Publication 970 (2006), Tax Benefits for Education

Publication 970 - Additional Material

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Table of Contents

Appendices

The following appendices include an illustrated example of how to use the Form 8863 when claiming both the Hope and lifetime learning (education) credits at the same time and a chart reflecting some of the major differences between the many tax benefits for education that are outlined in this publication.

Appendix A—An Illustrated Example of Education Credits including a filled-in Form 8863 showing how to claim both the Hope credit and lifetime learning credit for 2006.
Appendix B—A chart summarizing some of the differences between the education tax benefits discussed in this publication. It is intended only as a guide. Look in this publication for more complete information.

Appendix A. Illustrated Example of Education Credits

Dave and Valerie Jones are married and file a joint tax return. For 2006, they claim exemptions for their two dependent children on their tax return. Their modified adjusted gross income is $93,000. Their tax, before credits, is $9,956. Their son, Sean, will receive his bachelor's degree in psychology from the state college in May 2007. Their daughter, Corey, enrolled full-time at that same college in August 2005 to begin working on her bachelor's degree in physical education. In July 2006, Dave and Valerie paid $2,200 in tuition costs for each child for the Fall 2006 semester. In December 2006, they also paid $2,600 of tuition for each child for the Spring 2007 semester that begins in January.

Dave and Valerie, their children, and the college meet all of the require-ments for the education credits. Because Sean is beyond the second (sophomore) year of his postsec- ondary education, his expenses do not qualify for the Hope credit. But, amounts paid for Sean's expenses in 2007 for academic periods beginning in 2006 and the first 3 months of 2007 qualify for the lifetime learning credit. Corey is in her first two (freshman and sophomore) years of postsecondary education and expenses paid for her in 2006, for academic periods beginning in 2006 and January 2007, qualify for the Hope credit.

Dave and Valerie figure their tentative education credits for 2006, $2,610, as shown in the completed Form 8863. They cannot claim the full amount because their modified adjusted gross income is more than $90,000. They carry the amount from line 17 of Form 8863, $2,219 to line 50 of Form 1040, and they attach the Form 8863 to their return.

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Form 8863 for Dave and Valerie Jones

Appendix A (Continued)--Form 8863 Education Credits (Hope and Lifetime Learning Credits) 2006. Summary: This is an example of Form 8863 (2005) as pertains to the description in the text. The line items completed are:

“Name(s) shown on return” field contains Dave and Valerie Jones

“Your social security number” field contains 987-00-6543

Under “Part I: Hope Credit”:

“1a. Student's name (as shown on page 1 of your tax return:”

“First name” field contains Corey

“Last name” field contains Jones

“1b. Student's social security number (as shown on page 1 of your tax return)” field contains 137-00-9642

“1c. Qualified expenses (see instructions). Do not enter more than $2,000 for each student.” field contains 2,000

“1d. Enter the smaller of the amount in column (c) or $1,000” field contains 1,000

“1e. Add column (c) and column (d)” field contains 3,000

“1f. Enter one-half of the amount in column (e)” field contains 1,500

“2. Tentative Hope credit. Add the amounts on line 1, column (f). If you are taking the lifetime learning credit for another student, go to Part II; otherwise, go to Part III” field contains 1,500

Under “Part II: Lifetime Learning Credit”:

“3a. Student's name (as shown on page 1 of your tax return)”

“First name” field contains Sean

“Last name” field contains Jones

“3b. Student's social security number (as shown on page 1 of your tax return)” field contains 246-00-9731

“3c. Qualified expenses (see instructions)” field contains 4,800

“4. Add the amounts on line 3, column (c), and enter the total” field contains 4,800

“5. Enter the smaller of line 4 or $10,000” field contains 4,800

“6. Tentative lifetime learning credit. Multiply line 5 by 20% (.20) and go to Part III” field contains 960

Under “Part III: Allowable Education Credits”:

“7. Tentative education credits. Add lines 2 and 6” field contains 2,460

“8. Enter: $107,000 if married filing jointly; $53,000 if single, head of household, or qualifying widow(er)” field contains 107,000

