Tax Scholarships

Userid: CPM Schema: tipx Leadpct: 100% Pt. size: 10 Draft Ok to Print AH XSL/XML Fileid: … tions/P970/2019/A/XML/Cycle03/source (Init. & Date) _______ Page 1 of 93 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Department of the Treasury Internal Revenue Service

Publication 970 Cat. No. 25221V

Tax Benefits for Education For use in preparing 2019 Returns

Get forms and other information faster and easier at: • IRS.gov (English) • IRS.gov/Spanish (Español) • IRS.gov/Chinese (中文)

• IRS.gov/Korean (한국어) • IRS.gov/Russian (Pусский) • IRS.gov/Vietnamese (TiếngViệt)

Contents Future Developments . . . . . . . . . . . . . . . . . . . . . . . 2 What's New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Reminders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Chapter 1. Scholarships, Fellowship Grants,

Grants, and Tuition Reductions . . . . . . . . . . . . 5 Scholarships and Fellowship Grants . . . . . . . . . . 5 Other Types of Educational Assistance . . . . . . . . 7

Chapter 2. American Opportunity Credit . . . . . . . 9 Can You Claim the Credit? . . . . . . . . . . . . . . . . 11 What Expenses Qualify? . . . . . . . . . . . . . . . . . . 12 Who Is an Eligible Student? . . . . . . . . . . . . . . . . 18 Who Can Claim a Dependent's Expenses? . . . . . 19 Figuring the Credit . . . . . . . . . . . . . . . . . . . . . . 20 Claiming the Credit . . . . . . . . . . . . . . . . . . . . . . 22

Chapter 3. Lifetime Learning Credit . . . . . . . . . . 22 Can You Claim the Credit? . . . . . . . . . . . . . . . . 23 What Expenses Qualify? . . . . . . . . . . . . . . . . . 24 Who Is an Eligible Student? . . . . . . . . . . . . . . . 29 Who Can Claim a Dependent's Expenses? . . . . 29 Figuring the Credit . . . . . . . . . . . . . . . . . . . . . . 30 Claiming the Credit . . . . . . . . . . . . . . . . . . . . . . 31

Chapter 4. Student Loan Interest Deduction . . . 31 Student Loan Interest Defined . . . . . . . . . . . . . . 32 Can You Claim the Deduction? . . . . . . . . . . . . . 34 Figuring the Deduction . . . . . . . . . . . . . . . . . . . 35 Claiming the Deduction . . . . . . . . . . . . . . . . . . . 36

Chapter 5. Student Loan Cancellations and Repayment Assistance . . . . . . . . . . . . . . . . . 38 Student Loan Cancellation . . . . . . . . . . . . . . . . 38 Student Loan Repayment Assistance . . . . . . . . . 39

Chapter 6. Tuition and Fees Deduction . . . . . . . 39 Can You Claim the Deduction? . . . . . . . . . . . . . 39 What Expenses Qualify? . . . . . . . . . . . . . . . . . . 40 Who Is an Eligible Student? . . . . . . . . . . . . . . . . 43 Who Can Claim a Dependent's Expenses? . . . . . 43 Figuring the Deduction . . . . . . . . . . . . . . . . . . . 44 Claiming the Deduction . . . . . . . . . . . . . . . . . . . 44

Chapter 7. Coverdell Education Savings Account (ESA) . . . . . . . . . . . . . . . . . . . . . . . . 45 What Is a Coverdell ESA? . . . . . . . . . . . . . . . . . 46 Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Rollovers and Other Transfers . . . . . . . . . . . . . . 50 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Chapter 8. Qualified Tuition Program (QTP) . . . . 57 What Is a Qualified Tuition Program? . . . . . . . . . 57 How Much Can You Contribute? . . . . . . . . . . . . 58 Recontribution of Refunded Amounts . . . . . . . . . 58

Jan 17, 2020

Page 2 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Are Distributions Taxable? . . . . . . . . . . . . . . . . 58 Rollovers and Other Transfers . . . . . . . . . . . . . . 60

Chapter 9. Education Exception to Additional Tax on Early IRA Distributions . . . . . . . . . . . . 61 Who Is Eligible? . . . . . . . . . . . . . . . . . . . . . . . . 61 Figuring the Amount Not Subject to the 10%

Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Reporting Early Distributions . . . . . . . . . . . . . . . 63

Chapter 10. Education Savings Bond Program . . . . . . . . . . . . . . . . . . . . . . . . 63 Who Can Cash in Bonds Tax Free? . . . . . . . . . . 63 Figuring the Tax-Free Amount . . . . . . . . . . . . . . 64 Claiming the Exclusion . . . . . . . . . . . . . . . . . . . 65

Chapter 11. Employer-Provided Educational Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Chapter 12. Business Deduction for Work-Related Education . . . . . . . . . . . . . . . . 66 Qualifying Work-Related Education . . . . . . . . . . 66 What Expenses Can Be Deducted? . . . . . . . . . . 69 How To Treat Reimbursements . . . . . . . . . . . . . 71 Deducting Business Expenses . . . . . . . . . . . . . 72 Recordkeeping . . . . . . . . . . . . . . . . . . . . . . . . . 73

Chapter 13. How To Get Tax Help . . . . . . . . . . . . 73 Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Future Developments For the latest information about developments related to Pub. 970, such as legislation enacted after it was published, go to IRS.gov/Pub970.

What's New Lifetime learning credit. For 2019, the amount of your lifetime learning credit is gradually reduced (phased out) if your MAGI is between $58,000 and $68,000 ($116,000 and $136,000 if you file a joint return). You can't claim the credit if your MAGI is $68,000 or more ($136,000 or more if you file a joint return). See chapter 3. Student loan interest deduction.

• For 2019, the amount of your student loan interest de- duction is gradually reduced (phased out) if your MAGI is between $70,000 and $85,000 ($140,000 and $170,000 if you file a joint return). You can’t claim the deduction if your MAGI is $85,000 or more ($170,000 or more if you file a joint return).

• You can’t deduct as interest on a student loan any amount paid from a distribution of earnings made from a qualified tuition program (QTP) after 2018 to the

extent the earnings are treated as tax free because they were used to pay student loan interest.

See chapter 4. Tuition and fees deduction. The tuition and fees de- duction has been extended to cover qualified education expenses paid in 2018, 2019, and 2020. See chapter 6. Qualified tuition program (QTP). For distributions made from qualified tuition programs (QTPs) after 2018, qualified higher education expenses may include:

• Certain expenses required for a designated benefi- ciary's participation in certain apprenticeship pro- grams.

• No more than $10,000 paid as principal or interest on a qualified student loan of the designated beneficiary or the designated beneficiary's sibling.

See chapter 8. Education savings bond program. For 2019, the amount of your education savings bond interest exclusion is gradually reduced (phased out) if your MAGI is between $81,100 and $96,100 ($121,600 and $151,600 if you file a joint return). You can't exclude any of the interest if your MAGI is $96,100 or more ($151,600 or more if you file a joint return). See chapter 10. Business deduction for work-related education. Gen- erally, if you claim a business deduction for work-related education and you drive your car to and from school, the amount you can deduct for miles driven from January 1, 2019, through December 31, 2019, is 58 cents a mile. See chapter 12.

