoa, and as a decimal (rounded to at least 3 places) 6. .
5. Exclusion of income for bona fide residents of Puerto 7. Multiply line 1 by line 6 . . . . . . . . . . . . . . 7.
Rico. 8. Subtract line 7 from line 1 . . . . . . . . . . . . 8.
MAGI when using Form 1040NR. If you file Form Note: The total Coverdell ESA contributions from all sources for the
designated beneficiary during the tax year may not exceed $2,000.
1040NR, your MAGI is the AGI on line 36 of that form.
MAGI when using Form 1040NR-EZ. If you file Form
1040NR-EZ, your MAGI is the AGI on line 10 of that form. Example. Paul, who is single, had MAGI of $96,500 for
You can use Worksheet 7-1 to figure your MAGI. 2008. Paul can contribute up to $1,800 in 2008 for each
beneficiary, as shown in the illustrated Worksheet 7-2.
Worksheet 7-1. MAGI for a Coverdell ESA
Worksheet 7-2. Coverdell ESA Contribution
1. Enter your adjusted gross income Limit—Illustrated
(Form 1040, line 38) . . . . . . . . . . . . . . . 1.
2. Enter your foreign earned 1. Maximum contribution . . . . . . . . . . . . . . 1. $ 2,000
income exclusion and/or
housing exclusion (Form 2. Enter your modified adjusted gross income
2555, line 45, or Form (MAGI) for purposes of figuring the
2555-EZ, line 18) . . . . . . . 2. contribution limit to a Coverdell ESA (see
definition or Worksheet 7-1 earlier) . . . . . 2. 96,500
3. Enter your foreign housing
deduction (Form 2555, line 3. Enter $190,000 if married filing jointly;
50) . . . . . . . . . . . . . . . . . 3. $95,000 for all other filers . . . . . . . . . . . . 3. 95,000
4. Enter the amount of 4. Subtract line 3 from line 2. If zero or less,
income from Puerto Rico enter -0- on line 4, skip lines 5 through 7,
you are excluding . . . . . . 4. and enter $2,000 on line 8 . . . . . . . . . . . 4. 1,500
5. Enter the amount of 5. Enter $30,000 if married filing jointly;
income from American $15,000 for all other filers . . . . . . . . . . . . 5. 15,000
Samoa you are excluding Note. If the amount on line 4 is greater
(Form 4563, line 15) . . . . 5. than or equal to the amount on line 5,
stop here. You are not allowed to
6. Add lines 2, 3, 4, and 5 . . . . . . . . . . . . . 6. contribute to a Coverdell ESA for 2008.
7. Add lines 1 and 6. This is your 6. Divide line 4 by line 5 and enter the result
modified adjusted gross income . . . . . 7. as a decimal (rounded to at least 3 places) 6. .100
7. Multiply line 1 by line 6 . . . . . . . . . . . . . . 7. 200
Figuring the limit. To figure the limit on the amount you 8. Subtract line 7 from line 1 . . . . . . . . . . . . 8. 1,800
can contribute for each designated beneficiary, multiply
$2,000 by a fraction. The numerator (top number) is your Note: The total Coverdell ESA contributions from all sources for the
designated beneficiary during the tax year may not exceed $2,000.
MAGI minus $95,000 ($190,000 if filing a joint return). The
denominator (bottom number) is $15,000 ($30,000 if filing
a joint return). Subtract the result from $2,000. This is the

Additional Tax on If Greta limits 2009 contributions to $1,450 ($2,000 maxi-

Excess Contributions mum allowed − $550 excess contributions from 2008), she
will not owe any additional tax in 2009 for excess contribu-
The beneficiary must pay a 6% excise tax each year on tions.
excess contributions that are in a Coverdell ESA at the end
of the year. Excess contributions are the total of the follow- Figuring and reporting the additional tax. You figure
ing two amounts. this excise tax in Part V of Form 5329, Additional Taxes on
1. Contributions to any designated beneficiary’s Cover- Qualified Plans (Including IRAs) and Other Tax-Favored
dell ESA for the year that are more than $2,000 (or, if Accounts. Report the additional tax on Form 1040, line 59
less, the total of each contributor’s limit for the year, (or Form 1040NR, line 54).
as discussed earlier).
2. Excess contributions for the preceding year, reduced
by the total of the following two amounts: Rollovers and Other Transfers
a. Distributions (other than those rolled over as dis- Assets can be rolled over from one Coverdell ESA to
cussed later) during the year, and another or the designated beneficiary can be changed.
b. The contribution limit for the current year minus The beneficiary’s interest can be transferred to a spouse or
the amount contributed for the current year. former spouse because of divorce.
Rollovers
Exceptions. The excise tax does not apply if excess con-
tributions made during 2008 (and any earnings on them) Any amount distributed from a Coverdell ESA is not tax-
are distributed before the first day of the sixth month of the able if it is rolled over to another Coverdell ESA for the
following tax year (June 1, 2009, for a calendar year benefit of the same beneficiary or a member of the benefi-
taxpayer). ciary’s family (including the beneficiary’s spouse) who is
However, you must include the distributed earnings in under age 30. This age limitation does not apply if the new
gross income for the year in which the excess contribution beneficiary is a special needs beneficiary.
was made. You should receive Form 1099-Q, Payments An amount is rolled over if it is paid to another Coverdell
From Qualified Education Programs (Under Sections 529 ESA within 60 days after the date of the distribution.
and 530), from each institution from which excess contribu- Do not report qualifying rollovers (those that meet the
tions were distributed. Box 2 of that form will show the above criteria) anywhere on Form 1040 or 1040NR. These
amount of earnings on your excess contributions. Code “2” are not taxable distributions.
or “3” entered in the blank box below boxes 5 and 6
indicate the year in which the earnings are taxable. See
Instructions for Recipient on the back of copy B of your Members of the beneficiary’s family. For these pur-
Form 1099-Q. Enter the amount of earnings on line 21 of poses, the beneficiary’s family includes the beneficiary’s
Form 1040 (or Form 1040NR) for the applicable tax year. spouse and the following other relatives of the beneficiary.
For more information, see Taxable Distributions, later. 1. Son, daughter, stepchild, foster child, adopted child,
The excise tax does not apply to any rollover contribu- or a descendant of any of them.
tion.
2. Brother, sister, stepbrother, or stepsister.
Note. Contributions made in one year for the preceding 3. Father or mother or ancestor of either.
taxable year are considered to have been made on the last
day of the preceding year. 4. Stepfather or stepmother.
5. Son or daughter of a brother or sister.
Example. In 2007, Greta’s parents and grandparents
contributed a total of $2,300 to Greta’s Coverdell ESA— 6. Brother or sister of father or mother.
an excess contribution of $300. Because Greta did not 7. Son-in-law, daughter-in-law, father-in-law,
withdraw the excess before June 1, 2008, she had to pay mother-in-law, brother-in-law, or sister-in-law.
an additional tax of $18 (6% × $300) when she filed her
2007 tax return. 8. The spouse of any individual listed above.
In 2008, excess contributions of $500 were made to 9. First cousin.
Greta’s account, however, she withdrew $250 from that
account to use for qualified education expenses. Using the Example. When Aaron graduated from college last
steps shown under Additional Tax on Excess Contribu- year he had $5,000 left in his Coverdell ESA. He wanted to
tions, Greta figures the excess contribution in her account give this money to his younger sister, who was still in high
at the end of 2008 as follows. school. In order to avoid paying tax on the distribution of
(1) $500 excess contributions made the amount remaining in his account, Aaron contributed
in 2008 the same amount to his sister’s Coverdell ESA within 60
+ (2) $300 excess contributions in
days of the distribution.
ESA at end of 2007 Only one rollover per Coverdell ESA is allowed
− (2a) $250 distribution during 2008 !
CAUTION
during the 12-month period ending on the date of
the payment or distribution.
$550 excess at end of 2008 × 6% = $33

Military death gratuity. If you received a military death Table 7-3. Coverdell ESA Distributions at a
gratuity or a payment from Servicemember’s Group Life Glance
Insurance (SGLI) after October 6, 2001, you may roll over
all or part of the amount received to one or more Coverdell Do not rely on this table alone. It provides only
general highlights. See the text for definitions
ESAs for the benefit of members of the beneficiary’s family of terms in bold type and for
(see Rollovers above). Such payments are made to an more complete explanations.
eligible survivor upon the death of a member of the armed
forces. Question Answer
This rollover contribution is subject to the contribution Is a distribution from a Generally, yes, to the extent
limits discussed earlier under Contribution Limits. The Coverdell ESA to pay for a the amount of the distribution
amount you roll over cannot exceed the total survivor designated beneficiary’s is not more than the
benefits you received, reduced by contributions from these qualified education expenses designated beneficiary’s
benefits to a Roth IRA or other Coverdell ESAs. tax free? adjusted qualified education
expenses.
The contribution to a Coverdell ESA from survivor bene- After the designated Yes. Amounts must be
fits received after June 16, 2008, cannot be made later beneficiary completes his or distributed when the
than 1 year after the date on which you receive the gratuity her education at an eligible designated beneficiary
or SGLI payment. If you received survivor benefits before educational institution, can reaches age 30, unless he or
June 17, 2008, with respect to a death from injury occuring amounts remaining in the she is a special needs
after October 6, 2001, you can contribute to a Coverdell Coverdell ESA be distributed? beneficiary. Also, certain
ESA no later than June 17, 2009. transfers to members of the
beneficiary’s family are
The amount contributed from the survivor benefits is permitted.
treated as part of your basis (cost) in the Coverdell ESA, Does the designated No.
and will not be taxed when distributed. See Distributions, beneficiary need to be
on this page. enrolled for a minimum
number of courses to take a
The limit of one rollover per Coverdell ESA during tax-free distribution?
!
CAUTION
a 12-month period does not apply to a military
death gratuity or SGLI payment.
Adjusted qualified education expenses. To determine
if total distributions for the year are more than the amount
of qualified education expenses, reduce total qualified ed-
Changing the Designated Beneficiary ucation expenses by any tax-free educational assistance.
The designated beneficiary can be changed to a member Tax-free educational assistance includes:
of the beneficiary’s family (defined above). There are no • The tax-free part of scholarships and fellowships
tax consequences if, at the time of the change, the new (see chapter 1),
beneficiary is under age 30 or a special needs beneficiary.
Example. Assume the same situation as in the last • Pell grants (see chapter 1),
example. Instead of closing his Coverdell ESA and paying
the distribution into his sister’s Coverdell ESA, Aaron could • Employer-provided educational assistance (see
have instructed the trustee of his account to simply change chapter 11), and
the name of the beneficiary on his account to that of his • Any other nontaxable (tax-free) payments (other
sister. than gifts or inheritances) received as educational
assistance.
Transfer Because of Divorce The amount you get by subtracting tax-free educational
assistance from your total qualified education expenses is
If a spouse or former spouse receives a Coverdell ESA your adjusted qualified education expenses.
under a divorce or separation instrument, it is not a taxable
transfer. After the transfer, the spouse or former spouse
treats the Coverdell ESA as his or her own. Tax-Free Distributions
Example. In their divorce settlement, Peg received her Generally, distributions are tax free if they are not more
ex-husband’s Coverdell ESA. In this process, the account than the beneficiary’s adjusted qualified education ex-
was transferred into her name. Peg now treats the funds in penses for the year. Do not report tax-free distributions
this Coverdell ESA as if she were the original owner. (including qualifying rollovers) on your tax return.
Withdrawal of economic stimulus payment. If your
economic stimulus payment was directly deposited to your
Distributions Coverdell ESA and you withdraw the payment by the later
of June 1, 2009, or the due date of your 2008 return
The designated beneficiary of a Coverdell ESA can take a (including extensions), the amount withdrawn will be tax
distribution at any time. Whether the distributions are tax free. Do not report this withdrawal on your 2008 tax return.
free depends, in part, on whether the distributions are
equal to or less than the amount of adjusted qualified
education expenses (defined next) that the beneficiary has
in the same tax year.
See Table 7-3 for highlights.

Taxable Distributions 1. $850 (distribution) × $1,500 basis + $0 contributions

$950 value + $850 distribution
A portion of the distributions is generally taxable to the = $708 (basis portion of distribution)
beneficiary if the distributions are more than the benefi- 2. $850 (distribution) − $708 (basis portion of distribution)
ciary’s adjusted qualified education expenses for the year. = $142 (earnings included in distribution)
Excess distribution. This is the part of the total distribu- $700 AQEE
tion that is more than the beneficiary’s adjusted qualified 3. $142 (earnings) × $850 distribution
education expenses for the year. = $117 (tax-free earnings)
Earnings and basis. You will receive a Form 1099-Q for 4. $142 (earnings) − $117 (tax-free earnings) = $25 (taxable
each of the Coverdell ESAs from which money was distrib- earnings)
uted in 2008. The amount of your gross distribution will be
shown in box 1. For 2008, instead of dividing the gross You must include $25 in income as distributed earnings not
distribution between your earnings (box 2) and your basis used for qualified education expenses. Report this amount
(already-taxed amount) (box 3), the payer or trustee may on Form 1040, line 21, listing the type and amount of
report the fair market value (account balance) of the Cov- income on the dotted line.
erdell ESA as of December 31, 2008. This will be shown in Worksheet 7-3, at the end of this chapter, can help you
the blank box below boxes 5 and 6. figure your adjusted qualified education expenses, how
much of your distribution must be included in income, and
the remaining basis in your Coverdell ESAs.
Figuring the Taxable
Portion of a Distribution
Coordination With Hope and
The taxable portion is the amount of the excess distribution Lifetime Learning Credits
that represents earnings that have accumulated tax free in
the account. Figure the taxable portion for 2008 as shown The Hope or lifetime learning credit can be claimed in the
in the following steps. same year the beneficiary takes a tax-free distribution from
a Coverdell ESA, as long as the same expenses are not
1. Multiply the total amount distributed by a fraction. used for both benefits. This means the beneficiary must
The numerator is the basis (contributions not previ- reduce qualified higher education expenses by tax-free
ously distributed) at the end of 2007 plus total contri- educational assistance, and then further reduce them by
butions for 2008 and the denominator is the value any expenses taken into account in determining a Hope or
(balance) of the account at the end of 2008 plus the lifetime learning credit.
amount distributed during 2008.
2. Subtract the amount figured in (1) from the total Example. Derek Green had $4,200 of qualified higher
amount distributed during 2008. This is the amount education expenses for 2008, his first year in college. He
of earnings included in the distribution(s). paid his college expenses from the following sources.
3. Multiply the amount of earnings figured in (2) by a Partial tuition scholarship (tax free) $1,500
fraction. The numerator is the adjusted qualified edu- Coverdell ESA distribution 1,000
cation expenses paid during 2008 and the denomina- Gift from parents 500
tor is the total amount distributed during 2008. Earnings from part-time job 1,200
4. Subtract the amount figured in (3) from the amount Of his $4,200 of qualified higher education expenses,
figured in (2). This is the amount the beneficiary must $2,700 was tuition and related expenses that also qualified
include in income. for a Hope credit. Derek’s parents claimed a $1,800 Hope
The taxable amount must be reported on Form 1040 or credit (based on $2,400 expenses) on their tax return.
Form 1040NR, line 21. Before Derek can determine the taxable portion of his
Coverdell ESA distribution, he must reduce his total quali-
Example. You received an $850 distribution from your fied higher education expenses.
Coverdell ESA, to which $1,500 had been contributed Total qualified higher education expenses $4,200
before 2008. There were no contributions in 2008. This is Minus: Tax-free educational assistance −1,500
your first distribution from the account, so your basis in the Minus: Expenses taken into account in
account on December 31, 2007, was $1,500. The value figuring Hope credit −2,400
(balance) of your account on December 31, 2008, was Equals: Adjusted qualified higher education
$950. You had $700 of adjusted qualified education ex- expenses (AQHEE) $ 300
penses (AQEE) for the year. Using the steps above, figure
the taxable portion of your distribution as follows.

Since the adjusted qualified higher education expenses 3. Finally, Beatrice figures the taxable and tax-free
($300) are less than the Coverdell ESA distribution, part of portions of her QTP distribution based on her
the distribution will be taxable. The balance in Derek’s $3,000 of QHEE. (See Figuring the Taxable Portion
account was $1,800 on December 31, 2008. Prior to 2008, of a Distribution, in chapter 8, for more information.)
$2,100 had been contributed to this account. Contributions
for 2008 totaled $400. Using the four steps outlined earlier,
Derek figures the taxable portion of his distribution as Example 2. Assume the same facts as in Example 1,
shown below. except that Beatrice withdrew $1,800 from her Coverdell
ESA and $3,200 from her QTP. In this case, she allocates
$2,100 basis + $400 contributions
1. $1,000 (distribution) × $1,800 her qualified education expenses as follows.
value + $1,000 distribution
= $893 (basis portion of distribution) 1. Using the same reasoning as in Example 1, Beatrice
matches $1,000 of her Coverdell ESA distribution to
2. $1,000 (distribution) − $893 (basis portion of distribution)
her $1,000 of QESEE—she has $800 of her distribu-
= $107 (earnings included in distribution) tion remaining.
3. $107 (earnings) × $300 AQHEE 2. Because higher education expenses can also qualify a
$1,000 distribution
Coverdell ESA distribution for tax-free treatment, Bea-
= $32 (tax-free earnings) trice allocates her $3,000 of QHEE between the re-
4. $107 (earnings) − $32 (tax-free earnings) = $75 (taxable maining $800 Coverdell ESA and the $3,200 QTP
earnings) distributions ($4,000 total).
Derek must include $75 in income (Form 1040, line 21). $3,000 $800 ESA distribution $600
This is the amount of distributed earnings not used for QHEE × $4,000 total distribution = QHEE (ESA)
adjusted qualified higher education expenses.
$3,000 $3,200 QTP distribution $2,400
Coordination With Qualified Tuition QHEE × $4,000 total distribution = QHEE (QTP)
Program (QTP) Distributions
3. Beatrice then figures the taxable part of her:
If a designated beneficiary receives distributions from both
a Coverdell ESA and a QTP in the same year, and the total a. Coverdell ESA distribution based on qualified ed-
distribution is more than the beneficiary’s adjusted quali- ucation expenses of $1,600 ($1,000 QESEE +
fied higher education expenses, those expenses must be $600 QHEE). See Figuring the Taxable Portion of
allocated between the distribution from the Coverdell ESA a Distribution, earlier in this chapter.
and the distribution from the QTP before figuring how b. QTP distribution based on her $2,400 of QHEE
much of each distribution is taxable. The following two (see Figuring the Taxable Portion of a Distribu-
examples illustrate possible allocations. tion, in chapter 8).
Example 1. In 2008, Beatrice graduated from high
school and began her first semester of college. That year, The above examples show two types of allocation
she had $1,000 of qualified elementary and secondary TIP between distributions from a Coverdell ESA and
education expenses (QESEE) for high school and $3,000 a QTP. However, you do not have to allocate your
of qualified higher education expenses (QHEE) for college. expenses in the same way. You can use any reasonable
To pay these expenses, Beatrice withdrew $800 from her method.
Coverdell ESA and $4,200 from her QTP. No one claimed
Beatrice as a dependent, nor was she eligible for an
education credit. She did not receive any tax-free educa- Losses on Coverdell ESA Investments
tional assistance in 2008. Beatrice must allocate her total
qualified education expenses between the two distribu- If you have a loss on your investment in a Coverdell ESA,
tions. you may be able to take the loss on your income tax return.
You can take the loss only when all amounts from that
1. Beatrice knows that tax-free treatment will be avail- account have been distributed and the total distributions
able if she applies her $800 Coverdell ESA are less than your unrecovered basis. Your basis is the
distribution toward her $1,000 of qualified education total amount of contributions to that Coverdell ESA. You
expenses for high school. The qualified expenses claim the loss as a miscellaneous itemized deduction on
are greater than the distribution, making the $800 Schedule A (Form 1040), line 23 (Schedule A (Form
Coverdell ESA distribution tax free. 1040NR), line 11), subject to the 2%-of-adjusted-
gross-income limit. For more information and examples of
the calculation, see Losses on QTP Investments in chapter
2. Next, Beatrice matches her $4,200 QTP distribution 8 under Figuring the Taxable Portion of a Distribution.
to her $3,000 of QHEE, and finds she has an
excess QTP distribution of $1,200 ($4,200 QTP −
$3,000 QHEE). She cannot use the extra $200 of Additional Tax on Taxable Distributions
high school expenses (from (1) above) against the
QTP distribution because those expenses do not Generally, if you receive a taxable distribution, you also
qualify a QTP for tax-free treatment. must pay a 10% additional tax on the amount included in
income.
Exceptions. The 10% additional tax does not apply to
distributions:

