Qualified Education Expenses(p238)

Generally, qualified education expenses are amounts paid in 2011 for tuition and fees required for the student's enrollment or attendance at an eligible educational institution. It does not matter whether the expenses were paid in cash, by check, by credit or debit card, or with borrowed funds.

Only certain expenses for course-related books, supplies, and equipment qualify.

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

Qualified education expenses do not include amounts paid for:

• Room and board, insurance, medical expenses (including student health fees), transportation, or other similar personal, living, or family expenses.
• Any course or other education involving sports, games, or hobbies, or any noncredit course, unless such course or other education is part of the student's degree program or (for the lifetime learning credit only) helps the student acquire or improve job skills.
• Nonacademic fees, such as student activity fees, athletic fees, insurance expenses, or other expenses unrelated to the academic course of instruction.

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

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

You cannot do any of the following.

• Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an education credit based on those same expenses.
• Claim more than one education credit based on the same qualified education expenses.
• Claim an education credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP).
• Claim an education credit based on qualified education expenses paid with educational assistance, such as a tax-free scholarship, grant, or employer-provided educational assistance. See Adjustments to Qualified Education Expenses, next.

If you pay qualified education expenses with certain tax-free funds, you cannot claim an education 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:

• Tax-free parts of scholarships and fellowships (see chapter 12 of this publication and chapter 1 of Publication 970),
• Pell grants (see chapter 1 of Publication 970),
• Employer-provided educational assistance (see chapter 11 of Publication 970),
• Veterans' educational assistance (see chapter 1 of Publication 970), 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 more information, see Refunds in chapters 2 and 3 of Publication 970.

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 chapter 2 in Publication 970.