Reminders Form 1098-T, Tuition Statement. When figuring an ed- ucation credit, use only the amounts you paid and are deemed to have paid during the tax year for qualified edu- cation expenses. In most cases, the student should re- ceive Form 1098-T from the eligible educational institution by January 31, 2020. However, the amount on Form 1098-T might be different from the amount you actually paid and are deemed to have paid. In addition, Form 1098-T should give you other information for that institu- tion, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements, or re- funds, and whether the student was enrolled at least half-time or was a graduate student. The eligible educa- tional institution may ask for a completed Form W-9S, Re- quest for Student's or Borrower's Taxpayer Identification Number and Certification, or similar statement to obtain the student's name, address, and taxpayer identification number. Form 1098-T requirement. To be eligible to claim the American opportunity credit or the lifetime learning credit, the law requires a taxpayer (or a dependent) to have re- ceived Form 1098-T, Tuition Statement, from an eligible educational institution, whether domestic or foreign.

However, you may claim a credit if the student doesn't receive Form 1098-T because the student's educational

Page 2 Publication 970 (2019)

Page 3 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

institution isn't required to furnish Form 1098-T to the stu- dent under existing rules (for example, if the student is a qualified nonresident alien, has qualified education ex- penses paid entirely with scholarships, has qualified edu- cation expenses paid under a formal billing arrangement, or is enrolled in courses for which no academic credit is awarded). If a student's educational institution isn't re- quired to provide Form 1098-T to the student, you may claim a credit without Form 1098-T if you otherwise qual- ify, can demonstrate that you (or a dependent) were enrol- led at an eligible educational institution, and can substan- tiate the payment of qualified tuition and related expenses.

You may also claim a credit if the student attended an eligible educational institution required to furnish Form 1098-T but the student doesn’t receive Form 1098-T be- fore you file your tax return (for example, if the institution is otherwise required to furnish Form 1098-T and doesn’t furnish it or refuses to do so) and you take the following required steps: After January 31, 2020, but before the due date for your 2019 tax return, you or the student must re- quest that the educational institution furnish Form 1098-T. You must fully cooperate with the educational institution's efforts to gather the information needed to furnish Form 1098-T. You must also otherwise qualify for the benefit, be able to demonstrate that you (or a dependent) were enrol- led at an eligible educational institution, and substantiate the payment of qualified tuition and related expenses. Educational institution's EIN required. To claim the American opportunity credit, you must provide the educa- tional institution's employer identification number (EIN) on your Form 8863. You should be able to obtain this infor- mation from Form 1098-T or the educational institution. See chapter 2. Form 8862 may be required. If your American opportu- nity credit was denied or reduced for any reason other than a math or clerical error for any tax year beginning af- ter 2015, you must attach a completed Form 8862, Infor- mation To Claim Certain Refundable Credits After Disal- lowance, to your tax return for the next year for which you claim the credit. See chapter 2. Ban on claiming the American opportunity credit. If you claim the American opportunity credit even though you're not eligible, you may be banned from claiming the credit for 2 or 10 years depending on your conduct. See chapter 2. Taxpayer identification number (TIN) needed by due date of return. If you haven’t been issued a TIN by the due date of your 2019 return (including extensions), you can't claim the American opportunity credit on either your original or an amended 2019 return. Also, the American opportunity credit isn't allowed on either your original or an amended 2019 return for a student who hasn’t been is- sued a TIN by the due date of your return (including exten- sions). See chapter 2. Coordination with Pell grants and other scholarships or fellowship grants. It may benefit you to choose to in- clude otherwise tax-free scholarships or fellowship grants in income. This may increase your education credit and lower your total tax or increase your refund. See

Coordination with Pell grants and other scholarships or fellowship grants in chapter 2 and chapter 3. Achieving a Better Life Experience (ABLE) account. This is a savings account for individuals with disabilities and their families. Distributions are tax free if used to pay the beneficiary's qualified disability expenses, which may include education expenses. For more information, see Pub. 907, Tax Highlights for Persons With Disabilities. Estimated tax payments. If you have taxable income from any of your education benefits and the payer doesn't withhold enough income tax, you may need to make esti- mated tax payments. For more information, see Pub. 505, Tax Withholding and Estimated Tax. Miscellaneous itemized deductions. For tax years be- ginning after 2017 and before 2026, you can no longer de- duct work-related education expenses as a miscellaneous itemized deduction subject to a 2%-of-adjusted-gross-in- come floor. See chapter 12. Photographs of missing children. The Internal Reve- nue Service is a proud partner with the National Center for Missing & Exploited Children® (NCMEC). Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (800-843-5678) if you recognize a child.

Introduction This publication explains tax benefits that may be availa- ble to you if you are saving for or paying education costs for yourself or, in many cases, another student who is a member of your immediate family. Most benefits apply only to higher education. What is in this publication. Chapter 1 explains the tax treatment of various types of educational assistance, in- cluding scholarships, fellowship grants, and tuition reduc- tions.

Two tax credits for which you may be eligible are ex- plained in chapter 2 and chapter 3. These benefits, which reduce the amount of income tax you may have to pay, are:

• The American opportunity credit, and • The lifetime learning credit.

Ten other types of benefits are explained in chapters 4 through 12. These benefits, which reduce the amount of income tax you may have to pay, are:

• Deduct student loan interest; • Receive tax-free treatment of a canceled student loan; • Deduct tuition and fees for education; • Receive tax-free student loan repayment assistance; • Establish and contribute to a Coverdell education sav-

ings account (ESA), which features tax-free earnings; • Participate in a qualified tuition program (QTP), which

features tax-free earnings;

Publication 970 (2019) Page 3

Page 4 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

• Take early distributions from any type of individual re- tirement arrangement (IRA) for education costs with- out paying the 10% additional tax on early distribu- tions;

• Cash in savings bonds for education costs without having to pay tax on the interest;

• Receive tax-free education benefits from your em- ployer; and

• Claim a business deduction for work-related educa- tion.

Note. You generally can't claim more than one of the benefits described in the list above for the same qualifying education expense.

Comparison table. Some of the features of these benefits are highlighted in Appendix B, later, in this publi- cation. This general comparison table may guide you in determining which benefits you may be eligible for and which chapters you may want to read.

When you figure your taxes, you may want to compare these tax benefits so you can choose the method(s) that gives you the lowest tax liabil-

ity. If you qualify, you may find that a combination of credit(s) and deduction(s) gives you the lowest tax.

Analyzing your tax withholding. After you estimate your education tax benefits for the year, you may be able to reduce the amount of your federal income tax withhold- ing. Also, you may want to recheck your withholding dur- ing the year if your personal or financial situation changes. For more information, see Pub. 505, Tax Withholding and Estimated Tax. Glossary. In this publication, wherever appropriate, we have tried to use the same or similar terminology when re- ferring to the basic components of each education benefit. Some of the terms used are:

• Qualified education expenses, • Eligible educational institution, and • Modified adjusted gross income.

Even though the same term, such as qualified educa- tion expenses, is used to label a basic component of many of the education benefits, the same expenses aren't necessarily allowed for each benefit. For example, the cost of room and board is a qualified education expense for the qualified tuition program, but not for the education savings bond program.

Many of the terms used in the publication are defined in the glossary near the end of the publication. The glossary isn't intended to be a substitute for reading the chapter on a particular education benefit, but it will give you an over- view of how certain terms are used in discussing the dif- ferent benefits. Comments and suggestions. We welcome your com- ments about this publication and your suggestions for fu- ture editions.

TIP

You can send us comments through IRS.gov/ FormComments. Or you can write to:

Internal Revenue Service Tax Forms and Publications 1111 Constitution Ave. NW, IR-6526 Washington, DC 20224

Although we can’t respond individually to each com- ment received, we do appreciate your feedback and will consider your comments as we revise our tax forms, in- structions, and publications. We can’t answer tax ques- tions sent to the above address.