1. Paid to a beneficiary (or to the estate of the desig- 1. The designated beneficiary reaches age 30. In this
nated beneficiary) on or after the death of the desig- case, the remaining assets must be distributed within
nated beneficiary. 30 days after the beneficiary reaches age 30. How-
2. Made because the designated beneficiary is dis- ever, this rule does not apply if the beneficiary is a
abled. A person is considered to be disabled if he or special needs beneficiary.
she shows proof that he or she cannot do any sub- 2. The designated beneficiary dies before reaching age
stantial gainful activity because of his or her physical 30. In this case, the remaining assets must generally
or mental condition. A physician must determine that
his or her condition can be expected to result in be distributed within 30 days after the date of death.
death or to be of long-continued and indefinite dura-
tion.
Exception for Transfer to
3. Included in income because the designated benefi-
ciary received: Surviving Spouse or Family Member
a. A tax-free scholarship or fellowship (see chapter If a Coverdell ESA is transferred to a surviving spouse or
1), other family member as the result of the death of the
designated beneficiary, the Coverdell ESA retains its sta-
b. Veterans’ educational assistance (see chapter 1), tus. (“Family member” was defined earlier under Rollo-
c. Employer-provided educational assistance (see vers.) This means the spouse or other family member can
chapter 11), or treat the Coverdell ESA as his or her own and does not
d. Any other nontaxable (tax-free) payments (other need to withdraw the assets until he or she reaches age
than gifts or inheritances) received as educational 30. This age limitation does not apply if the new beneficiary
assistance. is a special needs beneficiary. There are no tax conse-
quences as a result of the transfer.
4. Made on account of the attendance of the desig-
nated beneficiary at a U.S. military academy (such
as West Point). This exception applies only to the How To Figure the Taxable Earnings
extent that the amount of the distribution does not When a total distribution is made because the designated
exceed the costs of advanced education (as defined
in section 2005(e)(3) of title 10 of the U.S. Code) beneficiary either reached age 30 or died, the earnings that
attributable to such attendance. accumulated tax free in the account must be included in
taxable income. You determine these earnings as shown
5. Included in income only because the qualified educa- in the following two steps.
tion expenses were taken into account in determining
the Hope or lifetime learning credit (see Coordination 1. Multiply the amount distributed by a fraction. The
With Hope and Lifetime Learning Credits, earlier). numerator is the basis (contributions not previously
6. Made before June 1, 2009, of an excess 2008 contri- distributed) at the end of 2007 plus total contributions
bution (and any earnings on it). The distributed earn- for 2008 and the denominator is the balance in the
ings must be included in gross income for the year in account at the end of 2008 plus the amount distrib-
which the excess contribution was made. uted during 2008.
Exception (3) applies only to the extent the distribution is 2. Subtract the amount figured in (1) from the total
not more than the scholarship, allowance, or payment. amount distributed during 2008. The result is the
Figuring the additional tax. Use Part II of Form 5329, amount of earnings included in the distribution.
Additional Taxes on Qualified Plans (Including IRAs) and For an example, see steps (1) and (2) of the Example
Other Tax-Favored Accounts, to figure any additional tax. under Figuring the Taxable Portion of a Distribution, ear-
Report the amount on Form 1040, line 59, or Form lier.
1040NR, line 54.
The beneficiary or other person receiving the distribu-
tion must report this amount on Form 1040, line 21, or
When Assets Must Be Distributed Form 1040NR, line 21, listing the type and amount of
Any assets remaining in a Coverdell ESA must be distrib- income on the dotted line.
uted when either one of the following two events occurs.

Worksheet 7-3. Coverdell ESA—Taxable Distributions and Basis Keep for Your Records
How to complete this worksheet.

• Complete Part I, lines A through H, on only one worksheet.
• Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs.
• Complete Part III, the Summary (line 16), on only one worksheet.
Part I. Qualified Education Expenses (Complete for total expenses)
A. Enter your total qualified education expenses for 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A.

B. Enter those qualified education expenses paid for with tax-free educational
assistance (for example, tax-free scholarships, veterans’ educational benefits,
Pell grants, employer-provided educational assistance) . . . . . . . . . . . . . . B.
C. Enter those qualified higher education expenses deducted on
Schedule C or C-EZ (Form 1040), Schedule F (Form 1040), or as
a miscellaneous itemized deduction on Schedule A (Form 1040) . . . . . . . . C.
D. Enter those qualified higher education expenses on which
a Hope or lifetime learning credit was based . . . . . . . . . . . . . . . . . . . . . . D.
E. Add lines B, C, and D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E.
F. Subtract line E from line A. This is your adjusted qualified education expense for 2008 . . . . . . . . . . . . . . . . F.
G. Enter your total distributions from all Coverdell ESAs during 2008. Do not include rollovers
or the return of excess contributions (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G.
H. Divide line F by line G. Enter the result as a decimal (rounded to at least 3 places). If the
result is 1.000 or more, enter 1.000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . H. .
Part II. Taxable Distributions and Basis (Complete separately for each account)
1. Enter the amount contributed to this Coverdell ESA for 2008, including contributions made for 2008 from
January 1, 2009, through April 15, 2009. Do not include rollovers or the return of excess contributions . . . . . 1.
2. Enter your basis in this Coverdell ESA as of December 31, 2007 (see instructions) . . . . . . . . . . . . . . . . . . 2.
3. Add lines 1 and 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.
4. Enter the total distributions from this Coverdell ESA during 2008. Do not include rollovers
or the return of excess contributions (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.
5. Multiply line 4 by line H. This is the amount of adjusted qualified
education expense attributable to this Coverdell ESA . . . . . . . . . . . . . . . . 5.
6. Subtract line 5 from line 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.
7. Enter the total value of this Coverdell ESA as of December 31, 2008,
plus any outstanding rollovers (see instructions) . . . . . . . . . . . . . . . . . . . . 7.
8. Add lines 4 and 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.
9. Divide line 3 by line 8. Enter the result as a decimal (rounded to
at least 3 places). If the result is 1.000 or more, enter 1.000 . . . . . . . . . . . . 9. .
10. Multiply line 4 by line 9. This is the amount of basis allocated to your
distributions, and is tax free . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.
Note. If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15.
11. Subtract line 10 from line 4 ....................................................... 11.
12. Divide line 5 by line 4. Enter the result as a decimal (rounded to
at least 3 places). If the result is 1.000 or more, enter 1.000 . . . . . . . . . . . . 12. .
13. Multiply line 11 by line 12. This is the amount of qualified education
expenses allocated to your distributions, and is tax free . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.
14. Subtract line 13 from line 11. This is the portion of the distributions from this
Coverdell ESA in 2008 that you must include in income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.
15. Subtract line 10 from line 3. This is your basis in this Coverdell ESA as of December 31, 2008 . . . . . . . . . 15.
Part III. Summary (Complete only once)
16. Taxable amount. Add together all amounts on line 14 for all your Coverdell ESAs. Enter here
and include on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the
dotted line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.

Worksheet 7-3 Instructions. Coverdell ESA—Taxable Distributions and Basis
Line G. Enter the total distributions received from all Coverdell ESAs during 2008. Do not include amounts rolled over to
another ESA within 60 days (only one rollover is allowed during any 12-month period). Also, do not include
excess contributions that were distributed with the related earnings (or less any loss) before the first day of the
sixth month of the tax year following the year for which the contributions were made.
Line 2. Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2007, is the total of:
• All contributions to this Coverdell ESA before 2008
• Minus the tax-free portion of any distributions from this Coverdell ESA before 2008.
If your last distribution from this Coverdell ESA was before 2008, you must start with the basis in your account as
of the end of the last year in which you took a distribution. For years before 2002, you can find that amount on the
last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year.
For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970
for that year. You can determine your basis in this Coverdell ESA as of December 31, 2007, by adding to the
basis as of the end of that year any contributions made to that account after the year of the distribution and before
2008.
Line 4. Enter the total distributions received from this Coverdell ESA in 2008. Do not include amounts rolled over to
another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period).
Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before
the first day of the sixth month of the tax year following the year of the contributions.
Line 7. Enter the total value of this Coverdell ESA as of December 31, 2008, plus any outstanding rollovers contributed
to the account after 2007, but before the end of the 60-day rollover period. A statement should be sent to you by
February 2, 2009, for this Coverdell ESA showing the value on December 31, 2008.
A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. An
outstanding rollover is any amount withdrawn within 60 days before the end of 2008 (November 2 through
December 31) that was rolled over after December 31, 2008, but within the 60-day rollover period.

Qualified education expenses. These expenses are the

8. amounts paid for tuition, fees, books, supplies, and equip-
ment required for enrollment or attendance at an eligible
educational institution (defined below).
Qualified Tuition They also include the reasonable costs of room and
board for a designated beneficiary who is at least a
Program (QTP) half-time student. The cost of room and board qualifies
only to the extent that it is not more than the greater of the
following two amounts.
What’s New 1. The allowance for room and board, as determined by
the eligible educational institution, that was included
Withdrawal of economic stimulus payment from a in the cost of attendance (for federal financial aid
qualified tuition program. If your economic stimulus purposes) for a particular academic period and living
payment was directly deposited to your QTP and you arrangement of the student.
withdraw the payment by the later of June 1, 2009, or due
date of your return (including extensions), the amount 2. The actual amount charged if the student is residing
withdrawn will not be taxed and no additional tax or penalty in housing owned or operated by the eligible educa-
will apply. tional institution.
You will need to contact the eligible educational institution
for qualified room and board costs.
Introduction The definition of qualified education expenses was ex-
Qualified tuition programs (QTPs) are also called “529 panded in 2002 to include expenses of a special needs
plans.” beneficiary that are necessary for that person’s enrollment
States may establish and maintain programs that allow or attendance at an eligible educational institution.
you to either prepay or contribute to an account for paying As of this printing, regulations defining a “special
a student’s qualified education expenses at a postsecon-
dary institution. Eligible educational institutions may estab-
!
CAUTION
needs beneficiary” have not been released. If
available, the definition will be included in Publi-
lish and maintain programs that allow you to prepay a cation 553, Highlights of 2008 Tax Changes, available in
student’s qualified education expenses. If you prepay tui- early 2009.
tion, the student (designated beneficiary) will be entitled to
a waiver or a payment of qualified education expenses. Designated beneficiary. The designated beneficiary is
You cannot deduct either payments or contributions to a generally the student (or future student) for whom the QTP
QTP. For information on a specific QTP, you will need to is intended to provide benefits. The designated beneficiary
contact the state agency or eligible educational institution can be changed after participation in the QTP begins. If a
that established and maintains it. state or local government or certain tax-exempt organiza-
What is the tax benefit of a QTP. No tax is due on a tions purchase an interest in a QTP as part of a scholarship
distribution from a QTP unless the amount distributed is program, the designated beneficiary is the person who
greater than the beneficiary’s adjusted qualified education receives the interest as a scholarship.
expenses. See Are Distributions Taxable, on the next
page, for more information. Eligible educational institution. For purposes of a QTP,
this is any college, university, vocational school, or other
Even if a QTP is used to finance a student’s postsecondary educational institution eligible to participate
TIP education, the student or the student’s parents in a student aid program administered by the U.S. Depart-
still may be eligible to claim either the Hope credit ment of Education. It includes virtually all accredited public,
or the lifetime learning credit. See Coordination With Hope nonprofit, and proprietary (privately owned profit-making)
and Lifetime Learning Credits, later. postsecondary institutions. The educational institution
should be able to tell you if it is an eligible educational
institution.
What Is a Qualified Certain educational institutions located outside the
Tuition Program Education’s Federal Student Aid (FSA) programs.
A qualified tuition program is a program set up to allow you
to either prepay, or contribute to an account established for
paying, a student’s qualified education expenses at an How Much Can You Contribute
eligible educational institution. QTPs can be established
and maintained by states (or agencies or instrumentalities Contributions to a QTP on behalf of any beneficiary cannot
of a state) and eligible educational institutions. The pro- be more than the amount necessary to provide for the
gram must meet certain requirements. Your state govern- qualified education expenses of the beneficiary. There are
ment or the eligible educational institution in which you are no income restrictions on the individual contributors.
interested can tell you whether or not they participate in a You can contribute to both a QTP and a Coverdell ESA
QTP. in the same year for the same designated beneficiary.
Page 54 Chapter 8 Qualified Tuition Program (QTP)

Partial tuition scholarship (tax-free) $3,100

Are Distributions Taxable QTP distribution 3,700
Before Sara can determine the taxable part of her QTP

The part of a distribution representing the amount paid or distribution, she must reduce her total qualified education
contributed to a QTP does not have to be included in expenses by any tax-free educational assistance.
income. This is a return of the investment in the plan.
The designated beneficiary generally does not have to Total qualified education expenses $6,700
include in income any earnings distributed from a QTP if Minus: Tax-free educational assistance −3,100
the total distribution is less than or equal to adjusted Equals: Adjusted qualified
education expenses (AQEE) $3,600
qualified education expenses (defined under Figuring the
Taxable Portion of a Distribution, below). Since the remaining expenses ($3,600) are less than the
QTP distribution, part of the earnings will be taxable.
Earnings and return of investment. You will receive a
Form 1099-Q, Payments From Qualified Education Pro- Sara’s Form 1099-Q shows that $1,200 of the QTP
grams (Under Sections 529 and 530), from each of the distribution is earnings. Sara figures the taxable part of the
programs from which you received a QTP distribution in distributed earnings as follows.
2008. The amount of your gross distribution (box 1) shown $3,600 AQEE
on each form will be divided between your earnings (box 2) 1. $1,200 (earnings) × $3,700 distribution
and your basis, or return of investment (box 3). Form = $1,168 (tax-free earnings)
1099-Q should be sent to you by February 2, 2009.
2. $1,200 (earnings) − $1,168 (tax-free earnings)
Figuring the Taxable = $32 (taxable earnings)
Portion of a Distribution Sara must include $32 in income (Form 1040, line 21) as
distributed QTP earnings not used for adjusted qualified
To determine if total distributions for the year are more or education expenses.
less than the amount of qualified education expenses, you
must compare the total of all QTP distributions for the tax
year to the adjusted qualified education expenses. Coordination With Hope and
Lifetime Learning Credits
Adjusted qualified education expenses. This amount is
the total qualified education expenses reduced by any A Hope or lifetime learning credit (education credit) can be
tax-free educational assistance. Tax-free educational as- claimed in the same year the beneficiary takes a tax-free
sistance includes: distribution from a QTP, as long as the same expenses are
not used for both benefits. This means that after the benefi-
• The tax-free part of scholarships and fellowships ciary reduces qualified education expenses by tax-free
(see chapter 1), educational assistance, he or she must further reduce
• Veterans’ educational assistance (see chapter 1), them by the expenses taken into account in determining
the credit.
• Employer-provided educational assistance (see Example 2. Assume the same facts as in Example 1,
chapter 11), and except that Sara’s parents claimed a Hope credit of $1,800
(based on $2,400 expenses).
than gifts or inheritances) received as educational Total qualified education expenses $6,700
assistance. Minus: Tax-free educational assistance −3,100
Minus: Expenses taken into account
in figuring Hope credit −2,400
Taxable earnings. Use the following steps to figure the Equals: Adjusted qualified
taxable part. education expenses (AQEE) $1,200
1. Multiply the total distributed earnings shown in box 2 The taxable part of the distribution is figured as follows.
of Form 1099-Q by a fraction. The numerator is the
adjusted qualified education expenses paid during 1. $1,200 (earnings) × $1,200 AQEE
$3,700 distribution
the year and the denominator is the total amount
distributed during the year. = $389 (tax-free earnings)
2. Subtract the amount figured in (1) from the total dis- 2. $1,200 (earnings) − $389 (tax-free earnings)
tributed earnings. This is the amount the beneficiary = $811 (taxable earnings)
must include in income. Report it on Form 1040 or
Form 1040NR, line 21.
Sara must include $811 in income (Form 1040, line 21).
This represents distributed earnings not used for adjusted
Example 1. In 2002, Sara Clarke’s parents opened a qualified education expenses.
savings account for her with a QTP maintained by their
state government. Over the years they contributed
$18,000 to the account. The total balance in the account Coordination With Coverdell
was $27,000 on the date the distribution was made. In the ESA Distributions
summer of 2008, Sara enrolled in college and had $6,700
of qualified education expenses for the rest of the year. If a designated beneficiary receives distributions from both
She paid her college expenses from the following sources. a QTP and a Coverdell ESA in the same year, and the total
Chapter 8 Qualified Tuition Program (QTP) Page 55

of these distributions is more than the beneficiary’s ad- 2. $5,500 (earnings) × $6,000 AQEE
$10,000 distribution
justed qualified higher education expenses, the expenses
must be allocated between the distributions. For purposes = $3,300 (tax-free earnings)
of this allocation, disregard any qualified elementary and 3. $5,500 (earnings) − $3,300 (tax-free earnings)
secondary education expenses. = $2,200 (taxable earnings)
Example 3. Assume the same facts as in Example 2, Taylor must include $2,200 in income on Form 1040, line
except that instead of receiving a $3,700 distribution from 21. Because Taylor’s accounts must be combined, he
her QTP, Sara received $3,000 from that account and cannot deduct his $2,000 loss (QTP #1) on Schedule A.
$700 from her Coverdell ESA. In this case, Sara must Instead, the $2,000 loss reduces the total earnings that
allocate her $1,200 of adjusted qualified higher education were distributed, thereby reducing his taxable earnings.
expenses (AQHEE) between the two distributions.
$1,200
×
$700 ESA distribution $227 Additional Tax on
$3,700 total distribution =
AQHEE AQHEE (ESA)
Taxable Distributions
$1,200 $3,000 QTP distribution $973
AQHEE × $3,700 total distribution = AQHEE (QTP) Generally, if you receive a taxable distribution, you also
must pay a 10% additional tax on the amount included in
Sara then figures the taxable portion of her Coverdell income.
ESA distribution based on qualified higher education ex-
penses of $227, and the taxable portion of her QTP distri- Exceptions. The 10% additional tax does not apply to
bution based on the other $973. distributions:
1. Paid to a beneficiary (or to the estate of the desig-
Note. If you are required to allocate your expenses nated beneficiary) on or after the death of the desig-
between Coverdell ESA and QTP distributions, and you nated beneficiary.
have adjusted qualified elementary and secondary educa-
tion expenses, see the examples in chapter 7 under Coor- 2. Made because the designated beneficiary is dis-
dination With Qualified Tuition Program (QTP) abled. A person is considered to be disabled if he or
Distributions. she shows proof that he or she cannot do any sub-
stantial gainful activity because of his or her physical
or mental condition. A physician must determine that
Losses on QTP Investments his or her condition can be expected to result in
death or to be of long-continued and indefinite dura-
If you have a loss on your investment in a QTP account, tion.
you may be able to take the loss on your income tax return. 3. Included in income because the designated benefi-
You can take the loss only when all amounts from that ciary received:
account have been distributed and the total distributions
are less than your unrecovered basis. Your basis is the a. A tax-free scholarship or fellowship (see chapter
total amount of contributions to that QTP account. You 1),
claim the loss as a miscellaneous itemized deduction on b. Veterans’ educational assistance (see chapter 1),
Schedule A (Form 1040), line 23 (Schedule A (Form
1040NR), line 11), subject to the 2%-of-adjusted- c. Employer-provided educational assistance (see
gross-income limit. chapter 11), or
If you have distributions from more than one QTP ac- d. Any other nontaxable (tax-free) payments (other
count during a year, you must combine the information than gifts or inheritances) received as educational
(amount of distribution, basis, etc.) from all such accounts assistance.
in order to determine your taxable earnings for the year. By
doing this, the loss from one QTP account reduces the 4. Made on account of the attendance of the desig-
distributed earnings (if any) from any other QTP accounts. nated beneficiary at a U.S. military academy (such
as West Point). This exception applies only to the
Example 1. In 2008, Taylor received a final distribution extent that the amount of the distribution does not
of $1,000 from QTP #1. His unrecovered basis in that exceed the costs of advanced education (as defined
account before the distribution was $3,000. If Taylor item- in section 2005(e)(3) of title 10 of the U.S. Code)
izes his deductions, he can claim the $2,000 loss on attributable to such attendance.
Schedule A. 5. Included in income only because the qualified educa-
tion expenses were taken into account in determining
Example 2. Assume the same facts as in Example 1, the Hope or lifetime learning credit (see Coordination
except that Taylor also had a distribution of $9,000 from With Hope and Lifetime Learning Credits, earlier.
QTP #2, giving him total distributions for 2008 of $10,000.
Exception (3) applies only to the extent the distribution is
His total basis in these distributions was $4,500 ($3,000 for not more than the scholarship, allowance, or payment.
QTP #1 and $1,500 for QTP #2). Taylor’s adjusted quali-
fied education expenses for 2008 totaled $6,000. In order Figuring the additional tax. Use Part II of Form 5329,
to figure his taxable earnings, Taylor combines the two Additional Taxes on Qualified Plans (Including IRAs) and
accounts and determines his taxable earnings as follows. Other Tax-Favored Accounts, to figure any additional tax.
Report the amount on Form 1040, line 59, or Form
1. $10,000 (total distribution) − $4,500 (basis portion of distribution) 1040NR, line 54.
= $5,500 (earnings included in distribution)
Page 56 Chapter 8 Qualified Tuition Program (QTP)

7. Son-in-law, daughter-in-law, father-in-law,

Rollovers and Other Transfers mother-in-law, brother-in-law, or sister-in-law.
8. The spouse of any individual listed above.
Assets can be rolled over or transferred from one QTP to
another. In addition, the designated beneficiary can be 9. First cousin.
changed without transferring accounts.
Example. When Aaron graduated from college last
Rollovers year he had $5,000 left in his QTP. He wanted to give this
money to his younger brother, who was in junior high
Any amount distributed from a QTP is not taxable if it is school. In order to avoid paying tax on the distribution of
rolled over to another QTP for the benefit of the same the amount remaining in his account, Aaron contributed
beneficiary or for the benefit of a member of the benefi- the same amount to his brother’s QTP within 60 days of the
ciary’s family (including the beneficiary’s spouse). An distribution.
amount is rolled over if it is paid to another QTP within 60
If the rollover is to another QTP for the same
days after the date of the distribution.
Do not report qualifying rollovers (those that meet the ! beneficiary, only one rollover is allowed within 12
months of a previous transfer to any QTP for that
above criteria) anywhere on Form 1040 or 1040NR. These CAUTION
are not taxable distributions. designated beneficiary.

