What Expenses Qualify(p21)

The lifetime learning 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 2010 for an academic period beginning in 2010 or in the first 3 months of 2011.

For example, if you paid $1,500 in December 2010 for qualified tuition for the spring 2011 semester beginning in January 2011, you may be able to use that $1,500 in figuring your 2010 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 lifetime learning credit for qualified education expenses paid with the proceeds of a loan. You use the expenses to figure the lifetime learning 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 lifetime learning credit for qualified education expenses not refunded when a student withdraws.

For purposes of the lifetime learning credit, qualified education expenses are tuition and certain related expenses required for enrollment in a course at an eligible educational institution. The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills.

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. For examples, see Related expenses in chapter 2 under Qualified Education Expenses.

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 lifetime learning credit based on those same expenses.
• Claim a lifetime learning credit in the same year that you are claiming a tuition and fees deduction for the same student.
• Claim a lifetime learning credit and an American opportunity credit based on the same qualified education expenses.
• Claim a lifetime learning 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 American Opportunity and Lifetime Learning Credits in chapter 7 (Coverdell ESA) and chapter 8 (QTP).
• Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. See Adjustments to Qualified Education Expenses, next.

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 part 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, on this page.)

If a refund of expenses paid in 2010 is received before you file your tax return for 2010, simply reduce the amount of the expenses paid by the amount of the refund received. If the refund is received after you file your 2010 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. Follow the above instructions according to when you are considered to receive the refund.

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).

For examples, see Adjustments to Qualified Education Expenses in chapter 2.

Qualified education expenses do not include amounts paid for:

• Insurance,
• Medical expenses (including student health fees),
• Room and board,
• Transportation, or
• Similar personal, living, or family expenses.

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

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 or is taken by the student to acquire or improve job skills, 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, on the next page, for more information about Form 1098-T.