Ordering forms and publications. Visit IRS.gov/ FormsPubs to download forms and publications. Other- wise, you can go to IRS.gov/OrderForms to order current and prior-year forms and instructions. Your order should arrive within 10 business days.

Tax questions. If you have a tax question not an- swered by this publication, check IRS.gov and How To Get Tax Help (chapter 13).

Useful Items You may want to see:

Publication 463 Travel, Gift, and Car Expenses 525 Taxable and Nontaxable Income 550 Investment Income and Expenses

590-A Contributions to Individual Retirement Arrangements (IRAs)

590-B Distributions from Individual Retirement Arrangements (IRAs)

Form (and Instructions) 1040 U.S. Individual Income Tax Return

1040-NR U.S. Nonresident Alien Income Tax Return 1040-NR-EZ U.S. Income Tax Return for Certain

Nonresident Aliens With No Dependents 1040-SR U.S. Tax Return for Seniors

2106 Employee Business Expenses 5329 Additional Taxes on Qualified Plans and Other

Tax-Favored Accounts 8815 Exclusion of Interest From Series EE and I

U.S. Savings Bonds Issued After 1989 8863 Education Credits 8917 Tuition and Fees Deduction

See chapter 13 for information about getting these publi- cations and forms.

463 525 550 590-A

590-B

1040 1040-NR 1040-NR-EZ

1040-SR 2106 5329

8815

8863 8917

Page 4 Publication 970 (2019)

Page 5 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

1.

Scholarships, Fellowship Grants, Grants, and Tuition Reductions

Reminder Individual retirement arrangements (IRAs). You can set up and make contributions to an IRA if you receive tax- able compensation. Under this rule, a taxable scholarship or fellowship grant is compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement. For more information about IRAs, see Pub. 590-A and Pub. 590-B.

Introduction This chapter discusses the income tax treatment of vari- ous types of educational assistance you may receive if you are studying, teaching, or researching in the United States. The educational assistance can be for a primary or secondary school, a college or university, or a vocational school. Included are discussions of:

• Scholarships; • Fellowship grants; • Need-based education grants, such as a Pell grant;

and • Qualified tuition reductions.

Many types of educational assistance are tax free if they meet the requirements discussed here.

Special rules apply to U.S. citizens and resident aliens who have received scholarships or fellowship grants for studying, teaching, or researching abroad. For information about these rules, see Pub. 54, Tax Guide for U.S. Citi- zens and Resident Aliens Abroad.

Scholarships and Fellowship Grants A scholarship is generally an amount paid or allowed to, or for the benefit of, a student (whether an undergraduate or a graduate) at an educational institution to aid in the pursuit of his or her studies.

A fellowship grant is generally an amount paid for the benefit of an individual to aid in the pursuit of study or re- search.

Amount of scholarship or fellowship grant. The amount of a scholarship or fellowship grant includes the following.

• The value of contributed services and accommoda- tions. This includes such services and accommoda- tions as room (lodging), board (meals), laundry serv- ice, and similar services or accommodations that are received by an individual as a part of a scholarship or fellowship grant.

• The amount of tuition, matriculation, and other fees that are paid for or remitted to the student to aid the student in pursuing study or research.

• Any amount received in the nature of a family allow- ance as a part of a scholarship or fellowship grant.

Tax-Free Scholarships and Fellowship Grants A scholarship or fellowship grant is tax free (excludable from gross income) only if you are a candidate for a de- gree at an eligible educational institution.

You may be able to increase the combined value of an education credit and certain educational as- sistance if the student includes some or all of the

educational assistance in income in the year it is received. See examples in Coordination with Pell grants and other scholarships in chapter 2 and chapter 3.

A scholarship or fellowship grant is tax free only to the extent:

• It doesn't exceed your qualified education expenses; • It isn't designated or earmarked for other purposes

(such as room and board), and doesn't require (by its terms) that it can't be used for qualified education ex- penses; and

• It doesn't represent payment for teaching, research, or other services required as a condition for receiving the scholarship. For exceptions, see Payment for serv- ices, later.

Use Worksheet 1-1 to figure the amount of a scholar- ship or fellowship grant you can exclude from gross in- come. Candidate for a degree. You are a candidate for a de- gree if you:

1. Attend a primary or secondary school or are pursuing a degree at a college or university; or

2. Attend an educational institution that: a. Provides a program that is acceptable for full

credit toward a bachelor's or higher degree, or of- fers a program of training to prepare students for gainful employment in a recognized occupation; and

b. Is authorized under federal or state law to provide such a program and is accredited by a nationally recognized accreditation agency.

TIP

Chapter 1 Scholarships, Fellowship Grants, Grants, and Tuition Reductions Page 5

Page 6 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Eligible educational institution. An eligible educational institution is one whose primary function is the presenta- tion of formal instruction and that normally maintains a regular faculty and curriculum and normally has a regu- larly enrolled body of students in attendance at the place where it carries on its educational activities. Qualified education expenses. For purposes of tax-free scholarships and fellowship grants, these are ex- penses for:

• Tuition and fees required to enroll at or attend an eligi- ble educational institution; and

• Course-related expenses, such as fees, books, sup- plies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of in- struction.

Expenses that don't qualify. Qualified education ex- penses don't include the cost of:

• Room and board, • Travel, • Research, • Clerical help, or • Equipment and other expenses that aren't required for

enrollment in or attendance at an eligible educational institution.

Payment for services. Generally, you can't exclude from your gross income the part of any scholarship or fel- lowship grant that represents payment for teaching, re- search, or other services required as a condition for re- ceiving the scholarship. This applies even if all candidates for a degree must perform the services to receive the de- gree. However, see Exceptions next.

Exceptions. You don't have to treat as payment for services the part of any scholarship or fellowship grant that represents payment for teaching, research, or other services if you receive the amount under:

• The National Health Service Corps Scholarship Pro- gram,

• The Armed Forces Health Professions Scholarship and Financial Assistance Program, or

• A comprehensive student work-learning-service pro- gram (as defined in section 448(e) of the Higher Edu- cation Act of 1965) operated by a work college (as de- fined in that section).

Example 1. You received a scholarship of $2,500. The scholarship wasn't received under any of the exceptions mentioned above. As a condition for receiving the scholar- ship, you must serve as a part-time teaching assistant. Of the $2,500 scholarship, $1,000 represents payment for teaching. The provider of your scholarship gives you a Form W-2 showing $1,000 as income. Your qualified edu- cation expenses were at least $1,500. Assuming that all other conditions are met, the most you can exclude from

your gross income is $1,500. The $1,000 you received for teaching must be included in your gross income.

Example 2. You are a candidate for a degree at a medical school. You receive a scholarship (not under any of the exceptions mentioned above) for your medical edu- cation and training. The terms of your scholarship require you to perform future services. A substantial penalty ap- plies if you don't comply. The entire amount of your grant is taxable as payment for services in the year it is re- ceived.

Athletic Scholarships An athletic scholarship is tax free only if and to the extent it meets the requirements discussed earlier. Worksheet 1-1. You can use Worksheet 1-1 to figure the tax-free and taxable parts of your athletic scholarship.

Taxable Scholarships and Fellowship Grants If and to the extent your scholarship or fellowship grant doesn't meet the requirements described earlier, it is taxa- ble and must be included in gross income. You can use Worksheet 1-1 to figure the tax-free and taxable parts of your scholarship or fellowship grant.