Members of the beneficiary’s family. For these pur-
poses, the beneficiary’s family includes the beneficiary’s Changing the Designated Beneficiary
spouse and the following other relatives of the beneficiary.
There are no income tax consequences if the designated
1. Son, daughter, stepchild, foster child, adopted child, beneficiary of an account is changed to a member of the
or a descendant of any of them. beneficiary’s family (defined on this page).
2. Brother, sister, stepbrother, or stepsister. Example. Assume the same situation as in the last
3. Father or mother or ancestor of either. example. Instead of closing his QTP and paying the distri-
bution into his brother’s QTP, Aaron could have instructed
4. Stepfather or stepmother. the trustee of his account to simply change the name of the
5. Son or daughter of a brother or sister. beneficiary on his account to that of his brother.
6. Brother or sister of father or mother.
Chapter 8 Qualified Tuition Program (QTP) Page 57

1. The allowance for room and board, as determined by

the eligible educational institution, that was included
9. in the cost of attendance (for federal financial aid
purposes) for a particular academic period and living
arrangement of the student.
Education Exception 2. The actual amount charged if the student is residing
to Additional Tax on
in housing owned or operated by the eligible educa-
tional institution.
Early IRA You will need to contact the eligible educational institution
for qualified room and board costs.
Distributions Eligible educational institution. An eligible educational
institution is any college, university, vocational school, or
other postsecondary educational institution eligible to par-
Introduction ticipate in a student aid program administered by the U.S.
Generally, if you take a distribution from your IRA before Department of Education. It includes virtually all accredited
you reach age 591/2, you must pay a 10% additional tax on public, nonprofit, and proprietary (privately owned
the early distribution. This applies to any IRA you own, profit-making) postsecondary institutions. The educational
whether it is a traditional IRA (including a SEP-IRA), a Roth institution should be able to tell you if it is an eligible
IRA, or a SIMPLE IRA. The additional tax on an early educational institution.
distribution from a SIMPLE IRA may be as high as 25%. Certain educational institutions located outside the
See Publication 560, Retirement Plans for Small Business, United States also participate in the U.S. Department of
for information on SEP-IRAs, and Publication 590, Individ- Education’s Federal Student Aid (FSA) programs.
ual Retirement Arrangements (IRAs), for information about
all other IRAs. Half-time student. A student is enrolled “at least
However, you can take distributions from your IRAs for half-time” if he or she is enrolled for at least half the
qualified higher education expenses without having to pay full-time academic work load for the course of study the
the 10% additional tax. You may owe income tax on at student is pursuing as determined under the standards of
least part of the amount distributed, but you may not have the school where the student is enrolled.
to pay the 10% additional tax.
The part not subject to the additional tax is generally the
amount of the distribution that is not more than the ad- Figuring the Amount Not
justed qualified education expenses for the year.
Subject to the 10% Tax
To determine the amount of your distribution that is not
Who Is Eligible subject to the 10% additional tax, first figure your adjusted
qualified education expenses. You do this by reducing your
You can take a distribution from your IRA before you reach total qualified education expenses by any tax-free educa-
age 591/2 and not have to pay the 10% additional tax if, for tional assistance, which includes:
the year of the distribution, you pay qualified education
expenses for: • Expenses used to figure the tax-free portion of distri-
butions from a Coverdell education savings account
• yourself, (ESA) (see chapter 7),
• your spouse, or • The tax-free part of scholarships and fellowships
• your or your spouse’s child, foster child, adopted (see chapter 1),
child, or descendant of any of them. • Pell grants (see chapter 1),
Qualified education expenses. For purposes of the 10%
additional tax, these expenses are tuition, fees, books, • Employer-provided educational assistance (see
supplies, and equipment required for enrollment or attend- chapter 11), and
ance at an eligible educational institution. They also in- • Any other nontaxable (tax-free) payments (other
clude expenses for special needs services incurred by or than gifts or inheritances) received as educational
for special needs students in connection with their enroll- assistance.
ment or attendance.
Do not reduce the qualified education expenses by
As of this printing, regulations defining “students amounts paid with funds the student receives as:
!
CAUTION
with special needs” have not been released. If
available, the definition will be included in Publi- • Payment for services, such as wages,
cation 553, Highlights of 2008 Tax Changes, available in • A loan,
early 2009.
• A gift,
In addition, if the student is at least a half-time student,
room and board are qualified education expenses. • An inheritance given to either the student or the
individual making the withdrawal, or
The expense for room and board qualifies only to the
extent that it is not more than the greater of the following • A withdrawal from personal savings (including sav-
two amounts. ings from a qualified tuition program (QTP)).
Page 58 Chapter 9 Education Exception to Additional Tax on Early IRA Distributions

If your IRA distribution is equal to or less than your ad- Example 3. Assume the same facts as in Example 1
justed qualified education expenses, you are not subject to and Example 2, except that Erin’s early distribution from
the 10% additional tax. her IRA was $5,500 (including $850 of taxable earnings).
The excess of her distribution ($5,500) over her qualified
Example 1. In 2008, Erin (age 32) took a year off from education expenses ($4,300) is $1,200. Because the ex-
teaching to attend graduate school full time. She paid cess distribution ($1,200) is greater than the taxable earn-
$5,800 of qualified education expenses from the following ings ($850), Erin must pay the 10% additional tax on the
sources. entire $850 of taxable earnings.
Employer-provided educational assistance
(tax free)
Early distribution from IRA
$1,500
Reporting Early Distributions
(includes $500 taxable earnings) 3,200
Savings account 1,100 By February 2, 2009, the payer of your IRA distribution
should send you Form 1099-R, Distributions From Pen-
Before Erin can determine if she must pay the 10% sions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
additional tax on her IRA distribution, she must reduce her Insurance Contracts, etc. The information on this form will
total qualified education expenses. help you determine how much of your distribution is tax-
able for income tax purposes and how much is subject to
Total qualified education expenses $5,800
Minus: Tax-free educational assistance −1,500 the 10% additional tax.
Equals: Adjusted qualified If you received an early distribution from your IRA, you
education expenses (AQEE) $4,300 must report the taxable earnings on Form 1040, line 15b
(Form 1040NR, line 16b). Then, if you qualify for an excep-
Because Erin’s AQEE ($4,300) are more than her IRA tion for qualified higher education expenses, you must file
distribution ($3,200), she does not have to pay the 10% Form 5329 to show how much, if any, of your early distribu-
additional tax on any part of this distribution. However, she tion is subject to the 10% additional tax. See the instruc-
must include the $500 taxable earnings in her gross in- tions for Form 5329, Part I, for help in completing the form
come subject to income tax. and entering the results on Form 1040 or 1040NR.
There are many other situations in which Form 5329 is
Example 2. Assume the same facts as in Example 1, required. If, during 2008, you had other distributions from
except that the assistance from Erin’s employer was IRAs or qualified retirement plans, or have made excess
delayed (not received until July 2008), so she withdrew contributions to certain tax-favored accounts, see the in-
$4,500 from her IRA instead of the smaller amount. This structions for line 59 (Form 1040) or line 54 (Form
included $700 of taxable earnings, which must be included 1040NR) to determine if you must file Form 5329.
in her income subject to income tax.
Erin’s IRA distribution ($4,500) is larger than her AQEE
($4,300). Therefore, she must pay the 10% additional tax
on $200, the amount of her distribution ($4,500) that is
more than her qualified education expenses ($4,300), but
not more than the taxable amount of her distribution
($700). She does not have to pay the 10% additional tax on
the remaining $500 of her taxable distribution.
Chapter 9 Education Exception to Additional Tax on Early IRA Distributions Page 59

Qualified education expenses. These include the fol-

10. lowing items you pay for either yourself, your spouse, or a
dependent for whom you claim an exemption.
Education Savings 1. Tuition and fees required to enroll at or attend an

eligible educational institution. Qualified education
Bond Program expenses do not include expenses for room and
board or for courses involving sports, games, or hob-
bies that are not part of a degree or certificate grant-
ing program.
What’s New 2. Contributions to a qualified tuition program (QTP)
(see chapter 8).
Income limits for exclusion reduction increased. For
2008, the amount of your interest exclusion is phased out 3. Contributions to a Coverdell education savings ac-
(gradually reduced) if your filing status is married filing count (ESA) (see chapter 7).
jointly or qualifying widow(er) and your MAGI is between
$100,650 and $130,650. You cannot exclude any of the Adjusted qualified education expenses. You must
interest if your MAGI is $130,650 or more. For 2007, the reduce your qualified education expenses by all of the
limits that applied to you were $98,400 and $128,400. following tax-free benefits.
For all other filing statuses, your interest exclusion is 1. Tax-free part of scholarships and fellowships (see
phased out if your MAGI is between $67,100 and $82,100. chapter 1).
You cannot exclude any of the interest if your MAGI is
$82,100 or more. For 2007, the limits that applied to you 2. Expenses used to figure the tax-free portion of distri-
were $65,600 and $80,600. See Effect of the Amount of butions from a Coverdell ESA (see chapter 7).
Your Income on the Amount of Your Exclusion, later. 3. Expenses used to figure the tax-free portion of distri-
butions from a QTP (see chapter 8).
Introduction 4. Any tax-free payments (other than gifts or inheri-

tances) received as educational assistance, such as:
Generally, you must pay tax on the interest earned on U.S.
savings bonds. If you do not include the interest in income a. Veterans’ educational assistance benefits (see
in the years it is earned, you must include it in your income chapter 1),
in the year in which you cash in the bonds. b. Qualified tuition reductions (see chapter 1), or
However, when you cash in certain savings bonds
under an education savings bond program, you may be c. Employer-provided educational assistance (see
able to exclude the interest from income. chapter 11).
5. Any expenses used in figuring the Hope and lifetime

learning credits (see chapters 2 and 3).
Who Can Cash In Bonds
Tax Free Eligible educational institution. An eligible educa-
tional institution is any college, university, vocational
school, or other postsecondary educational institution eligi-
You may be able to cash in qualified U.S. savings bonds
ble to participate in a student aid program administered by
without having to include in your income some or all of the
the U.S. Department of Education. It includes virtually all
interest earned on the bonds if you meet the following
accredited public, nonprofit, and proprietary (privately
conditions.
owned profit-making) postsecondary institutions. The edu-
• You pay qualified education expenses for yourself, cational institution should be able to tell you if it is an
your spouse, or a dependent for whom you claim an eligible educational institution.
exemption on your return. Certain educational institutions located outside the
• Your modified adjusted gross income (MAGI) is less United States also participate in the U.S. Department of
than $82,100 ($130,650 if married filing jointly or Education’s Federal Student Aid (FSA) programs.
qualifying widow(er)). Dependent for whom you claim an exemption. You
• Your filing status is not married filing separately. claim an exemption for a person if you list his or her name
and other required information on Form 1040 (or Form
1040A), line 6c.
Qualified U.S. savings bonds. A qualified U.S. savings
bond is a series EE bond issued after 1989 or a series I Modified adjusted gross income (MAGI). For most tax-
bond. The bond must be issued either in your name (as the payers, MAGI is adjusted gross income (AGI) as figured on
sole owner) or in the name of both you and your spouse (as their federal income tax return without taking into account
co-owners). this interest exclusion. However, as discussed below,
The owner must be at least 24 years old before the there may be other modifications.
bond’s issue date. The issue date is printed on the front of MAGI when using Form 1040A. If you file Form
the savings bond. 1040A, MAGI is the AGI on line 22 of that form figured
The issue date is not necessarily the date of without taking into account any savings bond interest ex-
!
CAUTION
purchase —it will be the first day of the month in
which the bond is purchased (or posted, if bought
clusion and modified by adding back any amount on line 18
(Student loan interest deduction) and line 19 (Tuition and
electronically). fees deduction).
Page 60 Chapter 10 Education Savings Bond Program

MAGI when using Form 1040. If you file Form 1040, of the fraction is the adjusted qualified education expenses
your MAGI is the AGI on line 38 of that form figured without (AQEE) you paid during the year. The denominator (bot-
taking into account any savings bond interest exclusion tom part) of the fraction is the total proceeds you received
and modified by adding back any: during the year.
1. Foreign earned income exclusion, Example. In February 2008, Mark and Joan Washing-
2. Foreign housing exclusion, ton, a married couple, cashed a qualified series EE U.S.
savings bond. They received proceeds of $9,000, repre-
3. Foreign housing deduction, senting principal of $6,000 and interest of $3,000. In 2008,
4. Exclusion of income for bona fide residents of Ameri- they paid $7,650 of their daughter’s college tuition. They
can Samoa, are not claiming a Hope or lifetime learning credit for those
expenses, and their daughter does not have any tax-free
5. Exclusion of income for bona fide residents of Puerto educational assistance. Their MAGI for 2008 was $80,000.
Rico,
6. Exclusion for adoption benefits received under an $3,000 $7,650 AQEE $2,550
× = tax-free
employer’s adoption assistance program, interest $9,000 proceeds interest
7. Deduction for student loan interest,
They can exclude $2,550 of interest in 2008. They must
8. Deduction for tuition and fees, and pay tax on the remaining $450 ($3,000 − $2,550) interest.
9. Deduction for domestic production activities.
Use the worksheet in the instructions for Form 8815,
Effect of the Amount of Your Income
line 9, to figure your MAGI. If you claim any of the exclusion on the Amount of Your Exclusion
or deduction items (1)–(6) listed above, add the amount of
the exclusion or deduction to the amount on line 5 of the The amount of your interest exclusion is gradually reduced
worksheet. Do not add in the deduction for (7) student loan (phased out) if your modified adjusted gross income is
interest, (8) tuition and fees, or (9) domestic production between $67,100 and $82,100 (between $100,650 and
activities (line 4 of the worksheet already includes these $130,650 if your filing status is married filing jointly or
amounts). Enter the total on Form 8815, line 9, as your qualifying widow(er)). You cannot exclude any of the inter-
modified AGI. est if your modified adjusted gross income is equal to or
more than the upper limit.
Because the deduction for interest expenses at-
!
CAUTION
tributable to royalties and other investments is
limited to your net investment income, you cannot
The phaseout, if any, is figured for you when you fill out
Form 8815.
figure the deduction until you have figured this interest
exclusion. Therefore, if you had interest expenses attribu-
table to royalties and deductible on Schedule E (Form Claiming the Exclusion
1040), Supplemental Income and Loss, you must make a
special computation of your deductible interest without Use Form 8815 to figure your education savings bond
regard to this exclusion to figure the net royalty income interest exclusion. Enter your exclusion on line 3 of Sched-
included in your modified AGI. See Royalties included in ule B (Form 1040), Interest and Ordinary Dividends, or
modified AGI under Education Savings Bond Program in Schedule 1 (Form 1040A), Interest and Ordinary Divi-
Publication 550, chapter 1. dends for Form 1040A Filers. Attach Form 8815 to your tax
return.
Figuring the Tax-Free Amount Illustrated Example

If the total you receive when you cash in the bonds is not
more than the adjusted qualified education expenses for The information is the same as in the above example for
the year, all of the interest on the bonds may be tax free. Mark and Joan Washington, except they have a modified
However, if the total you receive when you cash in the adjusted gross income of $114,450. In this example, they
bonds is more than the adjusted expenses, only part of the can exclude $1,377 (line 14 of Form 8815 shown on the
interest may be tax free. next page) of interest in 2008.
To determine the tax-free amount, multiply the interest They must pay tax on the remaining $1,623 interest
part of the proceeds by a fraction. The numerator (top part) ($3,000 total interest – $1,377 excluded interest).
Chapter 10 Education Savings Bond Program Page 61

Exclusion of Interest From Series EE and I OMB No. 1545-0074

Form 8815 U.S. Savings Bonds Issued After 1989 2008
Department of the Treasury (For Filers With Qualified Higher Education Expenses) Attachment
Mark & Joan Washington 000 00 4567
1 (a)
(b)
Name of person (you, your spouse, or your dependent) who
Name and address of eligible educational institution
was enrolled at or attended an eligible educational institution
Jamestown University
Anna Washington Normal, VA 20100
If you need more space, attach a statement.