“9. Enter the amount from Form 1040, line 38, or Form 1040A, line 22 (Footnote: See Publication 970 for the amount to enter if you are filing Form 2555, 2555-EZ, or 4563 or you are excluding income from Puerto Rico)” field contains 90,000

“12. Subtract line 9 from line 8. If zero or less, stop; you cannot take any education credits” field contains 17,000

“11. Enter: $20,000 if married filing jointly; $10,000 if single, head of household, or qualifying widow(er)” field contains 20,000

“12. If line 10 is equal to or more than line 11, enter the amount from line 7 on line 13 and go to line 14. If line 10 is less than line 11, divide line 10 by line 11. Enter the result as a decimal (rounded to at least three places)” field contains .850

“13. Multiply line 7 by line 12” field contains 2,091

“14. Enter the amount from Form 1040, line 46, or Form 1040A, line 28” field contains 9,956

“15. Enter the total, if any, of your credits from Form 1040, lines 47 through 49, or Form 1040A, lines 29 and 30” field contains 0

“16. Subtract line 15 from line 14. If zero or less, stop; you cannot take any education credits” field contains 9,956

“17. Education credits. Enter the smaller of line 13 or line 16 here and on Form 1040, line 50, or Form 1040A, line 31” field contains 2,091

Appendix B. Highlights of Tax Benefits for Education for Tax Year 2006

This chart highlights some differences among the benefits discussed in this publication. See the text for definitions and details.Do not rely on this chart alone.

Caution:You generally cannot claim more than one benefit for the same education expense.

	Scholarships, Fellowships, Grants, and Tuition Reductions	Hope Credit	Lifetime Learning Credit	Student Loan Interest Deduction	Tuition and Fees Deduction
What is your benefit?	Amounts received may not be taxable	Credits can reduce amount of tax you must pay		Can deduct interest paid	Can deduct expenses
What is the annual limit?	None	$1,650 credit per student	$2,000 credit per family	$2,500 deduction	$4,000 deduction
What expenses qualify besides tuition and required enrollment fees?	Course-related expenses such as fees, books, supplies, and equipment	None	None	Books Supplies Equipment Room & board Transportation Other necessary expenses	None
What education qualifies?	Undergrad. & graduate K-12	1st 2 years of undergraduate (postsecondary)	Undergrad. & graduate Courses to acquire or improve job skills	Undergrad. & graduate	Undergrad. & graduate
What are some of the other conditions that apply?	Must be in degree or vocational program Payment of tuition and required fees must be allowed under the grant	Can be claimed for only 2 tax years Must be enrolled at least half-time in degree program No felony drug conviction(s)		Must have been at least half-time student in degree program	Cannot claim both deduction & education credit for same student in same year
In what income range do benefits phase out?	No phaseout	$45,000 - $55,000 $90,000 - $110,000 for joint returns		$50,000 - $65,000 $105,000 - $135,000 for joint returns	$65,000 - $80,000 $130,000 - $160,000 for joint returns

(Continued)

Appendix B. <emphasis>(Continued)</emphasis>

This chart highlights some differences among the benefits discussed in this publication. See the text for definitions and details.Do not rely on this chart alone.

Caution:You generally cannot claim more than one benefit for the same education expense.