Reporting Scholarships and Fellowship Grants Whether you must report your scholarship or fellowship grant depends on whether you must file a return and whether any part of your scholarship or fellowship grant is taxable.

If your only income is a completely tax-free scholarship or fellowship grant, you don't have to file a tax return and no reporting is necessary. If all or part of your scholarship or fellowship grant is taxable and you are required to file a tax return, report the taxable amount as explained below. You must report the taxable amount whether or not you re- ceived a Form W-2. If you receive an incorrect Form W-2, ask the payer for a corrected one.

For information on whether you must file a return, see Pub. 501, Dependents, Standard Deduction, and Filing In- formation, or your income tax form instructions.

How To Report How you report any taxable scholarship or fellowship grant income depends on which return you file. Form 1040 or 1040-SR. If you file Form 1040 or 1040-SR, include the taxable amount in the total on line 1. If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount on the dotted line next to line 1.

Page 6 Chapter 1 Scholarships, Fellowship Grants, Grants, and Tuition Reductions

Page 7 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Form 1040-NR. If you file Form 1040-NR, report the tax- able amount on line 12. Generally, you must report the amount shown on Form(s) 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, box 2. See the In- structions for Form 1040-NR for more information. Form 1040-NR-EZ. If you file Form 1040-NR-EZ, report the taxable amount on line 5. Generally, you must report the amount shown on Form(s) 1042-S, box 2. See the In- structions for Form 1040-NR-EZ for more information.

Other Types of Educational Assistance The following discussions deal with other common types of educational assistance.

Fulbright Grants A Fulbright grant is generally treated as a scholarship or fellowship grant in figuring how much of the grant is tax free.

Pell Grants and Other Title IV Need-Based Education Grants These need-based grants are treated as scholarships for purposes of determining their tax treatment. They are tax

free to the extent used for qualified education expenses during the period for which a grant is awarded.

Payment to Service Academy Cadets An appointment to a U.S. military academy isn't a scholar- ship or fellowship grant. Payment you receive as a cadet or midshipman at an armed services academy is pay for personal services and will be reported to you in box 1 of Form W-2. Include this pay in your income in the year you receive it.

Veterans' Benefits Payments you receive for education, training, or subsis- tence under any law administered by the Department of Veterans Affairs (VA) are tax free. Don't include these payments as income on your federal tax return.

If you qualify for one or more of the education tax bene- fits discussed in chapters 2 through 12, you may have to reduce the amount of education expenses qualifying for a specific tax benefit by part or all of your VA payments. This applies only to the part of your VA payments that is required to be used for education expenses.

You may want to visit the Veterans Administration web- site at www.gibill.va.gov for specific information about the various VA benefits for education.

Example. You have returned to college and are re- ceiving two education benefits under the latest GI Bill: (1) a $1,534 monthly basic housing allowance (BHA) that is

Taxable Scholarship and Fellowship Grant Income

Worksheet 1-1. Keep for Your Records

1. Enter the total amount of any scholarship or fellowship grant for 2019. See Amount of scholarship or fellowship grant, earlier. 1.

• If you are a degree candidate at an eligible educational institution, go to line 2. • If you aren't a degree candidate at an eligible educational institution, stop here. The

entire amount is taxable. For information on how to report this amount on your tax return, see Reporting Scholarships and Fellowship Grants, earlier.

2. Enter the amount from line 1 that was for teaching, research, or any other services required as a condition for receiving the scholarship. Don't include amounts received for these items under the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, or a comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college (as defined in that section) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.

3. Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. 4. Enter the amount from line 3 that your scholarship or fellowship grant required you to use for

other than qualified education expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. 5. Subtract line 4 from line 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. 6. Enter the amount of your qualified education expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. 7. Enter the smaller of line 5 or line 6. This amount is the most you can exclude from your gross

income (the tax-free part of the scholarship or fellowship grant) . . . . . . . . . . . . . . . . . . . . . . . . 7. 8. Subtract line 7 from line 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. 9. Taxable part. Add lines 2, 4, and 8. See Reporting Scholarships and Fellowship Grants,

earlier, for how to report this amount on your tax return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.

Chapter 1 Scholarships, Fellowship Grants, Grants, and Tuition Reductions Page 7

Page 8 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

directly deposited to your checking account, and (2) $3,840 paid directly to your college for tuition. Neither of these benefits is taxable and you don't report them on your tax return. You also want to claim an American op- portunity credit on your return. Your total tuition charges are $5,000. To figure the amount of credit, you must first subtract the $3,840 from your qualified education expen- ses because this payment under the GI Bill was required to be used for education expenses. You don't subtract any amount of the BHA because it was paid to you and its use wasn't restricted.

Qualified Tuition Reduction If you are allowed to study tuition free or for a reduced rate of tuition, you may not have to pay tax on this benefit. This is called a “tuition reduction.” You don't have to include a qualified tuition reduction in your income.

A tuition reduction is qualified only if you receive it from, and use it at, an eligible educational institution. You don't have to use the tuition reduction at the eligible educational institution from which you received it. In other words, if you work for an eligible educational institution and the institu- tion arranges for you to take courses at another eligible educational institution without paying any tuition, you may not have to include the value of the free courses in your in- come.

The rules for determining if a tuition reduction is quali- fied, and therefore tax free, are different if the education provided is below the graduate level or is graduate educa- tion.

You must include in your income any tuition reduction you receive that is payment for your services. Eligible educational institution. An eligible educational institution is one that maintains a regular faculty and cur- riculum and normally has a regularly enrolled body of stu- dents in attendance at the place where it carries on its ed- ucational activities. Officers, owners, and highly compensated employ- ees. Qualified tuition reductions apply to officers, owners, or highly compensated employees only if benefits are available to employees on a nondiscriminatory basis. This means that the tuition reduction benefits must be available on substantially the same basis to each member of a group of employees. The group must be defined under a reasonable classification set up by the employer. The classification must not discriminate in favor of owners, offi- cers, or highly compensated employees. Payment for services. Generally, you must include in in- come the part of any qualified tuition reduction that repre- sents payment for teaching, research, or other services by the student required as a condition of receiving the quali- fied tuition reduction. This applies even if all candidates for a degree must perform the services to receive the de- gree. However, see Exceptions next.

Exceptions. You don't have to include in income the part of any scholarship or fellowship grant that represents

payment for teaching, research, or other services if you receive the amount under:

• The National Health Service Corps Scholarship Pro- gram,

• The Armed Forces Health Professions Scholarship and Financial Assistance Program, or

• A comprehensive student work-learning-service pro- gram (as defined in section 448(e) of the Higher Edu- cation Act of 1965) operated by a work college (as de- fined in that section).

Education Below the Graduate Level If you receive a tuition reduction for education below the graduate level (including primary, secondary, or high school), it is a qualified tuition reduction, and therefore tax free, only if your relationship to the educational institution providing the benefit is described below.

1. You are an employee of the eligible educational insti- tution.

2. You were an employee of the eligible educational in- stitution, but you retired or left on disability.

3. You are a widow or widower of an individual who died while an employee of the eligible educational institu- tion or who retired or left on disability.

4. You are the dependent child or spouse of an individ- ual described in (1) through (3) above.

Child of deceased parents. For purposes of the quali- fied tuition reduction, a child is a dependent child if the child is under age 25 and both parents have died. Child of divorced parents. For purposes of the qualified tuition reduction, a dependent child of divorced parents is treated as the dependent of both parents.