2 Enter the total qualified higher education expenses you paid in 2008 for the person(s) listed in
column (a) of line 1. See the instructions to find out which expenses qualify 2 7,650
3 Enter the total of any nontaxable educational benefits (such as nontaxable scholarship or
fellowship grants) received for 2008 for the person(s) listed in column (a) of line 1 (see instructions) 3 0
4 Subtract line 3 from line 2. If zero or less, stop. You cannot take the exclusion 4 7,650
5 Enter the total proceeds (principal and interest) from all series EE and I U.S. savings bonds
issued after 1989 that you cashed during 2008 5 9,000
6 Enter the interest included on line 5 (see instructions) 6 3,000
7 If line 4 is equal to or more than line 5, enter “1.000.” If line 4 is less than line 5, divide line 4
by line 5. Enter the result as a decimal (rounded to at least three places) 7 ⫻ . 850
8 Multiply line 6 by line 7 8 2,550
9 Enter your modified adjusted gross income (see instructions) 9 114,450

Note: If line 9 is $82,100 or more if single or head of household, or
$130,650 or more if married filing jointly or qualifying widow(er), stop.
You cannot take the exclusion.
10 Enter: $67,100 if single or head of household; $100,650 if married
filing jointly or qualifying widow(er) 10 100,650
11 Subtract line 10 from line 9. If zero or less, skip line 12, enter -0- on
line 13, and go to line 14 11 13,800
12 Divide line 11 by: $15,000 if single or head of household; $30,000 if married filing jointly or
qualifying widow(er). Enter the result as a decimal (rounded to at least three places) 12 ⫻ . 460
13 Multiply line 8 by line 12 13 1,173

14 Excludable savings bond interest. Subtract line 13 from line 8. Enter the result here and on
Schedule B (Form 1040), line 3, or Schedule 1 (Form 1040A), line 3, whichever applies 䊳 14 1,377
General Instructions U.S. Savings Bonds That Qualify for Exclusion

Section references are to the Internal Revenue Code. To qualify for the exclusion, the bonds must be series EE or I U.S.
savings bonds issued after 1989 in your name, or, if you are married,
Purpose of Form they may be issued in your name and your spouse’s name. Also, you
If you cashed series EE or I U.S. savings bonds in 2008 that were must have been age 24 or older before the bonds were issued. A
issued after 1989, you may be able to exclude from your income bond bought by a parent and issued in the name of his or her child
part or all of the interest on those bonds. Use this form to figure the under age 24 does not qualify for the exclusion by the parent or
amount of any interest you may exclude. child.
Who May Take the Exclusion Recordkeeping Requirements

You may take the exclusion if all four of the following apply. Keep the following records to verify interest you exclude.
1. You cashed qualified U.S. savings bonds in 2008 that were ● Bills, receipts, canceled checks, or other documents showing you
issued after 1989. paid qualified higher education expenses in 2008.
2. You paid qualified higher education expenses in 2008 for ● A written record of each post-1989 series EE or I bond that you
yourself, your spouse, or your dependents. cash. Your record must include the serial number, issue date, face
3. Your filing status is any status except married filing separately. value, and total redemption proceeds (principal and interest) of each
4. Your modified AGI (adjusted gross income) is less than: $82,100 bond. You may use Form 8818, Optional Form To Record
if single or head of household; $130,650 if married filing jointly or Redemption of Series EE and I U.S. Savings Bonds Issued After
qualifying widow(er). See the instructions for line 9 to figure your 1989, as your written record.
modified AGI.
For Paperwork Reduction Act Notice, see back of form. Cat. No. 10822S Form 8815 (2008)
Page 62 Chapter 10 Education Savings Bond Program

similar expenses, books, supplies, and equipment. The

11. payments may be for either undergraduate- or gradu-
ate-level courses. The payments do not have to be for
work-related courses.
Employer-Provided Educational assistance benefits do not include pay-
ments for the following items.
Educational 1. Meals, lodging, or transportation.
Assistance 2. Tools or supplies (other than textbooks) that you can
keep after completing the course of instruction.
3. Courses involving sports, games, or hobbies unless
Introduction they:
If you receive educational assistance benefits from your a. Have a reasonable relationship to the business of
employer under an educational assistance program, you your employer, or
can exclude up to $5,250 of those benefits each year. This
means your employer should not include the benefits with b. Are required as part of a degree program.
your wages, tips, and other compensation shown in box 1
of your Form W-2. This also means that you do not have to Benefits over $5,250. If your employer pays more than
include the benefits on your income tax return. $5,250 for educational benefits for you during the year, you
You cannot use any of the tax-free education must generally pay tax on the amount over $5,250. Your
!
CAUTION
expenses paid for by your employer as the basis
for any other deduction or credit, including the
employer should include in your wages (Form W-2, box 1)
the amount that you must include in income.
Hope credit and the lifetime learning credit. Working condition fringe benefit. However, if the
benefits over $5,250 also qualify as a working condition
Educational assistance program. To qualify as an edu-
fringe benefit, your employer does not have to include
cational assistance program, the plan must be written and
them in your wages. A working condition fringe benefit is a
must meet certain other requirements. Your employer can
benefit which, had you paid for it, you could deduct as an
tell you whether there is a qualified program where you
employee business expense. For more information on
work.
working condition fringe benefits, see Working Condition
Educational assistance benefits. Tax-free educational Benefits in chapter 2 of Publication 15-B, Employer’s Tax
assistance benefits include payments for tuition, fees and Guide to Fringe Benefits.
Chapter 11 Employer-Provided Educational Assistance Page 63

Also, keep in mind that your work-related education
12. expenses may qualify you to claim more than one tax
benefit. Generally, you may claim any number of benefits
as long as you use different expenses to figure each one.
Business Deduction
for Work-Related Qualifying Work-Related
Education Education
You can deduct the costs of qualifying work-related educa-
What’s New tion as business expenses. This is education that meets at
least one of the following two tests.
Standard mileage rate. Generally, if you claim a busi- • The education is required by your employer or the
ness deduction for work-related education and you drive law to keep your present salary, status, or job. The
your car to and from school, the amount you can deduct for required education must serve a bona fide business
miles driven from January 1, 2008, through June 30, 2008, purpose of your employer.
is 501/2 cents per mile. The amount you can deduct for
miles driven from July 1, 2008, through December 31, • The education maintains or improves skills needed
2008, is 581/2 cents per mile. This is up from 481/2 cents per in your present work.
mile in 2007. For more information, see Transportation
Expenses under What Expenses Can Be Deducted. However, even if the education meets one or both of the
above tests, it is not qualifying work-related education if it:
Limit on itemized deductions. If your adjusted gross
income for 2008 is more than $159,950 ($79,975 if you are • Is needed to meet the minimum educational require-
married filing separately), your itemized deductions may ments of your present trade or business, or
be limited. See Employees under Deducting Business Ex- • Is part of a program of study that will qualify you for
penses, and the instructions for Schedule A (Form 1040), a new trade or business.
line 29 or Schedule A (Form 1040NR), line 17.
You can deduct the costs of qualifying work-related
education as a business expense even if the education
Introduction could lead to a degree.
This chapter discusses work-related education expenses Use Figure 12-1 (see next page) as a quick check to see
that you may be able to deduct as business expenses. if your education qualifies.
To claim such a deduction, you must:
• Be working, Education Required by
• Itemize your deductions on Schedule A (Form 1040 Employer or by Law
or 1040NR) if you are an employee, Once you have met the minimum educational require-
• File Schedule C (Form 1040), Schedule C-EZ (Form ments for your job, your employer or the law may require
1040), or Schedule F (Form 1040) if you are you to get more education. This additional education is
self-employed, and qualifying work-related education if all three of the follow-
• Have expenses for education that meet the require- ing requirements are met.
ments discussed under Qualifying Work-Related Ed- • It is required for you to keep your present salary,
ucation status, or job,
• The requirement serves a business purpose of your
What is the tax benefit of taking a business deduction employer, and
for work-related education. If you are an employee and
can itemize your deductions, you may be able to claim a • The education is not part of a program that will
deduction for the expenses you pay for your work-related qualify you for a new trade or business.
education. Your deduction will be the amount by which
your qualifying work-related education expenses plus When you get more education than your employer or the
other job and certain miscellaneous expenses is greater law requires, the additional education can be qualifying
than 2% of your adjusted gross income. An itemized de- work-related education only if it maintains or improves
duction reduces the amount of your income subject to tax. skills required in your present work. See Education To
If you are self-employed, you deduct your expenses for Maintain or Improve Skills, later.
qualifying work-related education directly from your
self-employment income. This reduces the amount of your Example. You are a teacher who has satisfied the mini-
income subject to both income tax and self-employment mum requirements for teaching. Your employer requires
tax. you to take an additional college course each year to keep
Your work-related education expenses may also qualify your teaching job. If the courses will not qualify you for a
you for other tax benefits, such as the tuition and fees
deduction and the Hope and lifetime learning credits. You new trade or business, they are qualifying work-related
may qualify for these other benefits even if you do not meet education even if you eventually receive a master’s degree
the requirements listed above. and an increase in salary because of this extra education.
Page 64 Chapter 12 Business Deduction for Work-Related Education

Figure 12-1. Does Your Work-Related Education Qualify?

Start Here
Is the education required by your employer or
the law to keep your present salary, status, or
job?
Yes No
䊲䊲
Does the requirement serve a No Does the education maintain or

bona fide business requirement 䊳 improve skills needed in your
of your employer? present work?
Yes Yes
䊲䊲
Is the education needed to meet the minimum Yes No
educational requirements of your present trade
or business?
No
䊲䊲䊲
Is the education part of a program of study Yes
Your education is not
that will qualify you for a new trade or 䊳 qualifying work-related
business? education.
No
䊲
Your education is qualifying
work-related education.
Example. You quit your biology research job to become

Education To Maintain or a full-time biology graduate student for 1 year. If you return
to work in biology research after completing the courses,
Improve Skills the education is related to your present work even if you do
If your education is not required by your employer or the not go back to work with the same employer.
law, it can be qualifying work-related education only if it Indefinite absence. If you stop work for more than a
maintains or improves skills needed in your present work. year, your absence from your job is considered indefinite.
This could include refresher courses, courses on current Education during an indefinite absence, even if it maintains
developments, and academic or vocational courses. or improves skills needed in the work from which you are
Example. You repair televisions, radios, and stereo absent, is considered to qualify you for a new trade or
systems for XYZ Store. To keep up with the latest business. Therefore, it is not qualifying work-related edu-
changes, you take special courses in radio and stereo cation.
service. These courses maintain and improve skills re-
quired in your work. Education To Meet
Maintaining skills vs. qualifying for new job. Education Minimum Requirements
to maintain or improve skills needed in your present work is
not qualifying education if it will also qualify you for a new Education you need to meet the minimum educational
trade or business. requirements for your present trade or business is not
qualifying work-related education. The minimum educa-
Temporary absence. If you stop working for a year or tional requirements are determined by:
less in order to get education to maintain or improve skills
needed in your present work and then return to the same • Laws and regulations,
general type of work, your absence is considered tempo- • Standards of your profession, trade, or business,
rary. Education that you get during a temporary absence is
and
qualifying work-related education if it maintains or im-
proves skills needed in your present work. • Your employer.
Chapter 12 Business Deduction for Work-Related Education Page 65

Once you have met the minimum educational require- education unless it is part of a program of study that will
ments that were in effect when you were hired, you do not qualify you for a new trade or business.
have to meet any new minimum educational requirements.
This means that if the minimum requirements change after Example 2. Assume the same facts as in Example 1
you were hired, any education you need to meet the new except that you have a bachelor’s degree and only six
requirements can be qualifying education. professional education courses. The additional four educa-
tion courses can be qualifying work-related education.
You have not necessarily met the minimum edu-
!
CAUTION
cational requirements of your trade or business
simply because you are already doing the work.
Although you do not have all the required courses, you
have already met the minimum educational requirements.
Example 3. Assume the same facts as in Example 1

except that you are hired with only 3 years of college. The
Example 1. You are a full-time engineering student.
courses you take that lead to a bachelor’s degree (includ-
Although you have not received your degree or certifica- ing those in education) are not qualifying work-related
tion, you work part time as an engineer for a firm that will education. They are needed to meet the minimum educa-
employ you as a full-time engineer after you finish college. tional requirements for employment as a teacher.
Although your college engineering courses improve your
skills in your present job, they are also needed to meet the Example 4. You have a bachelor’s degree and you
minimum job requirements for a full-time engineer. The work as a temporary instructor at a university. At the same
education is not qualifying work-related education. time, you take graduate courses toward an advanced de-
gree. The rules of the university state that you can become
Example 2. You are an accountant and you have met a faculty member only if you get a graduate degree. Also,
the minimum educational requirements of your employer. you can keep your job as an instructor only as long as you
Your employer later changes the minimum educational show satisfactory progress toward getting this degree. You
requirements and requires you to take college courses to have not met the minimum educational requirements to
keep your job. These additional courses can be qualifying qualify you as a faculty member. The graduate courses are
work-related education because you have already satis- not qualifying work-related education.
fied the minimum requirements that were in effect when
you were hired. Certification in a new state. Once you have met the
minimum educational requirements for teachers for your
Requirements for Teachers state, you are considered to have met the minimum educa-
tional requirements in all states. This is true even if you
States or school districts usually set the minimum educa- must get additional education to be certified in another
tional requirements for teachers. The requirement is the state. Any additional education you need is qualifying
college degree or the minimum number of college hours work-related education. You have already met the mini-
usually required of a person hired for that position. mum requirements for teaching. Teaching in another state
If there are no requirements, you will have met the is not a new trade or business.
minimum educational requirements when you become a
Example. You hold a permanent teaching certificate in
faculty member. You generally will be considered a faculty
State A and are employed as a teacher in that state for
member when one or more of the following occurs. several years. You move to State B and are promptly hired
• You have tenure. as a teacher. You are required, however, to complete
certain prescribed courses to get a permanent teaching
• Your years of service count toward obtaining tenure. certificate in State B. These additional courses are qualify-
• You have a vote in faculty decisions. ing work-related education because the teaching position
in State B involves the same general kind of work for which
• Your school makes contributions for you to a retire- you were qualified in State A.
ment plan other than social security or a similar
program.
Education That Qualifies You for a
Example 1. The law in your state requires beginning New Trade or Business
secondary school teachers to have a bachelor’s degree, Education that is part of a program of study that will qualify
including 10 professional education courses. In addition, to you for a new trade or business is not qualifying work-
keep the job a teacher must complete a fifth year of training related education. This is true even if you do not plan to
within 10 years from the date of hire. If the employing enter that trade or business.
school certifies to the state Department of Education that
qualified teachers cannot be found, the school can hire If you are an employee, a change of duties that involves
the same general kind of work is not a new trade or
persons with only 3 years of college. However, to keep
business.
their jobs, these teachers must get a bachelor’s degree
and the required professional education courses within 3 Example 1. You are an accountant. Your employer
years. requires you to get a law degree at your own expense. You
Under these facts, the bachelor’s degree, whether or register at a law school for the regular curriculum that leads
not it includes the 10 professional education courses, is to a law degree. Even if you do not intend to become a
considered the minimum educational requirement for qual- lawyer, the education is not qualifying because the law
ification as a teacher in your state. degree will qualify you for a new trade or business.
If you have all the required education except the fifth
year, you have met the minimum educational require- Example 2. You are a general practitioner of medicine.
ments. The fifth year of training is qualifying work-related You take a 2-week course to review developments in

several specialized fields of medicine. The course does not Example. Your employer agrees to pay your education
qualify you for a new profession. It is qualifying work- expenses if you file a voucher showing your expenses.
related education because it maintains or improves skills You do not file a voucher and you do not get reimbursed.
required in your present profession. Because you did not file a voucher, you cannot deduct the
expenses on your tax return.
Example 3. While working in the private practice of
psychiatry, you enter a program to study and train at an Transportation Expenses
accredited psychoanalytic institute. The program will lead
to qualifying you to practice psychoanalysis. The psycho- If your education qualifies, you can deduct local transporta-
analytic training does not qualify you for a new profession. tion costs of going directly from work to school. If you are
It is qualifying work-related education because it maintains regularly employed and go to school on a temporary basis,
or improves skills required in your present profession. you can also deduct the costs of returning from school to
home.
Bar or CPA Review Course Temporary basis. You go to school on a temporary basis
Review courses to prepare for the bar examination or the if either of the following situations applies to you.
certified public accountant (CPA) examination are not 1. Your attendance at school is realistically expected to
qualifying work-related education. They are part of a pro- last 1 year or less and does indeed last for 1 year or
gram of study that can qualify you for a new profession. less.
2. Initially, your attendance at school is realistically ex-
Teaching and Related Duties pected to last 1 year or less, but at a later date your
attendance is reasonably expected to last more than
All teaching and related duties are considered the same 1 year. Your attendance is temporary up to the date
general kind of work. A change in duties in any of the you determine it will last more than 1 year.
following ways is not considered a change to a new busi-
ness. If you are in either situation (1) or (2) above, your attend-
ance is not temporary if facts and circumstances indicate
• Elementary school teacher to secondary school otherwise.
teacher.
Attendance not on a temporary basis. You do not go
• Teacher of one subject, such as biology, to teacher to school on a temporary basis if either of the following
of another subject, such as art. situations apply to you.
• Classroom teacher to guidance counselor. 1. Your attendance at school is realistically expected to
• Classroom teacher to school administrator. last more than 1 year. It does not matter how long
you actually attend.
2. Initially, your attendance at school is realistically ex-
What Expenses pected to last 1 year or less, but at a later date your
attendance is reasonably expected to last more than
Can Be Deducted 1 year. Your attendance is not temporary after the
date you determine it will last more than 1 year.
If your education meets the requirements described earlier
under Qualifying Work-Related Education you can gener-
ally deduct your education expenses as business ex- Deductible Transportation Expenses
penses. If you are not self-employed, you can deduct
business expenses only if you itemize your deductions. If you are regularly employed and go directly from home to
school on a temporary basis, you can deduct the round-trip
You cannot deduct expenses related to tax-exempt and costs of transportation between your home and school.
excluded income. This is true regardless of the location of the school, the
distance traveled, or whether you attend school on non-
Deductible expenses. The following education expenses work days.
can be deducted.
Transportation expenses include the actual costs of
• Tuition, books, supplies, lab fees, and similar items. bus, subway, cab, or other fares, as well as the costs of
• Certain transportation and travel costs. using your car. Transportation expenses do not include
amounts spent for travel, meals, or lodging while you are
• Other education expenses, such as costs of re- away from home overnight.
search and typing when writing a paper as part of an
educational program. Example 1. You regularly work in a nearby town, and
go directly from work to home. You also attend school
Nondeductible expenses. You cannot deduct personal every work night for 3 months to take a course that im-
or capital expenses. For example, you cannot deduct the proves your job skills. Since you are attending school on a
dollar value of vacation time or annual leave you take to temporary basis, you can deduct your daily round-trip
attend classes. This amount is a personal expense. transportation expenses in going between home and
school. This is true regardless of the distance traveled.
Unclaimed reimbursement. If you do not claim reim-
bursement that you are entitled to receive from your em- Example 2. Assume the same facts as in Example 1
ployer, you cannot deduct the expenses that apply to the except that on certain nights you go directly from work to
reimbursement. school and then home. You can deduct your transportation

expenses from your regular work site to school and then transportation expenses of going to Pleasantville. He can
home. deduct only the meals (subject to the 50% limit) and lodg-
ing connected with his educational activities.
Example 3. Assume the same facts as in Example 1
except that you attend the school for 9 months on Satur- Example 2. Sue works in Boston. She went to a univer-
days, nonwork days. Since you are attending school on a sity in Michigan to take a course for work. The course is
temporary basis, you can deduct your round-trip transpor- qualifying work-related education.
tation expenses in going between home and school. She took one course, which is one-fourth of a full course
load of study. She spent the rest of the time on personal
Example 4. Assume the same facts as in Example 1 activities. Her reasons for taking the course in Michigan
except that you attend classes twice a week for 15 months. were all personal.
Since your attendance in school is not considered tempo-
rary, you cannot deduct your transportation expenses in Sue’s trip is mainly personal because three-fourths of
going between home and school. If you go directly from her time is considered personal time. She cannot deduct
work to school, you can deduct the one-way transportation the cost of her round-trip train ticket to Michigan. She can
expenses of going from work to school. If you go from work deduct one-fourth of the meals (subject to the 50% limit)
to home to school and return home, your transportation and lodging costs for the time she attended the university.
expenses cannot be more than if you had gone directly
from work to school. Example 3. Dave works in Nashville and recently trav-
eled to California to take a 2-week seminar. The seminar is
Using your car. If you use your car (whether you own or qualifying work-related education.
lease it) for transportation to school, you can deduct your While there, he spent an extra 8 weeks on personal
actual expenses or use the standard mileage rate to figure activities. The facts, including the extra 8-week stay, show
the amount you can deduct. The standard mileage rate for that his main purpose was to take a vacation.
miles driven from January 1, 2008, through June 30, 2008,
is 501/2 cents per mile. The amount you can deduct for Dave cannot deduct his round-trip airfare or his meals
miles driven from July 1, 2008, through December 31, and lodging for the 8 weeks. He can deduct only his
2008, is 581/2 cents per mile. Whichever method you use, expenses for meals (subject to the 50% limit) and lodging
you can also deduct parking fees and tolls. See Publication for the 2 weeks he attended the seminar.
463, chapter 4, for information on deducting your actual
expenses of using a car. Cruises and conventions. Certain cruises and conven-
tions offer seminars or courses as part of their itinerary.
Travel Expenses Even if the seminars or courses are work related, your
deduction for travel may be limited. This applies to:
You can deduct expenses for travel, meals (see 50% limit
on meals on this page), and lodging if you travel overnight • Travel by ocean liner, cruise ship, or other form of
mainly to obtain qualifying work-related education. luxury water transportation, and
Travel expenses for qualifying work-related education • Conventions outside the North American area.
are treated the same as travel expenses for other em-
ployee business purposes. For more information, see For a discussion of the limits on travel expense deduc-
chapter 1 of Publication 463. tions that apply to cruises and conventions, see Luxury
You cannot deduct expenses for personal activi- Water Travel and Conventions in chapter 1 of Publication
!
CAUTION
ties such as sightseeing, visiting, or entertaining. 463.
50% limit on meals. You can deduct only 50% of the cost
of your meals while traveling away from home to obtain
Mainly personal travel. If your travel away from home is qualifying work-related education. You cannot have been
mainly personal, you cannot deduct all of your expenses reimbursed for the meals.
for travel, meals, and lodging. You can deduct only your Employees must use Form 2106 or Form 2106-EZ to
expenses for lodging and 50% of your expenses for meals apply the 50% limit.
during the time you attend the qualified educational activi-
ties.
Whether a trip’s purpose is mainly personal or educa- Travel as Education
tional depends upon the facts and circumstances. An im-
portant factor is the comparison of time spent on personal You cannot deduct the cost of travel as a form of education
activities with time spent on educational activities. If you even if it is directly related to your duties in your work or
spend more time on personal activities, the trip is consid- business.
ered mainly educational only if you can show a substantial
nonpersonal reason for traveling to a particular location. Example. You are a French language teacher. While
on sabbatical leave granted for travel, you traveled through
Example 1. John works in Newark, New Jersey. He France to improve your knowledge of the French lan-
traveled to Chicago to take a deductible 1-week course at guage. You chose your itinerary and most of your activities
the request of his employer. His main reason for going to to improve your French language skills. You cannot deduct
Chicago was to take the course. your travel expenses as education expenses. This is true
While there, he took a sightseeing trip, entertained even if you spent most of your time learning French by
some friends, and took a side trip to Pleasantville for a day. visiting French schools and families, attending movies or
Since the trip was mainly for business, John can deduct plays, and engaging in similar activities.
his round-trip airfare to Chicago. He cannot deduct his

