What Expenses Qualify(p11)

The American opportunity 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 2011 for an academic period beginning in 2011 or the first three months of 2012.

For example, if you paid $1,500 in December 2011 for qualified tuition for the spring 2012 semester beginning January 2012, you may be able to use that $1,500 in figuring your 2011 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 an American opportunity credit for qualified education expenses paid with the proceeds of a loan. Use the expenses to figure the American opportunity 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 American opportunity credit for qualified education expenses not refunded when a student withdraws.

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

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 are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance.

However, expenses for books, supplies, and equipment needed for a course of study are included in qualified education expenses whether or not the materials are purchased from the educational institution.

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

Jefferson is a sophomore in University V's degree program in dentistry. This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Because the equipment rental is needed for his course of study, Jefferson's equipment rental fee is a qualified expense.

Grace and William, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. William bought his books from a friend; Grace bought hers at College W's bookstore. Both are qualified education expenses for the American opportunity credit.

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

You cannot do any of the following.

• Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an American opportunity credit based on those same expenses.
• Claim an American opportunity credit in the same year that you are claiming a tuition and fees deduction for the same student.
• Claim an American opportunity credit and lifetime learning credit based on the same qualified education expenses.
• Claim an American opportunity 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 Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program.
• 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 parts of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions),
• Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions).
• Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance),
• Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), 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 receives 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 2011 is received before you file your tax return for 2011, simply reduce the amount of the expenses paid by the amount of the refund received. If the refund is received after you file your 2011 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, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions.
• The use of the money is not restricted.

Joan paid $3,000 for tuition and $5,000 for room and board at University X. The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. The terms of the scholarship state that it can be used to pay any of Joan's college expenses.

University X applies the $2,000 scholarship against Joan's $8,000 total bill, and Joan pays the $6,000 balance of her bill from University X with a combination of her student loan and her savings. Joan does not report any portion of the scholarship as income on her tax return.

In figuring the amount of either education credit (American opportunity or lifetime learning), Joan must reduce her qualified education expenses by the amount of the scholarship ($2,000) because she excluded the entire scholarship from her income. The student loan is not tax-free educational assistance, so she does not need to reduce her qualified expenses by any part of the loan proceeds. Joan is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship).

The facts are the same as in Example 1, except that Joan reports her entire scholarship as income on her tax return. Because Joan reported the entire $2,000 scholarship in her income, she does not need to reduce her qualified education expenses. Joan is treated as having paid $3,000 in qualified education expenses.

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, 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.