Graduate Education A tuition reduction you receive for graduate education is qualified, and therefore tax free, if both of the following re- quirements are met.

• It is provided by an eligible educational institution. • You are a graduate student who performs teaching or

research activities for the educational institution. You must include in income any other tuition reductions for graduate education that you receive.

How To Report Any tuition reduction that is taxable should be included as wages in box 1 of your Form W-2. Report the amount from box 1 of Form W-2 on Form 1040 or 1040-SR, line 1.

Page 8 Chapter 1 Scholarships, Fellowship Grants, Grants, and Tuition Reductions

Page 9 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

2.

American Opportunity Credit

Reminders Educational institution's EIN required. To claim the American opportunity credit, you must provide the educa- tional institution's employer identification number (EIN) on your Form 8863. You should be able to obtain this infor- mation from Form 1098-T or the educational institution. Form 8862 may be required. If your American opportu- nity credit was denied or reduced for any reason other than a math or clerical error for any tax year beginning af- ter 2015, you must attach a completed Form 8862, Infor- mation To Claim Certain Refundable Credits After Disal- lowance, to your tax return for the next year for which you claim the credit. See Form 8862 and its instructions for details. Form 1098-T requirement. To be eligible to claim the American opportunity credit, the law requires a taxpayer (or a dependent) to have received Form 1098-T, Tuition Statement, from an eligible educational institution, whether domestic or foreign.

However, you may claim the credit if the student doesn't receive a Form 1098-T because the student's ed- ucational institution isn't required to furnish a Form 1098-T to the student under existing rules (for example, if the stu- dent is a qualified nonresident alien, has qualified educa- tion expenses paid entirely with scholarships, has quali- fied education expenses paid under a formal billing arrangement, or is enrolled in courses for which no aca- demic credit is awarded). If a student's educational institu- tion isn't required to provide a Form 1098-T to the student, you may claim the credit without a Form 1098-T if you oth- erwise qualify, can demonstrate that you (or a dependent) were enrolled at an eligible educational institution, and can substantiate the payment of qualified tuition and rela- ted expenses.

You may also claim a credit if the student attended an eligible educational institution required to furnish Form 1098-T but the student doesn't receive Form 1098-T be- fore you file your tax return (for example, if the institution is otherwise required to furnish the Form 1098-T and doesn't furnish it or refuses to do so) and you take the following required steps: After January 31, 2020, but before the due date for your 2019 tax return, you or the student must re- quest that the educational institution furnish a Form 1098-T. You must fully cooperate with the educational in- stitution's efforts to gather the information needed to fur- nish the Form 1098-T. You must also otherwise qualify for the benefit, be able to demonstrate that you (or a depend- ent) were enrolled at an eligible educational institution,

and substantiate the payment of qualified tuition and rela- ted expenses. Ban on claiming the American opportunity credit. If you claim the American opportunity credit even though you're not eligible, you may be banned from claiming the credit for 2 or 10 years depending on your conduct. See Caution under Introduction below. Taxpayer identification number (TIN) needed by due date of return. If you haven't been issued a TIN by the due date of your 2019 return (including extensions), you can't claim the American opportunity credit on either your original or an amended 2019 return. Also, the American opportunity credit isn't allowed on either your original or an amended 2019 return for a student who hasn't been is- sued a TIN by the due date of your return (including exten- sions).

Introduction For 2019, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. They are the American oppor- tunity credit (this chapter) and the lifetime learning credit (chapter 3).

This chapter explains: • Who can claim the American opportunity credit, • What expenses qualify for the credit, • Who is an eligible student, • Who can claim a dependent's expenses, • How to figure the credit, • How to claim the credit, and • When the credit must be repaid.

What is the tax benefit of the American opportunity credit? For 2019, you may be able to claim a credit of up to $2,500 for adjusted qualified education expenses paid for each student who qualifies for the American opportu- nity credit.

A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Forty percent of the American opportunity credit may be refundable. This means that if the refunda- ble portion of your credit is more than your tax, the excess will be refunded to you.

Your allowable American opportunity credit may be limited by the amount of your income. Also, the nonre- fundable part of the credit may be limited by the amount of your tax. Overview of the American opportunity credit for 2019. See Table 2-1 for the basics of this credit. The de- tails are discussed in this chapter. Can you claim more than one education credit this year? For each student, you can elect for any year only one of the credits. For example, if you elect to claim the American opportunity credit for a dependent on your 2019

Chapter 2 American Opportunity Credit Page 9

Page 10 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

tax return, you can't use that same dependent's qualified education expenses to figure the lifetime learning credit for 2019.

If you pay qualified education expenses for more than one student in the same year, you can choose to claim the American opportunity credit on a per-student, per-year ba- sis. If you pay qualified education expenses for a student (or students) for whom you don't claim the American op- portunity credit, you can use the adjusted qualified educa- tion expenses of that student (or those students) in figur- ing your lifetime learning credit. This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. Differences between the American opportunity and lifetime learning credits. There are several differences between these two credits. For example, you can claim the American opportunity credit based on the same stu- dent's expenses for no more than 4 tax years, which in- cludes any tax years you claimed the Hope scholarship credit for that student. However, there is no limit on the number of years for which you can claim a lifetime learn- ing credit based on the same student's expenses. The dif- ferences between these credits are shown in Appendix B near the end of this publication.

If you claim the American opportunity credit for any student, you can choose between using that student's adjusted qualified education expenses

for the American opportunity credit or the lifetime learning credit. If you have the choice, the American opportunity credit will always be greater than the lifetime learning credit.

Form 8862 may be required. If your American opportu- nity credit was denied or reduced for any reason other than a math or clerical error for any tax year beginning af- ter 2015, you must attach a completed Form 8862, Infor- mation To Claim Certain Refundable Credits After Disal- lowance, to your tax return for the next tax year for which you claim the credit. See Form 8862 and its instructions for details.

Don't claim the American opportunity credit for 2 years after there was a final determination that your claim was due to reckless or intentional dis-

regard of the rules, or 10 years after there was a final de- termination that your claim was due to fraud.

TIP

CAUTION !

Page 10 Chapter 2 American Opportunity Credit

Page 11 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Overview of the American Opportunity Credit for 2019Table 2-1. Maximum credit Up to $2,500 credit per eligible student Limit on modified adjusted gross income (MAGI)

$180,000 if married filing jointly; $90,000 if single, head of household, or qualifying widow(er)

Refundable or nonrefundable 40% of credit may be refundable; the rest is nonrefundable Number of years of postsecondary education Available ONLY if the student had not completed the first 4 years of postsecondary

education before 2019 (generally, the freshman through senior years, determined by the eligible educational institution, not including academic credit awarded solely because of the student's performance on proficiency examinations)

Number of tax years credit available Available ONLY for 4 tax years per eligible student (including any year(s) the Hope scholarship credit was claimed)

Type of program required Student must be pursuing a program leading to a degree or other recognized education credential

Number of courses Student must be enrolled at least half-time for at least one academic period that begins during 2019 (or the first 3 months of 2020 if the qualified expenses were paid in 2019)

Felony drug conviction As of the end of 2019, the student had not been convicted of a felony for possessing or distributing a controlled substance

Qualified expenses Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance

Payments for academic periods Payments made in 2019 for academic periods beginning in 2019 or beginning in the first 3 months of 2020

TIN needed by filing due date Filers and students must have been issued a TIN by the due date of their 2019 return (including extensions)

Educational institution’s EIN You must provide the educational institution's employer identification number (EIN) on your Form 8863

Can You Claim the Credit? The following rules will help you determine if you are eligi- ble to claim the American opportunity credit on your tax return.