No Double Benefit Allowed Note. The following rules about reimbursement ar-
rangements also apply to expense allowances received
You cannot do any of the following. from your employer.
• Deduct work-related education expenses as busi-
ness expenses if you benefit from these expenses Accountable Plans
under any other provision of the law, for example, as To be an accountable plan, your employer’s reimburse-
a tuition and fees deduction. ment arrangement must require you to meet all three of the
• Deduct work-related education expenses paid with following rules.
tax-free scholarship, grant, or employer-provided • Your expenses must have a business connection—
educational assistance. See Adjustments to Qualify- that is, your expenses must be deductible under the
ing Work-Related Education Expenses, next. rules for qualifying work-related education explained
earlier.
Adjustments to Qualifying Work-Related • You must adequately account to your employer for
Education Expenses your expenses within a reasonable period of time.
• You must return any reimbursement or allowance in
If you pay qualifying work-related education expenses with excess of the expenses accounted for within a rea-
certain tax-free funds, you cannot claim a deduction for sonable period of time.
those amounts. You must reduce the qualifying expenses
by the amount of any tax-free educational assistance you If you are reimbursed under an accountable plan, your
received. employer should not include any reimbursement in your
income in box 1 of your Form W-2.
Tax-free educational assistance. This includes: If your employer included reimbursements in box
TIP 1 of your Form W-2 and you meet all three rules
• The tax-free part of scholarships and fellowships for accountable plans, ask your employer for a
(see chapter 1), corrected Form W-2.
Accountable plan rules not met. Even though you are
• Employer-provided educational assistance (see reimbursed under an accountable plan, some of your ex-
chapter 11), penses may not meet all three rules for accountable plans.
• Veterans’ educational assistance (see chapter 1), Those expenses that fail to meet the three rules are treated
and as having been reimbursed under a nonaccountable plan
(discussed later).
than gifts or inheritances) received as educational Expenses equal reimbursement. Under an accountable
assistance. plan, if your expenses equal your reimbursement, you do
not complete Form 2106 or 2106-EZ. Because your ex-
penses and reimbursements are equal, you do not have a
Amounts that do not reduce qualifying work-related deduction.
education expenses. Do not reduce the qualifying
Excess expenses. If your expenses are more than your
work-related education expenses by amounts paid with reimbursement, you can deduct your excess expenses.
funds the student receives as: This is discussed later under Deducting Business Ex-
• Payment for services, such as wages, penses
• A loan, Allocating your reimbursements for meals. Because
your excess meal expenses are subject to the 50% limit,
• A gift, you must figure them separately from your other expenses.
• An inheritance, or If your employer paid you a single amount to cover both
meals and other expenses, you must allocate the reim-
• A withdrawal from the student’s personal savings. bursement so that you can figure your excess meal ex-
penses separately. Make the allocation as follows.
Also, do not reduce the qualifying work-related educa-
tion expenses by any scholarship or fellowship reported as 1. Divide your meal expenses by your total expenses.
income on the student’s return or any scholarship which, 2. Multiply your total reimbursement by the result from
by its terms, cannot be applied to qualifying work-related (1). This is the allocated reimbursement for your
education expenses. meal expenses.
3. Subtract the amount figured in (2) from your total
reimbursement. The difference is the allocated reim-
How To Treat Reimbursements bursement for your other expenses of qualifying
work-related education.
How you treat reimbursements depends on the arrange-
ment you have with your employer.
Example. Your employer paid you an expense allow-
There are two basic types of reimbursement arrange- ance of $2,000 under an accountable plan. The allowance
ments —accountable plans and nonaccountable plans. was to cover all of your expenses of traveling away from
You can tell the type of plan you are reimbursed under by home to take a 2-week training course for work. There was
the way the reimbursement is reported on your Form W-2. no indication of how much of the reimbursement was for

each type of expense. Your actual expenses equal $2,500 Employees

($425 for meals + $700 lodging + $150 transportation
expenses + $1,225 for books and tuition). If you are an employee, you can deduct the cost of qualify-
Using the steps listed above, allocate the reimburse- ing work-related education only if you:
ment between the $425 meal expenses and the $2,075
other expenses. 1. Did not receive any reimbursement from your em-
ployer,
$425 meal expenses
1. $2,500 total expenses = .17 2. Were reimbursed under a nonaccountable plan
(amount is included in box 1 of Form W-2), or
2. $2,000 (reimbursement) × .17
3. Received reimbursement under an accountable plan,
= $340 (allocated reimbursement for meal expenses)
but the amount received was less than your ex-
3. $2,000 (reimbursement) − $340 (meals) penses.
= $1,660 (allocated reimbursement for other qualifying If either (1) or (2) applies, you can deduct the total qualify-
work-related education expenses) ing cost. If (3) applies, you can deduct only the qualifying
Your excess meal expenses are $85 ($425 − $340) and costs that were more than your reimbursement.
your excess other expenses are $415 ($2,075 − $1,660). In order to deduct the cost of your qualifying work-
After you apply the 50% limit to your meals, you have a related education as a business expense, include the
deduction for work-related education expenses of $458 amount with your deduction for any other employee busi-
(($85 × 50%) + $415). ness expenses on Schedule A (Form 1040), line 21, or
Schedule A (Form 1040NR), line 9. (Special rules for
Nonaccountable Plans expenses of certain performing artists and fee-basis offi-
cials and for impairment-related work expenses are ex-
Your employer will combine the amount of any reimburse- plained later.)
ment or other expense allowance paid to you under a This deduction is subject to the 2%-of-adjusted-
nonaccountable plan with your wages, salary, or other pay gross-income limit that applies to most miscellaneous
and report the total in box 1 of your Form W-2. itemized deductions. A separate limit may apply to your
You can deduct your expenses regardless of whether itemized deductions if your adjusted gross income is more
they are more than, less than, or equal to your reimburse- than $159,950 ($79,975 if you are married filing sepa-
ment. This is discussed below under Deducting Business rately). See the instructions for Schedule A (Form 1040),
Expenses. An illustrated example of a nonaccountable line 29, or Schedule A (Form 1040NR), line 17.
plan, using Form 2106-EZ, is shown at the end of this
chapter. Form 2106 or 2106-EZ. To figure your deduction for em-
ployee business expenses, including qualifying
Reimbursements for nondeductible expenses. Reim- work-related education, you generally must complete
bursements you received for nondeductible expenses are Form 2106 or 2106-EZ.
treated as paid under a nonaccountable plan. You must
include them in your income. For example, you must in- Form not required. Do not complete either Form 2106
clude in your income reimbursements your employer gave or 2106-EZ if:
you for expenses of education that: • All reimbursements, if any, are included in box 1 of
• You need to meet the minimum educational require- your Form W-2, and
ments for your job, or • You are not claiming travel, transportation, meal, or
• Is part of a program of study that can qualify you for entertainment expenses.
a new trade or business.
If you meet both of these requirements, enter the ex-
For more information on accountable and nonaccount- penses directly on Schedule A (Form 1040), line 21, or
able plans, see chapter 6 of Publication 463. Schedule A (Form 1040NR), line 9. (Special rules for
expenses of certain performing artists and fee-basis offi-
cials and for impairment-related work expenses are ex-
plained later.)
Deducting Business Expenses Using Form 2106-EZ. This form is shorter and easier to
Self-employed persons and employees report their busi- use than Form 2106. Generally, you can use this form if:
ness expenses differently. • All reimbursements, if any, are included in box 1 of
The following information explains what forms you must your Form W-2, and
use to deduct the cost of your qualifying work-related
education as a business expense. • You are using the standard mileage rate if you are
claiming vehicle expenses.
Self-Employed Persons If you do not meet both of these requirements, use Form
If you are self-employed, you must report the cost of your 2106.
qualifying work-related education on the appropriate form
used to report your business income and expenses (gener- Performing Artists and
ally Schedule C, C-EZ, or F). If your educational expenses Fee-Basis Officials
include expenses for a car or truck, travel, or meals, report
those expenses the same way you report other business If you are a qualified performing artist, or a state (or local)
expenses for those items. See the instructions for the form government official who is paid in whole or in part on a fee
you file for information on how to complete it. basis, you can deduct the cost of your qualifying work-

related education as an adjustment to gross income rather 1. Documents, such as transcripts, course descriptions,
than as an itemized deduction. catalogs, etc., showing periods of enrollment in edu-
Include the cost of your qualifying work-related educa- cational institutions, principal subjects studied, and
tion with any other employee business expenses on Form descriptions of educational activity.
1040, line 24, or Form 1040NR, line 34. You do not have to
2. Canceled checks and receipts to verify amounts you
itemize your deductions on Schedule A (Form 1040 or
spent for:
1040NR), and, therefore, the deduction is not subject to
the 2%-of-adjusted-gross-income limit. You must com- a. Tuition and books,
plete Form 2106 or 2106-EZ to figure your deduction even
if you meet the requirements described earlier under Form b. Meals and lodging while away from home over-
not required. night for educational purposes,
For more information on qualified performing artists, see c. Travel and transportation, and
chapter 6 of Publication 463.
d. Other educational expenses.
Impairment-Related Work Expenses 3. Statements from your employer explaining whether
If you are disabled and have impairment-related work the education was necessary for you to keep your
expenses that are necessary for you to be able to get job, salary, or status; how the education helped
qualifying work-related education, you can deduct these maintain or improve skills needed in your job; how
expenses on Schedule A (Form 1040), line 28, or Sched- much reimbursement you received; and the type of
ule A (Form 1949NR), line 16. They are not subject to the certificate and subjects taught, if you are a teacher.
2%-of-adjusted-gross-income limit. To deduct these ex- 4. Complete information about any scholarship or fel-
penses, you must complete Form 2106 or 2106-EZ even if lowship grants, including amounts you received dur-
you meet the requirements described earlier under Form ing the year.
not required.
For more information on impairment-related work ex-
penses, see chapter 6 of Publication 463.
Illustrated Example
Recordkeeping Victor Jones teaches math at a private high school in North
Carolina. He was selected to attend a 3-week math semi-
nar at a university in California. The seminar will improve
You must keep records as proof of any deduction his skills in his current job and is qualifying work-related
claimed on your tax return. Generally, you should education. He was reimbursed for his expenses under his
RECORDS keep your records for 3 years from the date of employer’s nonaccountable plan, so his reimbursement of
filing the tax return and claiming the deduction. $2,100 is included in the wages shown in box 1 of his Form
If you are an employee who is reimbursed for expenses W-2. Victor will file Form 1040.
and you give your records and documentation to your His actual expenses for the seminar are as follows:
employer, you do not have to keep duplicate copies of this
information. However, you should keep your records for a Lodging . . . . . . . . . . . . . . . . . . . . . . . $1,050
3-year period if: Meals . . . . . . . . . . . . . . . . . . . . . . . . . 526
Airfare . . . . . . . . . . . . . . . . . . . . . . . . 550
• You claim deductions for expenses that are more Taxi fares . . . . . . . . . . . . . . . . . . . . . . 50
than your reimbursement, Tuition and books . . . . . . . . . . . . . . . . 400
• Your employer does not use adequate accounting Total Expenses $2,576
procedures to verify expense accounts, Victor files Form 2106-EZ with his tax return. He shows
• You are related to your employer, or his expenses for the seminar in Part I of the form. He
enters $1,650 ($1,050 + $550 + $50) on line 3 to account
• Your expenses are reimbursed under a nonaccount- for his lodging, airfare, and taxi fares. He enters $400 on
able plan.
line 4 for his tuition and books. On the line for meals and
entertainment expenses to the left of line 5, Victor enters
Examples of records to keep. If any of the above cases $526 for meal expenses. He multiplies that amount by 50%
apply to you, you must be able to prove that your expenses and enters the result, $263, on line 5. On line 6, Victor
are deductible. You should keep adequate records or have totals the amounts from lines 3 through 5. He carries the
sufficient evidence that will support your expenses. Esti- total, $2,313, to Schedule A (Form 1040), line 21.
mates or approximations do not qualify as proof of an Since he does not claim any vehicle expenses, Victor
expense. Some examples of what can be used to help leaves Part II blank. His filled-in form is shown on the next
prove your expenses are: page.

OMB No. 1545-0074

Form 2106-EZ Unreimbursed Employee Business Expenses
Department of the Treasury
2008
Attachment
䊳 Attach to Form 1040 or Form 1040NR.
Internal Revenue Service (99) Sequence No. 129A
Your name Occupation in which you incurred expenses Social security number
Victor Jones Teaching 123 00 4321
You May Use This Form Only if All of the Following Apply.
● You are an employee deducting ordinary and necessary expenses attributable to your job. An ordinary expense is one that is
common and accepted in your field of trade, business, or profession. A necessary expense is one that is helpful and appropriate
for your business. An expense does not have to be required to be considered necessary.
● You do not get reimbursed by your employer for any expenses (amounts your employer included in box 1 of your Form W-2 are
not considered reimbursements for this purpose).
● If you are claiming vehicle expense, you are using the standard mileage rate for 2008.
Caution: You can use the standard mileage rate for 2008 only if: (a) you owned the vehicle and used the standard mileage rate for the first year
you placed the vehicle in service, or (b) you leased the vehicle and used the standard mileage rate for the portion of the lease period after 1997.
Part I Figure Your Expenses
1 Vehicle expense using the standard mileage rate. Complete Part II and then go to line 1a below.
a Multiply business miles driven before July 1, 2008, by 50.5¢ (.505) 1a
b Multiply business miles driven after June 30, 2008, by 58.5¢ (.585) 1b
c Add lines 1a and 1b 1c
2 Parking fees, tolls, and transportation, including train, bus, etc., that did not involve overnight
travel or commuting to and from work 2
3 Travel expense while away from home overnight, including lodging, airplane, car rental, etc.
Do not include meals and entertainment 3 1,650
4 Business expenses not included on lines 1c through 3. Do not include meals and
entertainment 4 400
5 Meals and entertainment expenses: $ 526 × 50% (.50). (Employees subject to

Department of Transportation (DOT) hours of service limits: Multiply meal expenses incurred
while away from home on business by 80% (.80) instead of 50%. For details, see instructions.) 5 263
6 Total expenses. Add lines 1c through 5. Enter here and on Schedule A (Form 1040), line
21 (or on Schedule A (Form 1040NR, line 9)). (Armed Forces reservists, fee-basis state or
local government officials, qualified performing artists, and individuals with disabilities: See
the instructions for special rules on where to enter this amount.) 6 2,313
Part II Information on Your Vehicle. Complete this part only if you are claiming vehicle expense on line 1.
7 When did you place your vehicle in service for business use? (month, day, year) 䊳 / /
8 Of the total number of miles you drove your vehicle during 2008, enter the number of miles you used your vehicle for:
a Business b Commuting (see instructions) c Other
9 Was your vehicle available for personal use during off-duty hours? Yes No
10 Do you (or your spouse) have another vehicle available for personal use? Yes No
11a Do you have evidence to support your deduction? Yes No
b If “Yes,” is the evidence written? Yes No

For Paperwork Reduction Act Notice, see page 4. Cat. No. 20604Q Form 2106-EZ (2008)

Internet. You can access the IRS website at

13. www.irs.gov 24 hours a day, 7 days a week to:
How To Get Tax Help • E-file your return. Find out about commercial tax
preparation and e-file services available free to eligi-
You can get help with unresolved tax issues, order free ble taxpayers.
publications and forms, ask tax questions, and get informa-
tion from the IRS in several ways. By selecting the method • Check the status of your 2008 refund. Go to www.
that is best for you, you will have quick and easy access to irs.gov and click on Where’s My Refund. Wait at
tax help. least 72 hours after the IRS acknowledges receipt of
your e-filed return, or 3 to 4 weeks after mailing a
Contacting your Taxpayer Advocate. The Taxpayer paper return. If you filed Form 8379 with your return,
Advocate Service (TAS) is an independent organization wait 14 weeks (11 weeks if you filed electronically).
within the IRS whose employees assist taxpayers who are Have your 2008 tax return available so you can
experiencing economic harm, who are seeking help in provide your social security number, your filing sta-
resolving tax problems that have not been resolved tus, and the exact whole dollar amount of your re-
through normal channels, or who believe that an IRS fund.
system or procedure is not working as it should.
You can contact the TAS by calling the TAS toll-free • Download forms, instructions, and publications.
case intake line at 1-877-777-4778 or TTY/TDD • Order IRS products online.
1-800-829-4059 to see if you are eligible for assistance.
You can also call or write your local taxpayer advocate, • Research your tax questions online.
whose phone number and address are listed in your local • Search publications online by topic or keyword.
telephone directory and in Publication 1546, Taxpayer
Advocate Service —Your Voice at the IRS. You can file • View Internal Revenue Bulletins (IRBs) published in
Form 911, Request for Taxpayer Advocate Service Assis- the last few years.
tance (And Application for Taxpayer Assistance Order), or • Figure your withholding allowances using the with-
ask an IRS employee to complete it on your behalf. For holding calculator online at www.irs.gov/individuals.
more information, go to www.irs.gov/advocate.
Low Income Taxpayer Clinics (LITCs). LITCs are in-
• Determine if Form 6251 must be filed by using our
Alternative Minimum Tax (AMT) Assistant.
dependent organizations that provide low income taxpay-
ers with representation in federal tax controversies with the • Sign up to receive local and national tax news by
IRS for free or for a nominal charge. The clinics also email.
provide tax education and outreach for taxpayers who
speak English as a second language. Publication 4134, • Get information on starting and operating a small
Low Income Taxpayer Clinic List, provides information on business.
clinics in your area. It is available at www.irs.gov or your
local IRS office.
Phone. Many services are available by phone.
Free tax services. To find out what services are avail-
able, get Publication 910, IRS Guide to Free Tax Services.
It contains lists of free tax information sources, including
publications, services, and free tax education and assis-
tance programs. It also has an index of over 100 TeleTax • Ordering forms, instructions, and publications. Call
topics (recorded tax information) you can listen to on your 1-800-829-3676 to order current-year forms, instruc-
telephone. tions, and publications, and prior-year forms and in-
Accessible versions of IRS published products are structions. You should receive your order within 10
available on request in a variety of alternative formats for days.
people with disabilities.
• Asking tax questions. Call the IRS with your tax
Free help with your return. Free help in preparing your questions at 1-800-829-1040.
return is available nationwide from IRS-trained volunteers.
The Volunteer Income Tax Assistance (VITA) program is • Solving problems. You can get face-to-face help
designed to help low-income taxpayers and the Tax Coun- solving tax problems every business day in IRS Tax-
seling for the Elderly (TCE) program is designed to assist payer Assistance Centers. An employee can explain
taxpayers age 60 and older with their tax returns. Many IRS letters, request adjustments to your account, or
VITA sites offer free electronic filing and all volunteers will help you set up a payment plan. Call your local
let you know about credits and deductions you may be Taxpayer Assistance Center for an appointment. To
entitled to claim. To find the nearest VITA or TCE site, call find the number, go to www.irs.gov/localcontacts or
1-800-829-1040. look in the phone book under United States Govern-
As part of the TCE program, AARP offers the Tax-Aide ment, Internal Revenue Service.
counseling program. To find the nearest AARP Tax-Aide • TTY/TDD equipment. If you have access to TTY/
site, call 1-888-227-7669 or visit AARP’s website at TDD equipment, call 1-800-829-4059 to ask tax
www.aarp.org/money/taxaide . questions or to order forms and publications.
For more information on these programs, go to
www.irs.gov and enter keyword “VITA” in the upper • TeleTax topics. Call 1-800-829-4477 to listen to
right-hand corner. pre-recorded messages covering various tax topics.
Chapter 13 How To Get Tax Help Page 73

