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IRS.gov Website
Publication 17
taxmap/pub17/p17-174.htm#en_us_publink1000235857

Qualified Education Expenses(p227)

rule
Generally, qualified education expenses are amounts paid in 2012 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.
For course-related books, supplies, and equipment, only certain expenses qualify.
Qualified education expenses include nonacademic fees, such as student activity fees, athletic fees, or other expenses unrelated to the academic course of instruction, only if the fee must be paid to the institution as a condition of enrollment or attendance. However, fees for personal expenses (described below) are never qualified education expenses.
Qualified education expenses for either credit do not include amounts paid for:
You should receive Form 1098–T, Tuition Statement, from the institution reporting either payments received in 2012 (box 1) or amounts billed in 2012 (box 2). However, the amount in box 1 or 2 of Form 1098–T may be different from the amount you paid (or are treated as having paid). In completing Form 8863, use only the amounts you actually paid (plus any amounts you are treated as having paid) in 2012 (reduced, as necessary, as described in Adjustments to Qualified Education Expenses, later.
Qualified education expenses paid on behalf of the student by someone other than the student (such as a relative) are treated as paid by the student. Qualified education expenses paid (or treated as paid) by a student who is claimed as a dependent on your tax return are treated as paid by you.
If you or the student takes a deduction for higher education expenses, such as on Schedule A or C (Form 1040), you cannot use those expenses in your qualified education expenses when figuring your education credits.
EIC
Qualified education expenses for any academic period must be reduced by any tax-free educational assistance allocable to that academic period. See Adjustments to Qualified Education Expenses, later.
taxmap/pub17/p17-174.htm#en_us_publink1000296972

Prepaid Expenses.(p227)

rule
Qualified education expenses paid in 2012 for an academic period that begins in the first 3 months of 2013 can be used in figuring an education credit for 2012 only. See Academic period, earlier. For example, if you pay $2,000 in December 2012 for qualified tuition for the 2013 winter quarter that begins in January 2013, you can use that $2,000 in figuring an education credit for 2012 only (if you meet all the other requirements).
EIC
You cannot use any amount you paid in 2011 or 2013 to figure the qualified education expenses you use to figure your 2012 education credit(s).
taxmap/pub17/p17-174.htm#en_us_publink1000236031

Paid with borrowed funds.(p227)

rule
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.
taxmap/pub17/p17-174.htm#en_us_publink1000236032

Student withdraws from class(es).(p228)

rule
You can claim an education credit for qualified education expenses not refunded when a student withdraws.
taxmap/pub17/p17-174.htm#en_us_publink1000236009

No Double Benefit Allowed(p228)

rule
You cannot do any of the following.
taxmap/pub17/p17-174.htm#en_us_publink1000236049

Adjustments to Qualified Education Expenses(p228)

rule
For each student, reduce the qualified education expenses paid in 2012 by or on behalf of that student under the following rules. The result is the amount of adjusted qualified education expenses for each student.
taxmap/pub17/p17-174.htm#en_us_publink1000236033

Tax-free educational assistance.(p228)

rule
For tax-free educational assistance received in 2012, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. See Academic period, earlier.
Tax-free educational assistance includes:
Generally, any scholarship or fellowship is treated as tax-free educational assistance. However, a scholarship or fellowship is not treated as tax-free educational assistance to the extent the student includes it in gross income (if the student is required to file a tax return) for the year the scholarship or fellowship is received and either:
Deposit
You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year received. For details, see Adjustments of Qualified Education Expenses, in chapters 2 and 3 of Pub. 970.
Some tax-free educational assistance received after 2012 may be treated as a refund of qualified education expenses paid in 2012. This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2012 for qualified education expenses paid on behalf of a student in 2012 (or attributable to enrollment at an eligible educational institution during 2012).
If this tax-free educational assistance is received after 2012 but before you file your 2012 income tax return, see Refunds received after 2012 but before your income tax return is filed, later. If this tax-free educational assistance is received after 2012 and after you file your 2012 income tax return, see Refunds received after 2012 and after your income tax return is filed, later.
taxmap/pub17/p17-174.htm#en_us_publink1000297017

Refunds.(p228)

rule
A refund of qualified education expenses may reduce qualified education expenses for the tax year or may require you to repay (recapture) the credit that you claimed in an earlier year. Some tax-free educational assistance received after 2012 may be treated as a refund. See Tax-free educational assistance, earlier
taxmap/pub17/p17-174.htm#en_us_publink1000297018
Refunds received in 2012.(p228)
For each student, figure the adjusted qualified education expenses for 2012 by adding all the qualified education expenses paid in 2012 and subtracting any refunds of those expenses received from the eligible educational institution during 2012.
taxmap/pub17/p17-174.htm#en_us_publink1000297019
Refunds received after 2012 but before your income tax return is filed.(p228)
If anyone receives a refund after 2012 of qualified education expenses paid on behalf of a student in 2012 and the refund is received before you file your 2012 income tax return, reduce the amount of qualified education expenses for 2012 by the amount of the refund.
taxmap/pub17/p17-174.htm#en_us_publink1000297020
Refunds received after 2012 and after your income tax return is filed.(p228)
If anyone receives a refund after 2012 of qualified education expenses paid on behalf of a student in 2012 and the refund is received after you file your 2012 income tax return, you may need to repay some or all of the credit that you claimed. See Credit recapture, next.
taxmap/pub17/p17-174.htm#en_us_publink1000297021

Credit recapture.(p228)

rule
If any tax-free educational assistance for the qualified education expenses paid in 2012, or any refund of your qualified education expenses paid in 2012, is received after you file your 2012 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2012 by reducing the expenses by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2012 and figure the amount by which your 2012 tax liability would have increased if you had claimed the refigured credit(s). Include that amount as an additional tax for the year the refund or tax-free assistance was received.
taxmap/pub17/p17-174.htm#en_us_publink1000297022
Example.(p228)
You paid $8,000 tuition and fees in December 2012 for your child's Spring semester beginning in January 2013. You filed your 2012 tax return on February 2, 2013, and claimed a lifetime learning credit of $1,600 ($8,000 qualified education expense paid x .20). You claimed no other tax credits. After you filed your return, your child withdrew from two courses and you received a refund of $1,400. You must refigure your 2012 lifetime learning credit using $6,600 ($8,000 qualified education expenses − $1,400 refund). The refigured credit is $1,320 and your tax liability increased by $280. You must include the difference of $280 ($1,600 credit originally claimed − $1,320 refigured credit) as additional tax on your 2013 income tax return. See the instructions for your 2013 income tax return to determine where to include this tax.
EIC
If you also pay qualified education expenses in 2013 for an academic period that begins in the first 3 months of 2013 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2013 instead of reducing your expenses for 2012.
taxmap/pub17/p17-174.htm#en_us_publink1000236036

Amounts that do not reduce qualified education expenses.(p228)

rule
Do not reduce qualified education expenses by amounts paid with funds the student receives as:
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.
For examples, see chapter 2 in Pub. 970.
taxmap/pub17/p17-174.htm#en_us_publink1000297128

Figure 34-A. Can You Claim an Education Credit for 2012?

taxmap/pub17/p17-174.htm#en_us_publink1000297129