Who Can Claim the Credit? Generally, you can claim the American opportunity credit if all three of the following requirements are met.

• You pay qualified education expenses of higher edu- cation.

• You pay the education expenses for an eligible stu- dent.

• The eligible student is either yourself, your spouse, or a dependent you claim on your tax return.

Note. Qualified education expenses paid by a depend- ent you claim on your tax return, or by a third party for that dependent, are considered paid by you.

Student qualifications. Generally, you can claim the American opportunity credit for a student only if all of the following four requirements are met.

1. As of the beginning of 2019, the student had not com- pleted the first 4 years of postsecondary education (generally, the freshman through senior years of col- lege), as determined by the eligible educational insti- tution. For this purpose, don't include academic credit awarded solely because of the student's performance on proficiency examinations.

2. Neither the American opportunity credit nor the Hope scholarship credit has been claimed by you or anyone else (see below) for this student for any 4 tax years before 2019. If the American opportunity credit (and Hope scholarship credit) has been claimed for this student for any 3 or fewer tax years before 2019, this requirement is met.

3. For at least one academic period beginning (or trea- ted as beginning) in 2019, the student both: a. Was enrolled in a program that leads to a degree,

certificate, or other recognized educational cre- dential; and

b. Carried at least one-half the normal full-time work- load for his or her course of study.

Chapter 2 American Opportunity Credit Page 11

Page 12 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

The standard for what is half of the normal full-time workload is determined by each eligible educational institution. However, the standard may not be lower than any of those established by the U.S. Department of Education under the Higher Education Act of 1965.

For 2019, treat an academic period beginning in the first 3 months of 2020 as if it began in 2019 if qualified education expenses for the student were paid in 2019 for that academic period. See Prepaid expenses, later.

4. As of the end of 2019, the student had not been con- victed of a federal or state felony for possessing or distributing a controlled substance.

Example 1. Sharon was never eligible for the Hope scholarship credit (available before 2009) but was eligible for the American opportunity credit for 2013, 2014, 2016, and 2018. Her parents claimed the American opportunity credit for Sharon on their 2013, 2014, and 2016 tax re- turns. Sharon claimed the American opportunity credit on her 2018 tax return. The American opportunity credit and Hope scholarship credit have been claimed for Sharon for 4 tax years before 2019. Therefore, the American oppor- tunity credit can't be claimed for Sharon for 2019. If Sharon were to file Form 8863 for 2019, she would check “Yes” for Part III, line 23, and would be eligible to claim only the lifetime learning credit.

Example 2. Wilbert was eligible for the American op- portunity credit for 2015, 2016, 2017, and 2019. His pa- rents claimed the American opportunity credit for Wilbert on their tax returns for 2015, 2016, and 2017. No one claimed an American opportunity credit or Hope scholar- ship credit for Wilbert for any other tax year. The American opportunity credit and Hope scholarship credit have been claimed for Wilbert for only 3 tax years before 2019. Therefore, Wilbert meets the second requirement to be el- igible for the American opportunity credit. If Wilbert were to file Form 8863 for 2019, he would check “No” for Part III, line 23. If Wilbert meets all of the other requirements, he is eligible for the American opportunity credit.

Example 3. Glenda enrolls on a full-time basis in a de- gree program for the 2020 spring semester, which begins in January 2020. Glenda pays her tuition for the 2020 spring semester in December 2019. Because the tuition Glenda paid in 2019 relates to an academic period that begins in the first 3 months of 2020, her eligibility to claim an American opportunity credit in 2019 is determined as if the 2020 spring semester began in 2019. Therefore, Glenda satisfies this third requirement.

If the requirements above aren't met for any stu- dent, you can't claim the American opportunity credit for that student. You may be able to claim

the lifetime learning credit for part or all of that student's qualified education expenses instead.

“Qualified education expenses” are defined later under Qualified Education Expenses. “Eligible students” are de- fined later under Who Is an Eligible Student. A dependent

TIP

you claim on your tax return is defined later under Who Can Claim a Dependent's Expenses.

You may find Figure 2-1 helpful in determining if you can claim an American opportunity credit on your tax re- turn.

Who Can't Claim the Credit? You can't claim the American opportunity credit for 2019 if any of the following apply.

• Your filing status is married filing separately. • You are claimed as a dependent on another person's

tax return, such as your parent's return. See Who Can Claim a Dependent's Expenses, later.

• Your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more if married filing jointly). MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit.

• You (or your spouse) were a nonresident alien for any part of 2019 and the nonresident alien didn't elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Pub. 519, U.S. Tax Guide for Aliens.

• You weren’t issued an SSN (or ITIN) by the due date of your 2019 return (including extensions). You can't claim the American opportunity credit on either your original or an amended 2019 return. Also, you can't claim this credit on your original or an amended 2019 return for a student who wasn’t issued an SSN, ATIN, or ITIN by the due date of your return (including exten- sions). If an ATIN or ITIN is applied for on or before the due date of a 2019 return (including extensions) and the IRS issues an ATIN or ITIN as a result of the application, the IRS will consider the ATIN or ITIN as issued on or before the due date of the return.

What Expenses Qualify? The American opportunity credit is based on adjusted qualified education expenses you pay for yourself, your spouse, or a dependent you claim on your tax return. Gen- erally, the credit is allowed for adjusted qualified educa- tion expenses paid in 2019 for an academic period begin- ning in 2019 or beginning in the first 3 months of 2020.

For example, if you paid $1,500 in December 2019 for qualified tuition for the spring 2020 semester beginning January 2020, you can use that $1,500 in figuring your 2019 credit. Academic period. An academic period includes a se- mester, 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 doesn't have aca- demic terms, each payment period can be treated as an academic period.

Page 12 Chapter 2 American Opportunity Credit

Page 13 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Paid with borrowed funds. 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 re- paid. Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account. Student withdraws from class(es). You can claim an American opportunity credit for qualified education expen- ses not refunded when a student withdraws.

Qualified Education Expenses For purposes of the American opportunity credit, qualified education expenses are tuition and certain related expen- ses required for enrollment or attendance at an eligible educational institution. Eligible educational institution. An eligible educational institution is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, uni- versity, vocational school, or other postsecondary

Figure 2-1. Can You Claim the American Opportunity Credit for 2019?

Yes

No

No

Yes

Yes

No

No

Yes

No

No

No

No

Yes

Yes

Yes

No

Yes

Yes

Yes

Did you pay quali�ed education expenses in 2019 for an eligible student?*

Did the academic period for which you paid quali�ed education expenses begin in 2019 or the �rst 3 months of 2020?

No

Is the eligible student you, your spouse (if married �ling jointly), or your dependent you claim on your tax return?

Are you listed as a dependent on another person’s tax return?

Is your �ling status married �ling separately?

For any part of 2019, were you (or your spouse) a nonresident alien who didn’t elect to be treated as a resident alien for tax purposes?

Is your modi�ed adjusted gross income (MAGI) less than $90,000 ($180,000 if married �ling jointly)?

Did you use the same expenses to claim a deduction or credit?

Were the same expenses paid entirely with a tax-free scholarship, grant, or employer-provided educational assistance?

Did you or someone else receive a refund of all the expenses?

You can claim the American

opportunity credit for 2019.**

*Qualified education expenses paid by a dependent you claim on your tax return, or by a third party for that dependent, are considered paid by you.

**Your education credits may be limited to your tax liability minus certain credits. See Form 8863 for more details.

You can’t claim the American opportunity credit

for 2019.