• Refund information. To check the status of your Mail. You can send your order for forms, instruc-
2008 refund, call 1-800-829-1954 during business tions, and publications to the address below. You
hours or 1-800-829-4477 (automated refund infor- should receive a response within 10 days after
mation 24 hours a day, 7 days a week). Wait at least your request is received.
72 hours after the IRS acknowledges receipt of your
e-filed return, or 3 to 4 weeks after mailing a paper Internal Revenue Service
return. If you filed Form 8379 with your return, wait 1201 N. Mitsubishi Motorway
14 weeks (11 weeks if you filed electronically). Have Bloomington, IL 61705-6613
your 2008 tax return available so you can provide
your social security number, your filing status, and DVD for tax products. You can order Publication
the exact whole dollar amount of your refund. Re- 1796, IRS Tax Products DVD, and obtain:
funds are sent out weekly on Fridays. If you check
the status of your refund and are not given the date
it will be issued, please wait until the next week
before checking back. • Current-year forms, instructions, and publications.
• Other refund information. To check the status of a • Prior-year forms, instructions, and publications.
prior year refund or amended return refund, call • Tax Map: an electronic research tool and finding aid.
1-800-829-1954.
• Tax law frequently asked questions.
Evaluating the quality of our telephone services. To • Tax Topics from the IRS telephone response sys-
ensure IRS representatives give accurate, courteous, and tem.
professional answers, we use several methods to evaluate • Internal Revenue Code—Title 26 of the U.S. Code.
the quality of our telephone services. One method is for a
second IRS representative to listen in on or record random • Fill-in, print, and save features for most tax forms.
telephone calls. Another is to ask some callers to complete • Internal Revenue Bulletins.
a short survey at the end of the call.
• Toll-free and email technical support.
Walk-in. Many products and services are avail- • Two releases during the year.
able on a walk-in basis. – The first release will ship the beginning of January
2009.
– The final release will ship the beginning of March
2009.
• Products. You can walk in to many post offices,
libraries, and IRS offices to pick up certain forms, Purchase the DVD from National Technical Information
instructions, and publications. Some IRS offices, li- Service (NTIS) at www.irs.gov/cdorders for $30 (no han-
braries, grocery stores, copy centers, city and county dling fee) or call 1-877-233-6767 toll free to buy the DVD
government offices, credit unions, and office supply for $30 (plus a $6 handling fee). The price is discounted to
stores have a collection of products available to print $25 for orders placed prior to December 1, 2008.
from a CD or photocopy from reproducible proofs.
Also, some IRS offices and libraries have the Inter- Small Business Resource Guide 2009. This
nal Revenue Code, regulations, Internal Revenue online guide is a must for every small business
Bulletins, and Cumulative Bulletins available for re- owner or any taxpayer about to start a business.
search purposes. This year’s guide includes:
• Services. You can walk in to your local Taxpayer • Helpful information, such as how to prepare a busi-
Assistance Center every business day for personal, ness plan, find financing for your business, and
face-to-face tax help. An employee can explain IRS much more.
letters, request adjustments to your tax account, or
help you set up a payment plan. If you need to • All the business tax forms, instructions, and publica-
resolve a tax problem, have questions about how the tions needed to successfully manage a business.
tax law applies to your individual tax return, or you • Tax law changes for 2009.
are more comfortable talking with someone in per-
son, visit your local Taxpayer Assistance Center • Tax Map: an electronic research tool and finding aid.
where you can spread out your records and talk with • Web links to various government agencies, business
an IRS representative face-to-face. No appointment associations, and IRS organizations.
is necessary —just walk in. If you prefer, you can call
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representative will call you back within 2 business • A site map of the guide to help you navigate the
days to schedule an in-person appointment at your pages with ease.
convenience. If you have an ongoing, complex tax
account problem or a special need, such as a disa- • An interactive “Teens in Biz” module that gives prac-
bility, an appointment can be requested. All other tical tips for teens about starting their own business,
issues will be handled without an appointment. To creating a business plan, and filing taxes.
find the number of your local office, go to
www.irs.gov/localcontacts or look in the phone book The information is updated during the year. Visit
under United States Government, Internal Revenue www.irs.gov and enter keyword “SBRG” in the upper
Service. right-hand corner for more information.
Page 74 Chapter 13 How To Get Tax Help

Appendices
The following appendices are pro- Appendix A. Illustrated ments for the education credits. Be-
cause Sean is beyond the second
vided to help you claim the education Example of Education (sophomore) year of his postsec-
benefits that will give you the lowest Credits ondary education, his expenses do not
tax.
qualify for the Hope credit. But,
1. Appendix A—An Illustrated Ex- Dave and Valerie Jones are married amounts paid for Sean’s expenses in
ample of Education Credits in- and file a joint tax return. For 2008, 2009 for academic periods beginning
cluding a filled-in Form 8863 they claim exemptions for their two in 2008 and the first 3 months of 2009
showing how to claim both the dependent children on their tax return. qualify for the lifetime learning credit.
Hope credit and lifetime learning Their modified adjusted gross income Corey is in her first 2 (freshman and
credit for 2008. is $99,000. Their tax, before credits, is sophomore) years of postsecondary
$11,219. Their son, Sean, will receive education and expenses paid for her in
2. Appendix B—A chart summariz- his bachelor’s degree in psychology 2008, for academic periods beginning
ing some of the major differences from the state college in May 2009. in 2008 and January 2009, qualify for
between the education tax bene- Their daughter, Corey, enrolled the Hope credit.
fits discussed in this publication. full-time at that same college in August Dave and Valerie figure their tenta-
It is intended only as a guide. 2007 to begin working on her bache- tive education credits for 2008,
Look in this publication for more lor’s degree in physical education. In $2,760, as shown in the completed
complete information. July 2008, Dave and Valerie paid Form 8863. They cannot claim the full
$2,400 in tuition costs for each child for amount because their modified ad-
the Fall 2008 semester. In December justed gross income is more than
2008, they also paid $2,600 of tuition $96,000. They carry the amount from
for each child for the Spring 2009 se- line 17 of Form 8863, $2,346, to line
mester that begins in January. 50 of Form 1040, and they attach the
Dave and Valerie, their children, Form 8863 to their return. ■
and the college meet all of the require-

Appendix A (Continued)
Dave and Valerie Jones
than $2,400* for
Corey
Jones 137 00 9642 2,400 1,200 3,600 1,800
$4,800.
credit for another student, go to Part II; otherwise, go to Part III 䊳 2 1,800
Sean Jones 246 00 9731 4,800
5a Enter the smaller of line 4 or $10,000 5a 4,800
c Subtract line 5b from line 5a 5c 4,800
b Multiply line 5c by 20% (.20) 6b 960
c Tentative lifetime learning credit. Add lines 6a and 6b and go to Part III 6c 960
7 Tentative education credits. Add lines 2 and 6c 7 2,760
(rounded to at least three places) 12 ⫻ . 850
13 Multiply line 7 by line 12 䊳 13 2,346
1040A, line 31 䊳 17 2,346

Appendix B. Highlights of Education Tax Benefits for Tax Year 2008

This chart highlights some differences among the benefits discussed in this publication. See the text for definitions and
details. Do not rely on this chart alone.
Caution: You generally cannot claim more than one benefit for the same education expense.
Scholarships,
Fellowships,
Grants, and Tuition Lifetime Learning Student Loan Tuition and Fees
Reductions Hope Credit Credit Interest Deduction Deduction
What is your Amounts received Credits can reduce amount of tax you must Can deduct interest Can deduct
benefit? may not be taxable pay paid expenses
What is the annual None $1,800 credit ($3,600 $2,000 credit ($4,000 $2,500 deduction $4,000 deduction
limit? if a student in a if a student in a
Midwestern disaster Midwestern disaster
area) per area) per
student family
What expenses Course-related None (but see None (but see Books None (but see
qualify besides expenses such as Students in Students in Supplies Students in
tuition and required fees, books, Midwestern disaster Midwestern disaster Equipment Midwestern disaster
enrollment fees? supplies, and areas under Qualified areas under Qualified areas under Qualified
equipment Education Expenses Education Expenses Room & board Education Expenses
in chapter 2 for an in chapter 3 for an in chapter 6 for an
exception) exception) Transportation exception)
Other necessary
expenses
What education Undergraduate & 1st 2 years of Undergraduate & Undergraduate & Undergraduate &
qualifies? graduate undergraduate graduate graduate graduate
(postsecondary)
K – 12 Courses to acquire or
improve job skills
What are some of Must be in degree or Can be claimed for No other conditions Must have been at Cannot claim both
the other vocational program only 2 tax years least half-time deduction &
conditions that student in degree education credit for
apply? Payment of tuition Must be enrolled at program same student in
and required fees least half-time in same year
must be allowed degree program
under the grant
No felony drug
conviction(s)
In what income No phaseout $48,000 – $58,000 $55,000 – $70,000 $65,000 – $80,000

range do benefits
phase out? $96,000 – $116,000 for joint returns $115,000 – $130,000 –
$145,000 for $160,000 for
joint returns joint returns
(Continued)

Appendix B. (Continued)
This chart highlights some differences among the benefits discussed in this publication. See the text for definitions and
details. Do not rely on this chart alone.
Caution: You generally cannot claim more than one benefit for the same education expense.
Education
Exception to Employer- Business
Additional Tax Education Provided Deduction for
Qualified Tuition on Early IRA Savings Bond Educational Work-Related
Coverdell ESA† Program (QTP) † Distributions† Program† Assistance† Education
What is your Earnings not Earnings not No 10% Interest not taxed Employer benefits Can deduct
benefit? taxed taxed additional tax on not taxed expenses
early distribution
What is the $2,000 None Amount of Amount of $5,250 exclusion Amount of
annual limit? contribution per qualified qualified qualifying
beneficiary education education work-related
expenses expenses education
expenses
What expenses Books Books Books Payments to Books Transportation
qualify besides Supplies Supplies Supplies Coverdell ESA Supplies
tuition and Equipment Equipment Equipment Equipment Travel
required Payments to QTP
enrollment fees? Expenses for Room & board if Room & board if Other necessary
special needs at least half-time at least half-time expenses
services student student
Payments to QTP Expenses for Expenses for
special needs special needs
Higher education: services services
Room & board if
at least half-time
student
Elem/sec (K – 12)
education:
Tutoring
Room & board
Uniforms
Transportation
Computer
access
Supplementary
expenses
What education Undergraduate & Undergraduate & Undergraduate & Undergraduate & Undergraduate & Required by
qualifies? graduate graduate graduate graduate graduate employer or law
to keep present
K – 12 job, salary, status
Maintain or
improve job skills
What are some Assets must be No other No other Applies only to No other Cannot be to
of the other distributed at age conditions conditions qualified series conditions meet minimum
conditions that 30 unless special EE bonds issued educational
apply? needs beneficiary after 1989 or requirements of
series I bonds present trade/
business
Cannot qualify
you for new trade/
business
In what income $95,000 – No phaseout No phaseout $67,100 – No phaseout May be subject to
range do $110,000 $82,100 limit on itemized
benefits phase deductions
out? $190,000 – $100,650 –
$220,000 for $130,650 for
joint returns joint and
qualifying
widow(er) returns
† Any nontaxable distribution is limited to the amount that does not exceed qualified education expenses.

Glossary
Designated beneficiary: The individ- • Student loan interest
The education benefits included in this deduction. Any college,
publication were enacted over many ual named in the document creating
the account/plan who is to receive the university, vocational school, or
years, leading to a number of common other postsecondary educational
terms being defined differently from benefit of the funds in the account/
plan. institution eligible to participate in
one benefit to the next. For example, a student aid program
an eligible educational institution administered by the Department
means one thing when determining if Eligible educational institution: of Education. It includes virtually
earnings from a Coverdell education all accredited public, nonprofit,
savings account are not taxable and • Coverdell education savings and proprietary (privately owned
something else when determining if a account (ESA). Any college, profit-making) postsecondary
scholarship or fellowship is not tax- university, vocational school, or institutions. Also included is an
able. other postsecondary educational institution that conducts an
For each term listed below that has institution eligible to participate in internship or residency program
more than one definition, the definition a student aid program leading to a degree or certificate
administered by the Department from an institution of higher
for each education benefit is listed. education, a hospital, or a health
of Education. It includes virtually
all accredited public, nonprofit, care facility that offers
Academic period: A semester, tri- and proprietary (privately owned postgraduate training.
mester, quarter, or other period of profit-making) postsecondary
study (such as a summer school ses- • Tuition and fees deduction.
institutions. Also included is any See Education savings bond
sion) as reasonably determined by an public, private, or religious school
educational institution. If an educa- program in this category.
that provides elementary or
tional institution uses credit hours or secondary education
(kindergarten through grade 12), Eligible student:
clock hours and does not have aca-
demic terms, each payment period as determined under state law. • Hope credit. A student who
can be treated as an academic period. • Education savings bond meets all of the following
program. Any college, university, requirements for the tax year for
Adjusted qualified education ex- vocational school, or other which the credit is being
penses (AQEE): Qualified education postsecondary educational determined.
expenses (defined later) reduced by institution eligible to participate in
any tax-free educational assistance, a student aid program 1. Did not have expenses that
administered by the Department were used to figure a Hope
such as a tax-free scholarship or em- credit in any 2 earlier tax
ployer-provided educational assis- of Education. It includes virtually years.
tance. They must also be reduced by all accredited public, nonprofit,
any qualified education expenses de- and proprietary (privately owned 2. Had not completed the first 2
ducted elsewhere on your return, used profit-making) postsecondary years of postsecondary
to determine an education credit or institutions. education.
other benefit, or used to determine a • Hope credit. See Education 3. For at least one academic
tax-free distribution. For information savings bond program above. period beginning in the tax
on a specific benefit, see the appropri- year, was enrolled at least
ate chapter in this publication. • IRA, early distributions from. half-time in a program leading
See Education savings bond to a degree, certificate, or
program above. other recognized educational
Candidate for a degree: A student
who meets either of the following re- • Lifetime learning credit. See credential.
quirements. Education savings bond program 4. Was free of any federal or
above. state felony conviction for
1. Attends a primary or secondary • Qualified tuition program possessing or distributing a
school or pursues a degree at a (QTP). See Education savings controlled substance as of the
college or university, or bond program above. end of the tax year.
2. Attends an accredited educa- • Scholarships and fellowships. • Lifetime learning credit. A
tional institution that is authorized An institution that maintains a student who is enrolled in one or
to provide: regular faculty and curriculum more courses at an eligible
and normally has a regularly educational institution.
a. A program that is acceptable enrolled body of students in
for full credit toward a bache- attendance at the place where it • Student loan interest
lor’s or higher degree, or carries on its educational deduction. A student who was
activities. enrolled at least half-time in a
b. A program of training to pre- program leading to a
pare students for gainful em- • Student loan, cancellation of. postsecondary degree, certificate,
ployment in a recognized See Scholarships and fellowships or other recognized educational
occupation. above. credential.

• Tuition and fees deduction. A • Hope credit. See Coverdell • Education savings bond
student who has either a high education savings account (ESA) program. Tuition and fees
school diploma or a General above. required to enroll at or attend an
Educational Development (GED) • Lifetime learning credit. See eligible educational institution.
credential, and who is enrolled in Coverdell education savings Also includes contributions to a
one or more courses at an account (ESA) above. qualified tuition program (QTP) or
eligible educational institution. Coverdell education savings
account (ESA). Does not include
• Student loan interest expenses for room and board.
deduction. Adjusted gross Does not include expenses for
Half-time student: A student who is income (AGI) as figured on the courses involving sports, games,
enrolled for at least half the full-time federal income tax return without or hobbies that are not part of a
academic work load for the course of taking into account any student degree or certificate granting
study the student is pursuing, as deter- loan interest deduction, tuition program.
mined under the standards of the and fees deduction, or domestic
school where the student is enrolled. production activities deduction, • Hope credit. Tuition and certain
and modified by adding back any: related expenses required for
1. Foreign earned income enrollment or attendance at an
Modified adjusted gross income eligible educational institution.
(MAGI): exclusion,
Student-activity fees and
2. Foreign housing exclusion, expenses for course-related
• Coverdell education savings books, supplies, and equipment
account (ESA). Adjusted gross 3. Foreign housing deduction,
are included only if the fees and
income (AGI) as figured on the 4. Exclusion of income for bona expenses must be paid to the
federal income tax return, fide residents of American institution as a condition of
modified by adding back any: Samoa, and enrollment or attendance. Does
1. Foreign earned income 5. Exclusion of income for bona not include expenses for room
exclusion, fide residents of Puerto Rico. and board (but see Students in
Midwestern disaster areas under
2. Foreign housing exclusion, • Tuition and fees deduction. Qualified Education Expenses in
3. Foreign housing deduction, Adjusted gross income (AGI) as chapter 2 for an exception). Does
figured on the federal income tax not include expenses for courses
4. Exclusion of income for bona return without taking into account involving sports, games, or
fide residents of American any tuition and fees deduction or hobbies (including noncredit
Samoa, and domestic production activities courses) that are not part of the
5. Exclusion of income for bona deduction, and modified by student’s postsecondary degree
fide residents of Puerto Rico. adding back any: program.
• Education savings bond 1. Foreign earned income • IRA, early distributions from.
program. Adjusted gross income exclusion, Tuition, fees, books, supplies,
(AGI) as figured on the federal 2. Foreign housing exclusion, and equipment required for
income tax return without taking enrollment or attendance at an
into account any savings bond 3. Foreign housing deduction, eligible educational institution,
interest exclusion and modified 4. Exclusion of income for bona plus certain limited costs of room
by adding back any: fide residents of American and board for students who are
Samoa, and enrolled at least half time. Also
1. Foreign earned income includes expenses for special
exclusion, 5. Exclusion of income for bona needs services incurred by or for
2. Foreign housing exclusion, fide residents of Puerto Rico. special needs students in
connection with their enrollment
3. Foreign housing deduction, Phaseout: The amount of credit or or attendance.
4. Exclusion of income for bona deduction allowed is reduced when • Lifetime learning credit. Same
fide residents of American modified adjusted gross income as for Hope credit, except that
Samoa, (MAGI) is greater than a specified courses may be taken either as
amount of income. part of a postsecondary degree
5. Exclusion of income for bona
fide residents of Puerto Rico, Qualified education expenses: See program or taken by the student
pertinent chapter for specific items. to acquire or improve job skills.
6. Exclusion for adoption benefits
received under an employer’s • Qualified tuition program
• Coverdell education savings (QTP). Tuition, fees, books,
adoption assistance program, account (ESA). Expenses supplies, and equipment required
7. Deduction for student loan related to or required for for enrollment or attendance at an
interest, enrollment or attendance of the eligible educational institution,
8. Deduction for tuition and fees, designated beneficiary at an plus certain limited costs of room
and eligible elementary, secondary, or and board for students who are
postsecondary school. Also enrolled at least half time.
9. Deduction for domestic includes contribution to qualified
production activities. tuition program (QTP).