	Coverdell ESA ^*	Qualified Tuition Program (QTP) ^*	Educational Exception to Additional Tax on Early IRA Distributions ^*	Education Savings Bond Program ^*	Employer- Provided Educational Assistance ^*	Business Deduction for Work-Related Education
What is your benefit?	Earnings not taxed	Earnings not taxed	No 10% additional tax on early distribution	Interest not taxed	Employer benefits not taxed	Can deduct expenses
What is the annual limit?	$2,000 contribution per beneficiary	None	Amount of qualified education expenses	Amount of qualified education expenses	$5,250 exclusion	Amount of qualifying work-related education expenses
What expenses qualify besides tuition and required enrollment fees?	Books Supplies Equipment Expenses for special needs services Payments to QTP Higher education: Room & board if at least half-time student Elem/sec (K-12) education: Tutoring Room & board Uniforms Transportation Computer access Supplementary expenses	Books Supplies Equipment Room & board if at least half-time student Expenses for special needs services	Books Supplies Equipment Room & board if at least half-time student Expenses for special needs services	Payments to Coverdell ESA Payments to QTP	Books Supplies Equipment	Transportation Travel Other necessary expenses
What education qualifies?	Undergrad. & graduate K-12	Undergrad. & graduate	Undergrad. & graduate	Undergrad. & graduate	Undergrad. & graduate	Required by employer or law to keep present job, salary, status Maintain or improve job skills
What are some of the other conditions that apply?	Assets must be distributed at age 30 unless special needs beneficiary			Applies only to qualified series EE bonds issued after 1989 or series I bonds		Cannot be to meet minimum educational requirements of present trade/business Cannot qualify you for new trade/business
In what income range do benefits phase out?	$95,000 - $110,000 $190,000 - $220,000 for joint returns	No phaseout	No phaseout	$63,100 - $78,100 $94,700 - $124,700 for joint returns	No phaseout	May be subject to limit on itemized deductions

^* Any nontaxable distribution is limited to the amount that does not exceed qualified education expenses.

Glossary

The education benefits included in this publication were enacted over many years, leading to a number of common terms being defined differently from one benefit to the next. For example, an eligible educational institution means one thing when determining if earnings from a Coverdell education savings account are not taxable and something else when determining if a scholarship or fellowship is not taxable.

For each term listed below that has more than one definition, the definition for each education benefit is listed.

Academic period: A semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. If an educational institution uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period.

Adjusted qualified education expenses (AQEE): Qualified education expenses (defined later) reduced by any tax-free educational assistance, such as a tax-free scholarship or employer-provided educational assistance. They must also be reduced by any qualified education expenses deducted elsewhere on your return, used to determine an education credit or other benefit, or used to determine a tax-free distribution. For information on a specific benefit, see the appropriate chapter in this publication.

Candidate for a degree: A student who meets either of the following requirements.

Attends a primary or secondary school or pursues a degree at a college or university, or
Attends an accredited educational institution that is authorized to provide:
1. A program that is acceptable for full credit toward a bachelor's or higher degree, or
2. A program of training to prepare students for gainful employment in a recognized occupation.

Designated beneficiary: The individual named in the document creating the account/plan who is to receive the benefit of the funds in the account/plan.

Eligible educational institution:

	•	Coverdell education savings account (ESA). Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Also included is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law.
	•	Education savings bond program. Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.
	•	Hope credit. See Education savings bond program in this category.
	•	IRA, early distributions from. See Education savings bond program in this category.
	•	Lifetime learning credit. See Education savings bond program in this category.
	•	Qualified tuition program (QTP). See Education savings bond program in this category.
	•	Scholarships and fellowships. An institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.
	•	Student loan, cancellation of. See Scholarships and fellowships in this category.

	•	Student loan interest deduction. Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Also included is an institution that conducts an internship or residency program leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training.
	•	Tuition and fees deduction. See Education savings bond program in this category.

Eligible student:

•	Hope credit. A student who meets all of the following requirements for the tax year for which the credit is being determined.
	1.	Did not have expenses that were used to figure a Hope credit in any 2 earlier tax years.
	2.	Had not completed the first 2 years of postsecondary education.
	3.	For at least one academic period beginning in the tax year, was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.
	4.	Was free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year.
•	Lifetime learning credit. A student who is enrolled in one or more courses at an eligible educational institution.
•	Student loan interest deduction. A student who was enrolled at least half-time in a program leading to a postsecondary degree, certificate, or other recognized educational credential.

•

Tuition and fees deduction. A student who has either a high school diploma or a General Educational Development (GED) credential, and who is enrolled in one or more courses at an eligible educational institution.

Half-time student: A student who is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled.

