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IRS.gov Website
Publication 17
taxmap/pub17/p17-177.htm#en_us_publink1000235857

Qualified Education Expenses(p223)

rule
Generally, qualified education expenses are amounts paid in 2014 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 the following.
You should receive Form 1098-T, Tuition Statement, from the institution reporting either payments received in 2014 (box 1) or amounts billed in 2014 (box 2). However, the amount on your Form 1098-T, box 1 or 2, 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 2014, reduced as necessary, as described in Adjustments to Qualified Education Expenses, later. See chapters 2 and 3 of Pub. 970 for more information on Form 1098-T.
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/p17-177.htm#en_us_publink1000296972

Prepaid Expenses. (p224)

rule
Qualified education expenses paid in 2014 for an academic period that begins in the first 3 months of 2015 can be used in figuring an education credit for 2014 only. See Academic period, earlier. For example, if you pay $2,000 in December 2014 for qualified tuition for the 2015 winter quarter that begins in January 2015, you can use that $2,000 in figuring an education credit for 2014 only (if you meet all the other requirements).
EIC
You cannot use any amount you paid in 2013 or 2015 to figure the qualified education expenses you use to figure your 2014 education credit(s).
taxmap/pub17/p17-177.htm#en_us_publink1000236031

Paid with borrowed funds. (p224)

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/p17-177.htm#en_us_publink1000236032

Student withdraws from class(es). (p224)

rule
You can claim an education credit for qualified education expenses not refunded when a student withdraws.
taxmap/pub17/p17-177.htm#en_us_publink1000236009

No Double Benefit Allowed(p224)

rule
You cannot do any of the following.
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Adjustments to Qualified Education Expenses(p224)

rule
For each student, reduce the qualified education expenses paid in 2014 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/p17-177.htm#en_us_publink1000236033

Tax-free educational assistance. (p224)

rule
For tax-free educational assistance received in 2014, 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:
Deposit
You may be able to increase the combined value of an education credit and certain educational assistance to living expenses and include the assistance in income in the year it is received. See Coordination with Pell grants and other scholarships of fellowship grants, later. Also, for more information, see examples in Coordination with Pell grants, and other scholarships or fellowship grants, in chapter 2 of Pub. 970 and Coordination with Pell grants, and other scholarships, in chapter 3 of Pub. 970.
Generally, any scholarship or fellowship grant is treated as tax-free educational assistance. However, a scholarship or fellowship grant 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 grant is received and either:
taxmap/pub17/p17-177.htm#en_us_publink100024399

Coordination with Pell grants and other scholarships or fellowship grants. (p224)

rule
You may be able to increase an education credit and reduce your total tax or increase your tax refund if the student (you, your spouse, or your dependent) chooses to include all or part of certain scholarships or fellowship grants in income. The scholarship or fellowship grant must be one that may qualify as a tax-free scholarship under the rules discussed in chapter 1 of Pub. 970. Also, the scholarship or fellowship grant must be one that may (by its terms) be used for expenses other than qualified education expenses (such as room and board).
The fact that the educational institution applies the scholarship or fellowship grant to qualified education expenses (such as tuition and related fees) does not prevent the student from choosing to apply certain scholarships or fellowship grants to other expenses (such as room and board). By choosing to do so, the student will include the part applied to other expenses (such as room and board) in gross income and may be required to file a tax return. But, this allows payments made in cash, by check, by credit or debit card, or with borrowed funds such as a student loan to be applied to qualified education expenses. These payments, unlike certain scholarships or fellowship grants, will not reduce the qualified education expenses available to figure an education credit. The result is generally a larger education credit that reduces your total tax or increases your tax refund.
taxmap/pub17/p17-177.htm#en_us_publink100024400

Example 1. (p224)

Last year, your child graduated from high school and enrolled in college for the fall semester. You and your child meet all other requirements to claim the American opportunity credit, and you need to determine adjusted qualified education expenses to figure the credit.
Your child has $5,000 of qualified education expenses and $4,000 of room and board. Your child received a $5,000 Pell grant and took out a $2,750 student loan to pay these expenses. You paid the remaining $1,250. The Pell grant by its terms may be used for any of these expenses.
If you and your child choose to apply the Pell grant to the qualified education expenses, it will qualify as a tax-free scholarship under the rules discussed in chapter 1 of Pub. 970. Your child will not include any part of the Pell grant in gross income. After reducing qualified education expenses by the tax-free scholarship you will have $0 ($5,000 - $5,000) of adjusted qualified education expenses available to figure your credit. Your credit will be $0.
taxmap/pub17/p17-177.htm#en_us_publink100024401