• Scholarships and fellowships. • Student loan interest allowed as a credit or deduction in a

Expenses for tuition and fees deduction. Total costs of prior year.
required to enroll at or attend an attending an eligible educational Rollover: A tax-free distribution to
eligible educational institution, institution, including graduate you of cash or other assets from a
and course-related expenses, school (however, limitations may tax-favored plan that you contribute to
such as fees, books, supplies, apply to the cost of room and
and equipment that are required board allowed). another tax-favored plan.
for the courses at the eligible • Tuition and fees deduction. Transfer: A movement of funds in a
educational institution. Course- See Hope credit in this category. tax-favored plan from one trustee di-
related items must be required of rectly to another, either at your request
all students in the course of or at the trustee’s request.
instruction. Recapture: To include as income on ■
your current year’s return an amount
To help us develop a more useful index, please let us know if you have ideas for index entries.
Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.
Education required by employer or by Conventions outside U.S. . . . . . . . . . . . 68

529 program (See Qualified tuition law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Coverdell education savings account
program (QTP)) Education to maintain or improve (ESA) . . . . . . . . . . . . . . . . . . . . . . . . . . 43-52
skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Additional tax:
Education to meet minimum On excess contributions . . . . . . . . . . 47
A requirements . . . . . . . . . . . . . . . . . 65-66 On taxable distributions . . . . . . . . . . 50
Academic period: Education to qualify for new trade or Assets to be distributed at age 30 or
Hope credit . . . . . . . . . . . . . . . . . . . . . . . . . 10 business . . . . . . . . . . . . . . . . . . . . . 66-67 death of beneficiary . . . . . . . . . . . . . . 51
Lifetime learning credit . . . . . . . . . . . . . 20 Excess expenses, accountable Contribution limits . . . . . . . . . . . . . . 45-46
Student loan interest deduction . . . . . 29 plan . . . . . . . . . . . . . . . . . . . . . . . . . . 69-70 Figuring the limit (Worksheet
Tuition and fees deduction . . . . . . . . . . 37 Indefinite absence . . . . . . . . . . . . . . . . . . 65 7-2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Maintaining skills vs. qualifying for new Contributions to . . . . . . . . . . . . . . . . 45-47
Accountable plans . . . . . . . . . . . . . . 69-70
job . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Table 7-2 . . . . . . . . . . . . . . . . . . . . . . . . 45
Additional tax: Nonaccountable plans . . . . . . . . . . . . . . 70 Coordination with Hope and lifetime
Coverdell ESA: Nondeductible expenses . . . . . . . . . . . 67 learning credits . . . . . . . . . . . . . . . 49-50
On excess contributions . . . . . . . . . . 47 Qualified education Coordination with qualified tuition
On taxable distributions . . . . . . . . . . 50 expenses . . . . . . . . . . . . . . . . . . . . 67-69 program (QTP) . . . . . . . . . . . . . . . . . . . 50
IRA distributions, education Recordkeeping requirements . . . . . . . 71 Defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
exception . . . . . . . . . . . . . . . . . . . . . . . . 58 Reimbursements, treatment Distributions . . . . . . . . . . . . . . . . . . . . 48-51
Qualified tuition program (QTP), on of . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69-70 Overview (Table 7-3) . . . . . . . . . . . . . 48
taxable distributions . . . . . . . . . . . . . . 56 Tax benefit of . . . . . . . . . . . . . . . . . . . . . . 64 Divorce, transfer due to . . . . . . . . . . . . . 48
Adjusted qualified education expenses Tax-free educational assistance . . . . 69 Eligible educational institution . . . . . . . 44
(See Qualified education expenses) Teachers . . . . . . . . . . . . . . . . . . . . . . . 66, 67 Figuring taxable portion of
Armed Forces Health Professions Temporary absence to acquire distribution . . . . . . . . . . . . . . . . . . . . . . . 49
Scholarship and Financial education . . . . . . . . . . . . . . . . . . . . . . . . 65 Worksheet 7-3 . . . . . . . . . . . . . . . . . . . 52
Assistance Program . . . . . . . . . . . . . . . 7 Transportation expenses . . . . . . . 67-68 Figuring the taxable earnings in
Assistance (See Tax help) Travel expenses . . . . . . . . . . . . . . . . . . . . 68 required distribution . . . . . . . . . . . . . . 51
Athletic scholarships . . . . . . . . . . . . . . . . . 6 Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Modified adjusted gross income
C (MAGI) . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
B Cancellation of student loan (See Worksheet 7-1 . . . . . . . . . . . . . . . . . . . 46
Bar review course . . . . . . . . . . . . . . . . . . . 67 Student loan cancellation) Overview (Table 7-1) . . . . . . . . . . . . . . . 43
Bonds, education savings (See Candidate for a degree: Qualified education expenses . . . . . . . 44
Education savings bond program) Scholarships and fellowships . . . . . . . . 5 Rollovers . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Business deduction for work-related Change of designated beneficiary: Tax benefit of . . . . . . . . . . . . . . . . . . . . . . 43
education . . . . . . . . . . . . . . . . . . . 2, 64-71 Coverdell ESA . . . . . . . . . . . . . . . . . . . . . . 48 Taxable distributions . . . . . . . . . . . . 49-51
Accountable plans . . . . . . . . . . . . . . 69-70 Qualified tuition program . . . . . . . . . . . . 57 Worksheet 7-3 to figure . . . . . . . . . . 52
Adjustments to qualifying work-related Collapsed loans . . . . . . . . . . . . . . . . . . . . . 30 Tax-free distributions . . . . . . . . . . . . . . . 48
education expenses . . . . . . . . . . . . . . 69 Comments on publication . . . . . . . . . . . . 3 Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Allocating meal reimbursements . . . . 69 Comprehensive or bundled fees: CPA review course . . . . . . . . . . . . . . . . . . 67
Deductible education Hope credit . . . . . . . . . . . . . . . . . . . . . . . . . 13 Credits:
expenses . . . . . . . . . . . . . . . . . . . . 67-69 Lifetime learning credit . . . . . . . . . . . . . 23 Hope (See Hope credit)
Deducting business Tuition and fees deduction . . . . . . . . . . 38 Lifetime learning (See Lifetime learning
expenses . . . . . . . . . . . . . . . . . . . . 70-71 Consolidated loans used to refinance credit)
Double benefit not allowed . . . . . . . . . . 69 student loans . . . . . . . . . . . . . . . . . . . . . . 30 Cruises, educational . . . . . . . . . . . . . . . . 68

D Lifetime learning credit . . . . . . . . . . . . . 20 Form 8917:

Deductions (See Business deduction for Qualified tuition program (QTP) . . . . . 54 Filled-in examples . . . . . . . . . . . . . . . . . . 41
work-related education) Qualified tuition reduction . . . . . . . . . . . . 8 Form W-9S . . . . . . . . . . . . . . 16, 24, 32, 40
Scholarships and fellowships . . . . . 5, 8 Free tax services . . . . . . . . . . . . . . . . . . . . 73
Designated beneficiary:
Student loan cancellation . . . . . . . . . . . 34 Fulbright grants . . . . . . . . . . . . . . . . . . . . . . 7
Coverdell ESA . . . . . . . . . . . . . . . . . . 43, 48
Student loan interest deduction . . . . . 29
Qualified tuition program (QTP) . . . . 54,
Tuition and fees deduction . . . . . . . . . . 37
57 G
Eligible elementary or secondary
Disabilities, persons with: Glossary . . . . . . . . . . . . . . . . . . . . . . 3, 79-81
school:
Impairment-related work
Coverdell ESA . . . . . . . . . . . . . . . . . . . . . . 44 Graduate education tuition
expenses . . . . . . . . . . . . . . . . . . . . . . . . 71
Eligible student: reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Distributions (See specific benefit)
Hope credit . . . . . . . . . . . . . . . . . . . . . . . . . 13 Grants:
Divorce: Lifetime learning credit . . . . . . . . . . . . . 23 Fulbright . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Coverdell ESA transfer due to . . . . . . 48 Student loan interest deduction . . . . . 29 Pell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Expenses paid under decree: Tuition and fees deduction . . . . . . . . . . 39 Title IV need-based education . . . . . . . 7
Hope credit . . . . . . . . . . . . . . . . . . . . . . 15
Employees:
Lifetime learning credit . . . . . . . . . . . 23
Deducting work-related education
Tuition and fees deduction . . . . . . . 39
expenses . . . . . . . . . . . . . . . . . . . . . . . . 70 H
Double benefit not allowed: Half-time student:
Employer-provided educational
Hope credit . . . . . . . . . . . . . . . . . . . . . . . . . 12 Coverdell ESA . . . . . . . . . . . . . . . . . . . . . . 44
assistance . . . . . . . . . . . . . . . . . . . . . . . . . 63
Lifetime learning credit . . . . . . . . . . . . . 22 Early distributions from IRAs . . . . . . . . 58
ESAs (See Coverdell education savings
Student loan interest deduction . . . . . 31 Hope credit . . . . . . . . . . . . . . . . . . . . . . . . . 13
account (ESA))
Tuition and fees deduction . . . . . . . . . . 37 Student loan interest deduction . . . . . 29
Work-related education . . . . . . . . . . . . . 69 Estimated tax . . . . . . . . . . . . . . . . . . . . . . . . . 2
Help (See Tax help)
Excess contributions:
Hope credit . . . . . . . . . . . . . . . . . . . . . 2, 9-17
Coverdell ESA . . . . . . . . . . . . . . . . . . . . . . 47
E Academic period . . . . . . . . . . . . . . . . . . . 10
Excess expenses, accountable
Early distributions from Adjustments to qualified education
plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69-70
IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . 58-59 expenses . . . . . . . . . . . . . . . . . . . . . . . . 12
Expenses (See specific benefit) Claiming dependent’s expenses . . . . 15
Eligible educational institution . . . . . . . 58
Figuring amount not subject to 10% Tuition reduction . . . . . . . . . . . . . . . . . 15
Claiming the credit . . . . . . . . . . . . . . 10, 16
tax . . . . . . . . . . . . . . . . . . . . . . . . . . . 58-59 F Qualifying to claim (Figure
Qualified education expenses . . . . . . . 58 Family members, beneficiary:
Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . 59 2-1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Coverdell ESA . . . . . . . . . . . . . . . . . . . . . . 47 Coordination with Coverdell ESA
Education IRA (See Coverdell education Qualified tuition program (QTP) . . . . . 57 distributions . . . . . . . . . . . . . . . . . . 49-50
savings account (ESA)) Fee-basis officials, work-related Coordination with qualified tuition
Education loans (See Student loan education deduction . . . . . . . . . . 70-71 program (QTP) distributions . . . . . . 55
interest deduction) Fellowships (See Scholarships and Differences from lifetime learning
Education savings account (See fellowships) credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Coverdell education savings account Figures (See Tables and figures) Comparison table (Table 2-1) . . . . . 10
(ESA)) Financial aid (See Scholarships and Eligible educational institution . . . . . . . 10
Education savings bond fellowships) Eligible student . . . . . . . . . . . . . . . . . . . . . 13
program . . . . . . . . . . . . . . . . . . . . 2, 60-62 Form 1098-E: Requirements (Figure 2-2) . . . . . . . . 13
Cashing in bonds tax free . . . . . . . 60-61 Student loan interest deduction . . . . 30, Expenses qualifying for . . . . . . . . . 10-13
Claiming dependent’s 31 Figuring the credit . . . . . . . . . . . . . . 15-16
exemption . . . . . . . . . . . . . . . . . . . . . . . . 60 Income level, effect on amount of
Form 1098-T:
Claiming exclusion . . . . . . . . . . . . . . . . . 61 credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Hope credit . . . . . . . . . . . . . . . . . . . . . 16, 17
Eligible educational institution . . . . . . . 60 Income limits . . . . . . . . . . . . . . . . . . . . 9, 16
Lifetime learning credit . . . . . . . . . . . . . 24
Figuring tax-free amount . . . . . . . . . . . . 61 Modified adjusted gross income
Tuition and fees deduction . . . . . . . . . . 40
Income level, effect on amount of (MAGI) . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
exclusion . . . . . . . . . . . . . . . . . . . . . . . . . 61 Form 1099-Q:
Coverdell ESA . . . . . . . . . . . . . . . . . . 47, 49 Worksheet 2-1 . . . . . . . . . . . . . . . . . . . 16
Income limits for exclusion Phaseout . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
reduction . . . . . . . . . . . . . . . . . . . . . . . . . 60 Qualified tuition program (QTP) . . . . . 55
Qualified education expenses . . . . . . . 10
Modified adjusted gross income Form 1099-R:
Refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(MAGI) . . . . . . . . . . . . . . . . . . . . . . . 60-61 Early distributions from IRAs . . . . . . . . 59
Repayment of credit . . . . . . . . . . . . . . . . 16
Phaseout . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Form 2106 . . . . . . . . . . . . . . . . . . . . . . . 68, 70 Tax benefit of . . . . . . . . . . . . . . . . . . . . . . . 9
Qualified education expenses . . . . . . . 60 Form 2106-EZ . . . . . . . . . . . . . . . . . . . . 68, 70
Educational assistance, Filled-in example . . . . . . . . . . . . . . . . . . . 71
employer-provided (See Form 5329: I
Employer-provided educational Coverdell ESA . . . . . . . . . . . . . . . . . . . . . . 51 Illustrated example of education
assistance) Early distributions from IRAs . . . . . . . . 59 credits (Appendix A) . . . . . . . . . . 75-76
Eligible educational institution: Qualified tuition program (QTP) . . . . . 56 Impairment-related work expenses:
Cancellation of student loan . . . . . . . . 34 Form 8815 . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Work-related education
Coverdell ESA . . . . . . . . . . . . . . . . . . . . . . 44 Filled-in example . . . . . . . . . . . . . . . . . . . 61 deduction . . . . . . . . . . . . . . . . . . . . . . . . 71
Early distributions from IRAs . . . . . . . . 58 Form 8863: Individual retirement arrangements
Education savings bond Filled-in examples . . . . . . . . . . 17, 27, 76 (IRAs):
program . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Hope credit . . . . . . . . . . . . . . . . . . . . . . . . . 17 Early distributions (See Early
Hope credit . . . . . . . . . . . . . . . . . . . . . . . . . 10 Lifetime learning credit . . . . . . . . . . . . . 27 distributions from IRAs)

Individual retirement arrangements Hope credit . . . . . . . . . . . . . . . . . . . . . . . . . 16 Qualified employer plans:

(IRAs): (Cont.) Worksheet 2-1 . . . . . . . . . . . . . . . . . . . 16 Student loan interest deduction not
Education (See Coverdell education Lifetime learning credit . . . . . . . . . . . . . 24 allowed . . . . . . . . . . . . . . . . . . . . . . . . . . 29
savings account (ESA)) Worksheet 3-1 . . . . . . . . . . . . . . . . . . . 24 Qualified student loans . . . . . . . . . . 28-29
Student loan interest deduction . . . . . 32 Qualified tuition program
Table 4-2 . . . . . . . . . . . . . . . . . . . . . . . . 32 (QTP) . . . . . . . . . . . . . . . . . . . . . . . . . . 54-57
L Tuition and fees deduction . . . . . . . . . . 40 Additional tax on taxable
Lifetime learning credit . . . . . . . 2, 19-27 Table 6-2 . . . . . . . . . . . . . . . . . . . . . . . . 40 distributions . . . . . . . . . . . . . . . . . . . . . . 56
Academic period . . . . . . . . . . . . . . . . . . . 20 Worksheet 6-1 . . . . . . . . . . . . . . . . . . . 41 Change of designated
Adjustments to qualified education beneficiary . . . . . . . . . . . . . . . . . . . . . . . 57
More information (See Tax help)
expenses . . . . . . . . . . . . . . . . . . . . . . . . 22 Contributions to . . . . . . . . . . . . . . . . . . . . 54
Claiming dependent’s expenses . . . . 23 Coordination with Coverdell ESA
Tuition reduction . . . . . . . . . . . . . . . . . 23 N distributions . . . . . . . . . . . . . . . . . . 55-56
Claiming the credit . . . . . . . . . . . . . . 20, 25 National Health Service Corps Coordination with Hope and lifetime
Qualifying to claim (Figure Scholarship Program . . . . . . . . . . . . . . 7 learning credits . . . . . . . . . . . . . . . . . . . 55
3-1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Nonaccountable plans:
Coordination with Coverdell ESA
Work-related education . . . . . . . . . . . . . 70 Eligible educational institution . . . . . . . 54
distributions . . . . . . . . . . . . . . . . . . 49-50 Figuring taxable portion of
Coordination with qualified tuition distribution . . . . . . . . . . . . . . . . . . . 55-56
program (QTP) distributions . . . . . . 55 P Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Differences from Hope credit . . . . . . . 19 Pell grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Qualified education expenses . . . . . . . 54
Comparison table (Table 3-1) . . . . . 20 Rollovers . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Performing artists, work-related
Eligible educational institution . . . . . . . 20 Tax benefit of . . . . . . . . . . . . . . . . . . . . . . 54
education deduction . . . . . . . . . . 70-71
Eligible student . . . . . . . . . . . . . . . . . . . . . 23 Taxability of distributions . . . . . . . 55-56
Phaseout: Taxable earnings . . . . . . . . . . . . . . . . . . . 55
Expenses qualifying for . . . . . . . . . 20-22
Figuring the credit . . . . . . . . . . . . . . 24-25 Education savings bond Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
program . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Income level, effect on amount of Qualified tuition reduction . . . . . . . . . . . 8
credit . . . . . . . . . . . . . . . . . . . . . . . . 24-25 Hope credit . . . . . . . . . . . . . . . . . . . . . . . . . 16
Qualified U.S. savings bonds . . . . . . . 60
Income limits . . . . . . . . . . . . . . . . . . . 19, 24 Lifetime learning credit . . . . . . . . . . . . . 24
Qualifying work-related
Modified adjusted gross income Student loan interest deduction . . . . . 32
education . . . . . . . . . . . . . . . . . . . . . . 64-67
(MAGI) . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Prizes:
Determining if qualified (Figure
Worksheet 3-1 . . . . . . . . . . . . . . . . . . . 24 Scholarships won as . . . . . . . . . . . . . . . . 7 12-1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Phaseout . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Publications (See Tax help)
Qualified education
expenses . . . . . . . . . . . . . . . . . . . . 20-22 R
Qualifying to claim (Figure 3-1) . . . . . 22 Q Recapture:
Refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Qualified education expenses: Hope credit . . . . . . . . . . . . . . . . . . . . . . . . . 16
Repayment of credit . . . . . . . . . . . . . . . . 25 Adjustments to: Lifetime learning credit . . . . . . . . . . . . . 25
Tax benefit of . . . . . . . . . . . . . . . . . . . . . . 19 Coverdell ESA . . . . . . . . . . . . . . . . . . . 48 Tuition and fees deduction . . . . . . . . . . 40
Loans: Education savings bond Recordkeeping requirements:
Cancellation (See Student loan program . . . . . . . . . . . . . . . . . . . . . . . 60 Work-related education . . . . . . . . . . . . . 71
cancellation) Hope credit . . . . . . . . . . . . . . . . . . 12-13 Refinanced student loans . . . . . . . 30, 34
Capitalized interest on student Lifetime learning credit . . . . . . . . . . . 22 Refunds:
loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Qualified tuition program Hope credit . . . . . . . . . . . . . . . . . . . . . . . . . 12
Origination fees on student loan . . . . 30 (QTP) . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Lifetime learning credit . . . . . . . . . . . . . 22
Qualified education expenses paid with: Student loan interest Tuition and fees deduction . . . . . . . . . . 38
Hope credit . . . . . . . . . . . . . . . . . . . . . . 10 deduction . . . . . . . . . . . . . . . . . . . . . . 29 Reimbursements:
Lifetime learning credit . . . . . . . . . . . 20 Tuition and fees deduction . . . . . . . 38 Nondeductible expenses . . . . . . . . . . . 70
Student loan repayment Work-related education . . . . . . . . . . . 69 Work-related education . . . . . . . . . 69-70
assistance . . . . . . . . . . . . . . . . . . . 34-35 Coverdell ESA . . . . . . . . . . . . . . . . . . . . . . 44 Related persons:
Losses, deducting: Early distributions from IRAs . . . . . . . . 58 Coverdell ESA . . . . . . . . . . . . . . . . . . . . . . 47
Coverdell ESA . . . . . . . . . . . . . . . . . . . . . . 50 Education savings bond Qualified tuition program (QTP) . . . . . 57
Qualified tuition program (QTP) . . . . . 56 program . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Student loan interest deduction . . . . . 29
Luxury water transportation . . . . . . . . . 68 Expenses not qualified: Repayment programs (See Student
Hope credit . . . . . . . . . . . . . . . . . . . . . . 13 loan repayment assistance)
Lifetime learning credit . . . . . . . . . . . 23 Reporting:
M Tuition and fees deduction . . . . . . . 38 Coverdell ESA . . . . . . . . . . . . . . 47, 49, 51
Mileage deduction for work-related Hope credit . . . . . . . . . . . . . . . . . . . . . 10-13 Early distributions from IRAs . . . . . . . . 59
education . . . . . . . . . . . . . . . . . . . 2, 64, 68 Lifetime learning credit . . . . . . . . . 20-22 Education savings bond
Military academy cadets . . . . . . . . . . . . . 7 Qualified tuition program (QTP) . . . . . 54 program . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Missing children, photographs of . . . . 3 Scholarships and fellowships . . . . . . 5-6 Hope credit . . . . . . . . . . . . . . . . . . . . . . . . . 16
Modified adjusted gross income Student loan interest deduction . . . . . 29 Lifetime learning credit . . . . . . . . . . . . . 25
(MAGI): Tuition and fees deduction . . . . . . 36-38 Qualified tuition program (QTP) . . . . 55,
Coverdell ESA . . . . . . . . . . . . . . . . . . . . . . 46 Work-related education . . . . . . . . . 67-69 56, 57
Worksheet 7-1 . . . . . . . . . . . . . . . . . . . 46 Qualified elementary and secondary Scholarships and fellowships,
Education savings bond education expenses: taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
program . . . . . . . . . . . . . . . . . . . . . . 60-61 Coverdell ESAs . . . . . . . . . . . . . . . . . . . . 44 Student loan interest deduction . . . . . 32