Chapter 2 American Opportunity Credit Page 13

Page 14 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

educational institution. Also, the institution must be eligible to participate in a student aid program administered by the U.S. Department of Education. Virtually all accredited postsecondary institutions meet this definition.

An eligible educational institution also includes certain educational institutions located outside the United States that are eligible to participate in a student aid program ad- ministered by the U.S. Department of Education.

The educational institution should be able to tell you if it is an eligible educational institution.

Related expenses. 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 attend- ance.

However, expenses for books, supplies, and equip- ment needed for a course of study are included in quali- fied education expenses whether or not the materials are purchased from the educational institution. Prepaid expenses. Qualified education expenses paid in 2019 for an academic period that begins in the first 3 months of 2020 can be used in figuring an education credit for 2019 only. See Academic period, earlier. For ex- ample, if you pay $2,000 in December 2019 for qualified tuition for the 2020 winter quarter that begins in January 2020, you can use that $2,000 in figuring an education credit for 2019 only (if you meet all the other require- ments).

You can't use any amount you paid in 2018 or 2020 to figure the qualified education expenses you use to figure your 2019 education credit(s).

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

Example 1. Jefferson is a sophomore in University V's degree program in dentistry. This year, in addition to tui- tion, 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 ex- pense.

Example 2. Grace and William, both first-year stu- dents 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 re- ceive 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.

Example 3. 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 organi- zations and activities run by students, such as the student newspaper and the student government. No portion of the

TIP

CAUTION !

fee covers personal expenses. Although labeled as a stu- dent activity fee, the fee is required for Kelly's enrollment and attendance at College X and is a qualified expense.

No Double Benefit Allowed You can't 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 (see chapter 6 ) for the same student.

• Claim an American opportunity credit for any student and use any of that student's expenses in figuring your lifetime learning credit.

• Figure the tax-free portion of a distribution from a Cov- erdell education savings account (ESA) or qualified tuition program (QTP) using the same expenses you used to figure the American opportunity credit. See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7 and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8.

• Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an em- ployer. See Adjustments to Qualified Education Ex- penses next.

Adjustments to Qualified Education Expenses For each student, reduce the qualified education expen- ses paid by or on behalf of that student under the follow- ing rules. The result is the amount of adjusted qualified education expenses for each student. Tax-free educational assistance. For tax-free educa- tional assistance received in 2019, 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.

Some tax-free educational assistance received after 2019 may be treated as a refund of qualified education ex- penses paid in 2019. This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2019 for qualified education expenses paid on behalf of a student in 2019 (or attributable to en- rollment at an eligible educational institution during 2019).

If this tax-free educational assistance is received after 2019 but before you file your 2019 income tax return, see Refunds received after 2019 but before your income tax return is filed, later. If this tax-free educational assistance is received after 2019 and after you file your 2019 income tax return, see Refunds received after 2019 and after your income tax return is filed, later.

Page 14 Chapter 2 American Opportunity Credit

Page 15 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Tax-free educational assistance includes: • The tax-free parts of scholarships and fellowship

grants (see Tax-Free Scholarships and Fellowship Grants in chapter 1);

• The tax-free part of Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chap- ter 1);

• Employer-provided educational assistance (see chap- ter 11);

• Veterans' educational assistance (see Veterans' Ben- efits in chapter 1); and

• Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assis- tance.

Generally, any scholarship or fellowship grant is treated as tax free. However, a scholarship or fellowship grant isn't treated as tax free to the extent the student includes it in gross income (the student may or may not be required to file a tax return for the year the scholarship or fellowship grant is received) and either of the following is true.

• The scholarship or fellowship grant (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education ex- penses as defined in Qualified education expenses in chapter 1.

• The scholarship or fellowship grant (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education ex- penses as defined in Qualified education expenses in chapter 1.

A student can't choose to include in income a scholarship or fellowship grant provided by an In- dian tribal government that is excluded from in-

come under the Tribal General Welfare Exclusion Act of 2014 or benefits provided by an educational program de- scribed in Revenue Procedure 2014-35, section 5.02(2) (b)(ii), available at IRS.gov/irb/2014-26_IRB#RP-2014-35.

You may be able to increase the combined value of an education credit if the student includes some or all of a scholarship or fellowship grant in

income in the year it is received. For examples, see Coor- dination with Pell grants and other scholarships., later.

Refunds. A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Some tax-free educational assistance received after 2019 may be treated as a refund. See Tax-free educational assistance, earlier.

Refunds received in 2019. For each student, figure the adjusted qualified education expenses for 2019 by adding all the qualified education expenses for 2019 and subtracting any refunds of those expenses received from the eligible educational institution during 2019.

CAUTION !

TIP

Refunds received after 2019 but before your in- come tax return is filed. If anyone receives a refund af- ter 2019 of qualified education expenses paid on behalf of a student in 2019 and the refund is paid before you file an income tax return for 2019, the amount of qualified educa- tion expenses for 2019 is reduced by the amount of the refund.

Refunds received after 2019 and after your income tax return is filed. If anyone receives a refund after 2019 of qualified education expenses paid on behalf of a stu- dent in 2019 and the refund is paid after you file an in- come tax return for 2019, you may need to repay some or all of the credit. See Credit recapture next. Credit recapture. If any tax-free educational assistance for the qualified education expenses paid in 2019, or any refund of your qualified education expenses paid in 2019, is received after you file your 2019 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2019 by reducing the expenses by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2019 and figure the amount by which your 2019 tax liability would have increased if you claimed the refigured credit(s). In- clude that amount as an additional tax for the year the re- fund or tax-free assistance was received.

Example. You paid $7,000 tuition and fees in August 2019, and your child began college in September 2019. You filed your 2019 tax return on February 17, 2020, and claimed an American opportunity credit of $2,500. After you filed your return, you received a refund of $4,000. You must refigure your 2019 American opportunity credit using $3,000 of qualified education expenses instead of $7,000. The refigured credit is $2,250. The increase to your tax lia- bility is $250. Include the difference of $250 as additional tax on your 2020 tax return. See the instructions for your 2020 income tax return to determine where to include this tax.

If you pay qualified education expenses in both 2019 and 2020 for an academic period that be- gins in the first 3 months of 2020 and you receive

tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified educa- tion expenses for 2020 instead of reducing your expenses for 2019.

Amounts that don't reduce qualified education ex- penses. Don't 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.

TIP

Chapter 2 American Opportunity Credit Page 15

Page 16 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Don't reduce the qualified education expenses by any scholarship or fellowship grant 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 grant, to costs of attendance (such as room and board) other than qualified educa- tion expenses as defined in Qualified education ex- penses in chapter 1.

• The use of the money isn't restricted. Example 1. 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 or- der to enroll in or attend classes. To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 stu- dent 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 stu- dent loan and her savings. Joan doesn't report any portion of the scholarship as income on her tax return.

In figuring the amount of either education credit (Ameri- can 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 isn't tax-free educational assistance, so she doesn't need to reduce her qualified expenses by any part of the loan pro- ceeds. Joan is treated as having paid $1,000 in qualified education expenses ($3,000 tuition - $2,000 scholarship).