Example 2(p224)

The facts are the same as in Example 1. If, unlike in Example 1, you and your child choose to apply only $1,000 of the Pell grant to the qualified education expenses and to apply the remaining $4,000 to room and board, only $1,000 will qualify as a tax-free scholarship.
Your child will include the $4,000 applied to room and board in gross income, and it will be treated as earned income for purposes of determining whether your child is required to file a tax return. If the $4,000 is your child’s only income, your child will not be required to file a tax return.
After reducing qualified education expenses by the tax-free scholarship you will have $4,000 ($5,000 - $1,000) of adjusted qualified education expenses available to figure your credit. Your refundable American opportunity credit will be $1,000. Your nonrefundable credit may be as much as $1,500 but depends on your tax liability.
If you are not otherwise required to file a tax return, you should file to get a refund of your $1,000 refundable credit but your tax liability and nonrefundable credit will be $0.
Note. The result may be different if your child has other income or if you are the student. If you are the student and you claim the earned income credit, choosing not to apply a Pell grant to qualified education expenses may decrease your earned income credit at certain income levels by raising your adjusted gross income. However, you generally need at least $2,000 of adjusted qualified education expenses to receive the maximum benefit of claiming both credits. For more information, see Coordination with Pell grants, and other scholarships or fellowship grants, in chapters 2 and 3 of Pub. 970.
taxmap/pub17/p17-177.htm#en_us_publink100024403

Tax-free educational assistance treated as a refund.(p225)

rule
Some tax-free educational assistance received after 2014 may be treated as a refund of qualified education expenses paid in 2014. This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2014 for qualified education expenses paid on behalf of a student in 2014 (or attributable to enrollment at an eligible educational institution during 2014).
If this tax-free educational assistance is received after 2014 but before you file your 2014 income tax return, see Refunds received after 2014 but before your income tax return is filed, later. If this tax-free educational assistance is received after 2014 and after you file your 2014 income tax return, see Refunds received after 2014 and after your income tax return is filed, later.
taxmap/pub17/p17-177.htm#en_us_publink1000297017

Refunds.(p225)

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 2014 may be treated as a refund. See Tax-free educational assistance, earlier.
taxmap/pub17/p17-177.htm#en_us_publink1000297018
Refunds received in 2014.(p225)
For each student, figure the adjusted qualified education expenses for 2014 by adding all the qualified education expenses paid in 2014 and subtracting any refunds of those expenses received from the eligible educational institution during 2014.
taxmap/pub17/p17-177.htm#en_us_publink1000297019
Refunds received after 2014 but before your income tax return is filed.(p225)
If anyone receives a refund after 2014 of qualified education expenses paid on behalf of a student in 2014 and the refund is received before you file your 2014 income tax return, reduce the amount of qualified education expenses for 2014 by the amount of the refund.
taxmap/pub17/p17-177.htm#en_us_publink1000297020
Refunds received after 2014 and after your income tax return is filed.(p225)
If anyone receives a refund after 2014 of qualified education expenses paid on behalf of a student in 2014 and the refund is received after you file your 2014 income tax return, you may need to repay some or all of the credit that you claimed. See Credit recapture next.
taxmap/pub17/p17-177.htm#en_us_publink1000297021

Credit recapture.(p225)

rule
If any tax-free educational assistance for the qualified education expenses paid in 2014, or any refund of your qualified education expenses paid in 2014, is received after you file your 2014 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2014 by reducing the expenses by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2014 and figure the amount by which your 2014 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/p17-177.htm#en_us_publink1000297022
Example.(p225)
You paid $8,000 tuition and fees in December 2014 for your child's Spring semester beginning in January 2015. You filed your 2014 tax return on February 3, 2015, 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 2014 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 2015 income tax return. See the instructions for your 2015 income tax return to determine where to include this tax.
EIC
If you also pay qualified education expenses in 2015 for an academic period that begins in the first 3 months of 2015 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2015 instead of reducing your expenses for 2014.
taxmap/pub17/p17-177.htm#en_us_publink1000236036

Amounts that do not reduce qualified education expenses.(p225)

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 grant reported as income on the student's tax return in the following situations.
For examples, see chapter 2 in Pub. 970.
taxmap/pub17/p17-177.htm#en_us_publink1000297128

Figure 35-A. Can You Claim an Education Credit for 2014?

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