Reporting: (Cont.) Not included as interest . . . . . . . . . . . . . 31 Taxpayer Advocate . . . . . . . . . . . . . . . . . . 73

Tuition and fees deduction . . . . . . . . . . 40 Overview (Table 4-1) . . . . . . . . . . . . . . . 28 Teachers . . . . . . . . . . . . . . . . . . . . . . . . . 66, 67
Tuition reduction, taxable . . . . . . . . . . . . 8 Phaseout . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Temporary-basis student,
Work-related education Qualified education expenses . . . . . . . 29 transportation expenses of . . . . . . . 67
expenses . . . . . . . . . . . . . . . . . . . . 70-71 Qualified employer plans . . . . . . . . . . . 29 Title IV need-based education
Revolving lines of credit, interest Qualified student loans . . . . . . . . . 28-29 grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Reasonable period of time . . . . . . . . . . 29 Transfers:
Rollovers: Related persons . . . . . . . . . . . . . . . . . . . . 29 Coverdell ESA . . . . . . . . . . . . . . . . . . . . . . 47
Coverdell ESA . . . . . . . . . . . . . . . . . . . . . . 47 Student loan interest, Qualified tuition program (QTP) . . . . . 57
Qualified tuition program (QTP) . . . . . 57 defined . . . . . . . . . . . . . . . . . . . . . . . 28-31
Transportation expenses:
Third party interest payments . . . . . . . 31
Work-related education . . . . . . . . . 67-68
When interest must be paid . . . . . . . . . 31
Travel expenses:
S Worksheet 4-1 . . . . . . . . . . . . . . . . . . . . . . 33
50% limit on meals . . . . . . . . . . . . . . . . . 68
Savings bond program, education Student loan repayment
Not deductible as form of
(See Education savings bond program) assistance . . . . . . . . . . . . . . . . . . . . . 34-35
education . . . . . . . . . . . . . . . . . . . . . . . . 68
Scholarships and fellowships . . . . . . 5-7 Suggestions for publication . . . . . . . . . . 3 Work-related education . . . . . . . . . . . . . 68
Athletic scholarships . . . . . . . . . . . . . . . . . 6 Surviving spouse: TTY/TDD information . . . . . . . . . . . . . . . . 73
Eligible educational institution . . . . . 5, 8 Coverdell ESA transfer to . . . . . . . . . . . 51
Tuition and fees deduction . . . . . . 36-41
Fellowship, defined . . . . . . . . . . . . . . . . . . 5
Academic period . . . . . . . . . . . . . . . . . . . 37
Figuring tax-free and taxable parts
(Worksheet 1-1) . . . . . . . . . . . . . . . . . . . 6
T Adjustments to qualified education
Tables and figures: expenses . . . . . . . . . . . . . . . . . . . . . . . . 38
Prize, scholarship won as . . . . . . . . . . . . 7
Comparison of education tax benefits Can you claim the deduction . . . . . . . . 36
Qualified education expenses . . . . . . 5-6
(Appendix B) . . . . . . . . . . . . . . . . . . . . . 76 Claiming dependent’s expenses . . . . 39
Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Coverdell ESAs: Claiming the deduction . . . . . . . . . . . . . 40
Scholarship, defined . . . . . . . . . . . . . . . . . 5
Contributions to (Table 7-2) . . . . . . 45 Double benefit not allowed . . . . . . . . . . 37
Tax treatment of (Table 1-1) . . . . . . . . . 5
Distributions (Table 7-3) . . . . . . . . . . 48 Eligible educational institution . . . . . . . 37
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-7
Overview (Table 7-1) . . . . . . . . . . . . . 43 Eligible student . . . . . . . . . . . . . . . . . . . . . 39
Tax-free . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-6
Education credits, comparison of Expenses not qualifying for . . . . . . . . . 38
Section 501(c)(3) organizations (See Expenses qualifying for . . . . . . . . . 36-38
(Tables 2-1 & 3-1) . . . . . . . . . . . . 10, 20
Student loan cancellation) Figuring the deduction . . . . . . . . . . . . . . 40
Hope credit:
Section 529 program (See Qualified Comparing education credits (Table Income level, effect on amount of
tuition program (QTP)) 2-1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 deduction . . . . . . . . . . . . . . . . . . . . . . . . 40
Self-employed persons: Eligible student requirements (Figure Loan used to pay tuition and
Deducting work-related education 2-2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
expenses . . . . . . . . . . . . . . . . . . . . . . . . 70 Qualifying to claim (Figure Modified adjusted gross income
Service academy cadets . . . . . . . . . . . . . 7 2-1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 (MAGI) . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Sports, games, hobbies, and noncredit Lifetime learning credit: Table 6-2 . . . . . . . . . . . . . . . . . . . . . . . . 40
courses: Comparing education credits (Table Worksheet 6-1 . . . . . . . . . . . . . . . . . . . 41
Education savings bond 3-1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Overview (Table 6-1) . . . . . . . . . . . . . . . 36
program . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Qualifying to claim (Figure Qualified education
Hope credit . . . . . . . . . . . . . . . . . . . . . . . . . 13 3-1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 expenses . . . . . . . . . . . . . . . . . . . . 36-38
Lifetime learning credit . . . . . . . . . . . . . 23 Scholarships and fellowships, taxability Qualifying for deduction . . . . . . . . . . . . 36
Tuition and fees deduction . . . . . . . . . . 38 of (Table 1-1) . . . . . . . . . . . . . . . . . . . . . 5 Refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Standard mileage rate: Student loan interest deduction: Repayment of deduction . . . . . . . . . . . . 40
Work-related education . . . . . . 2, 64, 68 MAGI, effect of (Table 4-2) . . . . . . . 32 Tax benefit of . . . . . . . . . . . . . . . . . . . . . . 36
State prepaid education accounts Overview (Table 4-1) . . . . . . . . . . . . . 28 Tax-free educational assistance . . . . 38
(See Qualified tuition program (QTP)) Summary chart of differences between Tuition reduction:
Student loan cancellation . . . . . . . . . . . 34 education tax benefits (Appendix Hope credit . . . . . . . . . . . . . . . . . . . . . . . . . 15
Eligible educational institution . . . . . . . 34 B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Lifetime learning credit . . . . . . . . . . . . . 23
Section 501(c)(3) organizations . . . . . 34 Tuition and fees deduction: Qualified . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Student loan interest deduction: MAGI, effect of (Table 6-2) . . . . . . . 40 Tuition and fees deduction . . . . . . . . . . 39
Academic period . . . . . . . . . . . . . . . . . . . 29 Overview (Table 6-1) . . . . . . . . . . . . . 36
Work-related education, qualifying
Adjustments to qualified education
(Figure 12-1) . . . . . . . . . . . . . . . . . . . . . 65
U
expenses . . . . . . . . . . . . . . . . . . . . . . . . 29 U.S. savings bonds . . . . . . . . . . . . . . . . . . 60
Allocation between interest and Tax help . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Unclaimed reimbursement:
principal . . . . . . . . . . . . . . . . . . . . . . 30-31 Taxable scholarships and
Work-related education . . . . . . . . . . . . . 67
Claiming the deduction . . . . . . . . . . . . . 32 fellowships . . . . . . . . . . . . . . . . . . . . . . . 6-7
Eligible educational institution . . . . . . . 29 Tax-free educational assistance:
Eligible student . . . . . . . . . . . . . . . . . . . . . 29 Coverdell ESA . . . . . . . . . . . . . . . . . . . . . . 48 V
Figuring the deduction . . . . . . . . . . 31-32 Early distributions from IRAs . . . . . . . . 58 Veterans’ benefits . . . . . . . . . . . . . . . . . . . . 8
Include as interest . . . . . . . . . . . . . . . . . . 30 Education savings bond Voluntary interest payments . . . . . . . . 30
Income level, effect on amount of program . . . . . . . . . . . . . . . . . . . . . . . . . . 60
deduction . . . . . . . . . . . . . . . . . . . . . . . . 32 Hope credit . . . . . . . . . . . . . . . . . . . . . . . . . 12
Loan repayment assistance . . . . . . . . . 31 Lifetime learning credit . . . . . . . . . . . . . 22 W
Modified adjusted gross income Qualified tuition program (QTP) . . . . . 55 Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(MAGI) . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Tuition and fees deduction . . . . . . . . . . 38 Working condition fringe
Table 4-2 . . . . . . . . . . . . . . . . . . . . . . . . 32 Work-related education . . . . . . . . . . . . . 69 benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Work-related education (See Business Taxable distributions and basis Student loan interest deduction
deduction for work-related education) (Worksheet 7-3) . . . . . . . . . . . . . . . . 52 (Worksheet 4-1) . . . . . . . . . . . . . . . . . . 33
Worksheets: Hope credit MAGI calculation Tuition and fees deduction, MAGI
Coverdell ESA: (Worksheet 2-1) . . . . . . . . . . . . . . . . . . 16 calculation (Worksheet 6-1) . . . . . . . 41
Contribution limit (Worksheet Lifetime learning credit MAGI
7-2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 calculation (Worksheet 3-1) . . . . . . . 24 ■
MAGI, calculation of (Worksheet Scholarships and fellowships, taxable
7-1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 income (Worksheet 1-1) . . . . . . . . . . . 6

EPS File Name: NEWIND01 Size: Width = 44.0 picas, Depth = 58.0 picas
See How To Get Tax Help for a variety of ways to get publications, including
Tax Publications for Individual Taxpayers by computer, phone, and mail.
General Guides 531 Reporting Tip Income 908 Bankruptcy Tax Guide
1 Your Rights as a Taxpayer 535 Business Expenses 915 Social Security and Equivalent
17 Your Federal Income Tax For 536 Net Operating Losses (NOLs) for Railroad Retirement Benefits
Individuals Individuals, Estates, and Trusts 919 How Do I Adjust My Tax Withholding?
334 Tax Guide for Small Business (For 537 Installment Sales 925 Passive Activity and At-Risk Rules
Individuals Who Use Schedule C or 541 Partnerships 926 Household Employer’s Tax Guide For
C-EZ) 544 Sales and Other Dispositions of Assets Wages Paid in 2009
509 Tax Calendars for 2009 547 Casualties, Disasters, and Thefts 929 Tax Rules for Children and
553 Highlights of 2008 Tax Changes 550 Investment Income and Expenses Dependents
910 IRS Guide to Free Tax Services (Including Capital Gains and Losses) 936 Home Mortgage Interest Deduction
551 Basis of Assets 946 How To Depreciate Property
Specialized Publications 947 Practice Before the IRS and
552 Recordkeeping for Individuals
3 Armed Forces’ Tax Guide 554 Tax Guide for Seniors Power of Attorney
54 Tax Guide for U.S. Citizens and 555 Community Property 950 Introduction to Estate and Gift Taxes
Resident Aliens Abroad 967 The IRS Will Figure Your Tax
556 Examination of Returns, Appeal Rights,
225 Farmer’s Tax Guide and Claims for Refund 969 Health Savings Accounts and Other
463 Travel, Entertainment, Gift, and Car 559 Survivors, Executors, and Tax-Favored Health Plans
Expenses Administrators 970 Tax Benefits for Education
501 Exemptions, Standard Deduction, and 561 Determining the Value of Donated 971 Innocent Spouse Relief
Filing Information Property 972 Child Tax Credit
502 Medical and Dental Expenses (Including 564 Mutual Fund Distributions 1542 Per Diem Rates (For Travel Within the
the Health Coverage Tax Credit) 570 Tax Guide for Individuals With Income Continental United States)
503 Child and Dependent Care Expenses From U.S. Possessions 1544 Reporting Cash Payments of Over
504 Divorced or Separated Individuals 571 Tax-Sheltered Annuity Plans (403(b) $10,000 (Received in a Trade or
505 Tax Withholding and Estimated Tax Plans) For Employees of Public Business)
514 Foreign Tax Credit for Individuals Schools and Certain Tax-Exempt 1546 Taxpayer Advocate Service – Your
516 U.S. Government Civilian Employees Organizations Voice at the IRS
Stationed Abroad 575 Pension and Annuity Income
517 Social Security and Other Information 584 Casualty, Disaster, and Theft Loss Spanish Language Publications
for Members of the Clergy and Workbook (Personal-Use Property) 1SP Derechos del Contribuyente
Religious Workers 587 Business Use of Your Home (Including 17SP El Impuesto Federal sobre los Ingresos
519 U.S. Tax Guide for Aliens Use by Daycare Providers) (Para Personas Fisicas)
521 Moving Expenses 590 Individual Retirement Arrangements 594SP El Proceso de Cobro del IRS
523 Selling Your Home (IRAs)
593 Tax Highlights for U.S. Citizens and 596SP Crédito por Ingreso del Trabajo
524 Credit for the Elderly or the Disabled
Residents Going Abroad 850 English-Spanish Glossary of Words
525 Taxable and Nontaxable Income
594 The IRS Collection Process and Phrases Used in Publications
526 Charitable Contributions Issued by the Internal Revenue
527 Residential Rental Property (Including 596 Earned Income Credit (EIC) Service
Rental of Vacation Homes) 721 Tax Guide to U.S. Civil Service 1544SP Informe de Pagos en Efectivo en
529 Miscellaneous Deductions Retirement Benefits Exceso de $10,000 (Recibidos en
530 Tax Information for Homeowners 901 U.S. Tax Treaties una Ocupación o Negocio)
907 Tax Highlights for Persons with
Disabilities
Commonly Used Tax Forms See How To Get Tax Help for a variety of ways to get forms, including by computer, phone, and mail.
Form Number and Title Form Number and Title

1040 U.S. Individual Income Tax Return 2106 Employee Business Expenses
Sch A&B Itemized Deductions & Interest and 2106-EZ Unreimbursed Employee Business
Ordinary Dividends Expenses
Sch C Profit or Loss From Business 2210 Underpayment of Estimated Tax by
Sch C-EZ Net Profit From Business Individuals, Estates, and Trusts
Sch D Capital Gains and Losses 2441 Child and Dependent Care Expenses
Sch D-1 Continuation Sheet for Schedule D 2848 Power of Attorney and Declaration of
Sch E Supplemental Income and Loss Representative
Sch EIC Earned Income Credit 3903 Moving Expenses
Sch F Profit or Loss From Farming 4562 Depreciation and Amortization
Sch H Household Employment Taxes 4868 Application for Automatic Extension of Time
Sch J Income Averaging for Farmers and Fishermen To File U.S. Individual Income Tax Return
4952 Investment Interest Expense Deduction
Sch R Credit for the Elderly or the Disabled
Sch SE Self-Employment Tax 5329 Additional Taxes on Qualified Plans (Including
IRAs) and Other Tax-Favored Accounts
1040A U.S. Individual Income Tax Return
6251 Alternative Minimum Tax—Individuals
Sch 1 Interest and Ordinary Dividends for
Form 1040A Filers 8283 Noncash Charitable Contributions
Sch 2 Child and Dependent Care 8582 Passive Activity Loss Limitations
Expenses for Form 1040A Filers 8606 Nondeductible IRAs
Sch 3 Credit for the Elderly or the 8812 Additional Child Tax Credit
Disabled for Form 1040A Filers 8822 Change of Address
1040EZ Income Tax Return for Single and 8829 Expenses for Business Use of Your Home
Joint Filers With No Dependents 8863 Education Credits (Hope and Lifetime Learning
1040-ES Estimated Tax for Individuals Credits)
1040X Amended U.S. Individual Income Tax Return 9465 Installment Agreement Request

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Page 1 of 86 of Publication 970 16:39 - 6-JAN-2009

Department of the Treasury Contents

for Education 2. Hope Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Jan 06, 2009

Page 2 Publication 970 (2008)

Publication 970 (2008) Page 3

Page 4 Publication 970 (2008)

Table 1-1. Tax Treatment of Scholarship

Scholarships, AND you are... THEN your payment is...

and Tuition Tuition X X

Individual retirement arrangements (IRAs). You can Supplies X X3

Included are discussions of:

Chapter 1 Scholarships, Fellowships, Grants, and Tuition Reductions Page 5

• Tuition and fees required to enroll at or attend an Athletic Scholarships

Worksheet 1-1. Taxable Scholarship and Fellowship

1. Enter your scholarship or fellowship income for 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.

Page 6 Chapter 1 Scholarships, Fellowships, Grants, and Tuition Reductions

Chapter 1 Scholarships, Fellowships, Grants, and Tuition Reductions Page 7

Veterans’ Benefits Education Below the Graduate Level

Page 8 Chapter 1 Scholarships, Fellowships, Grants, and Tuition Reductions

This chapter explains:

Introduction Differences between the Hope and lifetime learning

Chapter 2 Hope Credit Page 9

Page 10 Chapter 2 Hope Credit

You can claim

Chapter 2 Hope Credit Page 11

Page 12 Chapter 2 Hope Credit

Chapter 2 Hope Credit Page 13

Figure 2-2. Who Is an Eligible Student for the Hope Credit?

Did the student complete the first 2 years of Yes

Page 14 Chapter 2 Hope Credit

Chapter 2 Hope Credit Page 15

Page 16 Chapter 2 Hope Credit

an expense you used to figure a Hope credit on that return,

Chapter 2 Hope Credit Page 17

Education Credits OMB No. 1545-0074

Page 18 Chapter 2 Hope Credit

• How to claim the credit, and

Chapter 3 Lifetime Learning Credit Page 19

Page 20 Chapter 3 Lifetime Learning Credit

You can claim

Chapter 3 Lifetime Learning Credit Page 21

1. Books, supplies, and equipment required for enroll-

Page 22 Chapter 3 Lifetime Learning Credit

Expenses That Do Not Qualify IF you... THEN only...

Chapter 3 Lifetime Learning Credit Page 23

MAGI when using Form 1040A. If you file Form

Page 24 Chapter 3 Lifetime Learning Credit

Example. You paid $9,300 tuition and fees in Decem-

Chapter 3 Lifetime Learning Credit Page 25

Education Credits OMB No. 1545-0074

Page 26 Chapter 3 Lifetime Learning Credit

Table 3-2. Table 1 from Publication 4492-B

Chapter 3 Lifetime Learning Credit Page 27

Table 4-1. Student Loan Interest Deduction

Student Loan Interest Feature Description

Introduction Qualified Student Loan