Modified adjusted gross income (MAGI):

•	Coverdell education savings account (ESA). Adjusted gross income (AGI) as figured on the federal income tax return, modified by adding back any:
	1.	Foreign earned income exclusion,
	2.	Foreign housing exclusion,
	3.	Exclusion of income for bona fide residents of American Samoa, and
	4.	Exclusion of income from Puerto Rico.
•	Education savings bond program. Adjusted gross income (AGI) as figured on the federal income tax return without taking into account any savings bond interest exclusion and modified by adding back any:
	1.	Foreign earned income exclusion,
	2.	Foreign housing exclusion,
	3.	Foreign housing deduction,
	4.	Exclusion of income for bona fide residents of American Samoa,
	5.	Exclusion of income from Puerto Rico,
	6.	Exclusion for adoption benefits received under an employer's adoption assistance program,
	7.	Deduction for student loan interest,
	8.	Deduction for tuition and fees, and
	9.	Deduction for domestic production activities.
•	Hope credit. See Coverdell education savings account (ESA) in this section.
•	Lifetime learning credit. See Coverdell education savings account (ESA) in this section.

	•	Hope credit. See Coverdell education savings account (ESA) in this section.
	•	Lifetime learning credit. See Coverdell education savings account (ESA) in this section.

•	Student loan interest deduction. Adjusted gross income (AGI) as figured on the federal income tax return without taking into account any student loan interest deduction or tuition and fees deduction, modified by adding back any:
	1.	Foreign earned income exclusion,
	2.	Foreign housing exclusion,
	3.	Foreign housing deduction,
	4.	Exclusion of income for bona fide residents of American Samoa, and
	5.	Exclusion of income from Puerto Rico.
•	Tuition and fees deduction. Adjusted gross income (AGI) as figured on the federal income tax return without taking into account any tuition and fees deduction, modified by adding back any:
	1.	Foreign earned income exclusion,
	2.	Foreign housing exclusion,
	3.	Foreign housing deduction,
	4.	Exclusion of income for bona fide residents of American Samoa, and
	5.	Exclusion of income from Puerto Rico.

Phaseout: The amount of credit or deduction allowed is reduced when modified adjusted gross income (MAGI) is within a certain range of incomes.

Qualified education expenses: See pertinent chapter for specific items.

	•	Coverdell education savings account (ESA). Expenses related to or required for enrollment or attendance of the designated beneficiary at an eligible elementary, secondary, or postsecondary school. Also includes contribution to qualified tuition program (QTP).
	•	Education savings bond program. Tuition and fees required to enroll at or attend an eligible educational institution. Also includes contributions to a qualified tuition program (QTP) or

		Coverdell education savings account (ESA). Does not include expenses for room and board. Does not include expenses for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program.
	•	Hope credit. Tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Student-activity fees and expenses for course-related books, supplies, and equipment are included only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance. Does not include expenses for room and board. Does not include expenses for courses involving sports, games, or hobbies (including noncredit courses) that are not part of the student's postsecondary degree program.
	•	IRA, early distributions from. Tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution, plus certain limited costs of room and board for students who are enrolled at least half time. Also includes expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance.
	•	Lifetime learning credit. Same as for Hope credit, except that courses may be taken either as part of a postsecondary degree program or taken by the student to acquire or improve job skills.
	•	Qualified tuition program (QTP). Tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution, plus certain limited costs of room and board for students who are enrolled at least half time.
	•	Scholarships and fellowships. Expenses for tuition and fees required to enroll at or attend an eligible educational institution, and course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. Course- related items must be required of all students in the course of instruction.
	•	Student loan interest deduction. Total costs of attending an eligible educational institution, including graduate school (however, limitations may apply to the cost of room and board allowed).
	•	Tuition and fees deduction. See Hope credit in this category.

Recapture: To include as income on your return an amount allowed as a credit or deduction in a prior year.

Rollover: A tax-free distribution to you of cash or other assets from a tax-favored plan that you contribute to another tax-favored plan.

Transfer: A movement of funds in a tax-favored plan from one trustee directly to another, either at your request or at the trustee's request.