What Expenses Qualify(p10)

The Hope credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Generally, 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 qualified tuition for the Spring 2009 semester beginning in January 2009, you may be able to use that $1,500 in figuring your 2008 credit.

An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period.

You can claim a Hope credit for qualified education expenses paid with the proceeds of a loan. Use the expenses to figure the Hope credit for the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account.

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

For purposes of the Hope credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.

An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.

Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.

Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.

In the following examples, assume that each student is an eligible student at an eligible educational institution.

Jackson is a sophomore in University V's degree program in dentistry. This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Because the equipment rental fee must be paid to University V for enrollment and attendance, Jackson's equipment rental fee is a qualified expense.

Donna and Charles, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. Charles bought his books from a friend, so what he paid for them is not a qualified education expense. Donna bought hers at College W's bookstore. Although Donna paid College W directly for her first-year books and materials, her payment is not a qualified expense because the books and materials are not required to be purchased from College W for enrollment or attendance at the institution.

When Marci enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and the student government. No portion of the fee covers personal expenses. Although labeled as a student activity fee, the fee is required for Marci's enrollment and attendance at College X. Therefore, it is a qualified expense.

The definition of qualified education expenses is expanded for students in these areas. In addition to tuition and fees required for enrollment or attendance at an eligible educational institution, qualified education expenses for students in Midwestern disaster areas include the following.

1. Books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.
2. For a special needs student, expenses that are necessary for that person's enrollment or attendance at an eligible educational institution.
3. For a student who is at least a half-time student, the reasonable costs of room and board, but only to the extent that the costs are not more than the greater of the following two amounts.
   1. The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
   2. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

You will need to contact the eligible educational institution for qualified room and board costs.

You cannot do any of the following.

• Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim a Hope credit based on those same expenses.
• Claim a Hope credit in the same year that you are claiming a tuition and fees deduction for the same student.
• Claim a Hope credit and a lifetime learning credit based on the same qualified education expenses.
• Claim a Hope credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP). See Coordination With Hope and Lifetime Learning Credits in chapter 7 (Coverdell ESA) and chapter 8 (QTP).
• Claim a credit based on qualified education expenses paid with a tax-free scholarship, grant, or employer-provided educational assistance. See Adjustments to Qualified Education Expenses, next.

If you pay qualified education expenses with certain tax-free funds, you cannot claim a credit for those amounts. You must reduce the qualified education expenses by the amount of any tax-free educational assistance and refund(s) you received.

This includes:

• The tax-free parts of scholarships and fellowships (see chapter 1),
• Pell grants (see chapter 1),
• Employer-provided educational assistance (see chapter 11),
• Veterans' educational assistance (see chapter 1), and
• Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

Qualified education expenses do not include expenses for which you, or someone else who paid qualified education expenses on behalf of a student, receive a refund. (For information on expenses paid by a dependent student or third party, see Who Can Claim a Dependent's Expenses, later in this chapter.)

If a refund of expenses paid in 2008 is received before you file your tax return for 2008, simply reduce the amount of the expenses paid by the amount of the refund received. If the refund is received after you file your 2008 tax return, see When Must the Credit Be Repaid (Recaptured), later.

You are considered to receive a refund of expenses when an eligible educational institution refunds loan proceeds to the lender on behalf of the borrower. Depending on when you are considered to receive the refund, follow the above instructions or see When Must the Credit Be Repaid (Recaptured), later.

Do not reduce qualified education expenses by amounts paid with funds the student receives as:

• Payment for services, such as wages,
• A loan,
• A gift,
• An inheritance, or
• A withdrawal from the student's personal savings.

Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations.

• The use of the money is restricted to costs of attendance (such as room and board) other than qualified education expenses.
• The use of the money is not restricted and is used to pay education expenses that are not qualified (such as room and board).

Jackie paid $3,000 for tuition and $5,000 for room and board at University X. The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan.

The terms of the scholarship state that it may be used to pay any of Jackie's college expenses. Because she applied it toward her tuition, the scholarship is tax free. Therefore, for purposes of figuring an education credit (either Hope or lifetime learning), she must first use the $2,000 scholarship to reduce her tuition (her only qualified education expense). The student loan is not tax-free educational assistance, so she does not use it to reduce her qualified expenses. Jackie is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship).

The facts are the same as in Example 1, except that Jackie uses the $2,000 scholarship to pay room and board, and, therefore, reports her entire scholarship as income on her tax return. In this case, the scholarship is allocated to expenses other than qualified education expenses. Jackie is treated as paying the entire $3,000 tuition with other funds and can figure her education credit on the entire $3,000.

Qualified education expenses do not include amounts paid for:

• Insurance,
• Medical expenses (including student health fees),
• Room and board (but see Students in Midwestern disaster areas under Qualified Education Expenses, earlier, for an exception),
• Transportation, or
• Similar personal, living, or family expenses.

This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.

Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify.

Some eligible educational institutions combine all of their fees for an academic period into one amount. If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T, Tuition Statement. See Figuring the Credit, later, for more information about Form 1098-T.