Example 2. 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 doesn't need to re- duce her qualified education expenses. Joan is treated as having paid $3,000 in qualified education expenses. Coordination with Pell grants and other scholar- ships. You may be able to increase your American op- portunity credit when the student (you, your spouse, or your dependent) includes certain scholarships or fellow- ship grants in the student's gross income. Your credit may increase only if the amount of the student's qualified edu- cation expenses minus the total amount of scholarships and fellowship grants is less than $4,000. If this situation applies, consider including some or all of the scholarship or fellowship grant in the student's income in order to treat the included amount as paying nonqualified expenses in- stead of qualified education expenses. Nonqualified ex- penses are expenses such as room and board that aren't qualified education expenses such as tuition and related fees.

Scholarships and fellowship grants that the student in- cludes in income don't reduce the student's qualified edu- cation expenses available to figure your American oppor- tunity credit. Thus, including enough scholarship or fellowship grant in the student's income to report up to $4,000 in qualified education expenses for your American opportunity credit may increase the credit by enough to

increase your tax refund or reduce the amount of tax you owe even considering any increased tax liability from the additional income. However, the increase in tax liability as well as the loss of other tax credits may be greater than the additional American opportunity credit and may cause your tax refund to decrease or the amount of tax you owe to increase. Your specific circumstances will determine what amount, if any, of scholarship or fellowship grant to include in income to maximize your tax refund or minimize the amount of tax you owe.

The scholarship or fellowship grant must be one that may qualify as a tax-free scholarship under the rules dis- cussed in chapter 1. Also, the scholarship or fellowship grant must be one that may (by its terms) be used for non- qualified expenses. Finally, the amount of the scholarship or fellowship grant that is applied to nonqualified expen- ses can't exceed the amount of the student's actual non- qualified expenses that are paid in the tax year. This amount may differ from the student's living expenses esti- mated by the student's school in figuring the official cost of attendance under student aid rules.

The fact that the educational institution applies the scholarship or fellowship grant to qualified education ex- penses, such as tuition and related fees, doesn't prevent the student from choosing to apply certain scholarships or fellowship grants to the student’s actual nonqualified ex- penses. By making this choice (that is, by including the part of the scholarship or fellowship grant applied to the student’s nonqualified expenses in income), the student may increase taxable 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.

Example 1—No scholarship. Bill Pass, age 28 and unmarried, enrolled full-time in 2019 as a first-year student at a local college to earn a degree in law enforcement. This was his first year of postsecondary education. During 2019, he paid $5,600 for his qualified education expenses and $4,400 for his room and board for the fall 2019 se- mester. He and the college meet all the requirements for the American opportunity credit. Bill's adjusted gross in- come (AGI) and his MAGI, for purposes of figuring his credit, are $34,700. Bill claims the standard deduction of $12,200, resulting in taxable income of $22,500 and an in- come tax liability before credits of $2,509. Bill claims no credits other than the American opportunity credit. He fig- ures his American opportunity credit based on qualified education expenses of $4,000, which results in a credit of $2,500 and a tax liability after credits of $9 ($2,509 - $2,500).

Example 2—Scholarship excluded from income. The facts are the same as in Example 1—No scholarship, except that Bill was awarded a $5,600 scholarship. Under the terms of his scholarship, it may be used to pay any ed- ucational expenses, including room and board. If Bill ex- cludes the scholarship from income, he will be deemed (for purposes of figuring his education credit) to have ap- plied the scholarship to pay his tuition, required fees, and course materials. His adjusted qualified education

Page 16 Chapter 2 American Opportunity Credit

Page 17 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

expenses would be zero and he wouldn't have an educa- tion credit. Therefore, Bill's tax liability after credits would be $2,509.

Example 3—Scholarship partially included in in- come. The facts are the same as in Example 2—Scholar- ship excluded from income. If, unlike Example 2, Bill in- cludes $4,000 of the scholarship in income, he will be deemed to have applied that amount to pay for room and board. The remaining $1,600 of the $5,600 scholarship would reduce his qualified education expenses, and his adjusted qualified education expenses would be $4,000. Bill's AGI and MAGI would increase to $38,700, his taxa- ble income would increase to $26,500, and his tax liability before credits would increase to $2,989. Based on his ad- justed qualified education expenses of $4,000, Bill would be able to claim an American opportunity credit of $2,500 and his tax liability after credits would be $489.

Example 4—Scholarship applied by the postse- condary school to tuition. The facts are the same as in Example 3—Scholarship partially included in income, ex- cept the $5,600 scholarship is paid directly to the local college. The fact that the local college applies the scholar- ship to Bill's tuition and related fees doesn't prevent Bill from including $4,000 of the scholarship in income. As in Example 3, by doing so, he will be deemed to have ap- plied $4,000 to pay for room and board. Bill would be able to claim the American opportunity credit of $2,500 and his tax liability after credits would be $489.

Example 5—Student with a dependent child. Jane Doe, age 28 and unmarried, enrolled full-time as a first-year student at a local technical college to get a certif- icate as a computer technician. This was her first year of postsecondary education. During 2019, she paid $6,000 for qualified education expenses. She and the college meet all the requirements for the American opportunity credit. Jane has a dependent child, age 10, who is a quali- fying child for purposes of receiving the earned income credit (EIC) and the child tax credit. Jane's wages are $20,000. Jane withheld no income taxes on these wages and has no other income or adjustments. Jane was awar- ded a $5,500 scholarship. Under the terms of her scholar- ship, it may be used to pay tuition and any living expense, including rent. Jane paid $10,000 in living expenses in 2019.

If Jane excludes the entire scholarship from income, she will be deemed to have applied the entire scholarship to pay qualified education expenses. Her AGI and MAGI would be $20,000. Her tax liability before any credits would be $166. Her qualified education expenses would be reduced to $500. She would be able to receive a $366 American opportunity credit ($200 refundable and $166 nonrefundable), a $1,400 additional child tax credit, and a $3,367 earned income credit. In total, she would be able to receive a tax refund of $4,967.

If Jane includes the entire scholarship in income, she will be deemed to have applied the entire scholarship to pay living expenses. Her qualified education expenses would be $6,000, and her AGI and MAGI would be $25,500. Her tax liability before any credits would be

$718. She would be able to receive a $1,718 American opportunity credit ($1,000 refundable and $718 nonre- fundable), a $1,400 additional child tax credit, and a $2,488 earned income credit. In total, she would be able to receive a tax refund of $4,888.

If Jane includes $3,500 of the scholarship in income, she will be deemed to have applied $3,500 of the scholar- ship to pay living expenses, and $2,000 to pay qualified education expenses. Her qualified education expenses would be $4,000, and her AGI and MAGI would be $23,500. Her tax liability before any credits would be $518. She would be able to receive a $1,518 American opportunity credit ($1,000 refundable and $518 nonre- fundable), a $1,400 additional child tax credit, and a $2,807 earned income credit. In total, she would be able to receive a tax refund of $5,207.

If Jane includes $1,500 of the scholarship in income, she will be deemed to have applied $1,500 of the scholar- ship to pay living expenses, and $4,000 to pay qualified education expenses. Her qualified education expenses would be $2,000, and her AGI and MAGI would be $21,500. Her tax liability before any credits would be $318. She would be able to receive a $1,118 American opportunity credit ($800 refundable and $318 nonrefunda- ble), a $1,400 additional child tax credit, and a $3,127 earned income credit. In total, she would be able to re- ceive a tax refund of $5,327. This is the highest tax refund among these scenarios.

Note. Whether you will benefit from applying a schol- arship or fellowship grant to nonqualified expenses will depend on the amount of the student's qualified education expenses, the amount of the scholarship or fellowship grant, and whether the scholarship or fellowship grant may (by its terms) be used for nonqualified expenses. Any benefit will also depend on the student’s federal and state marginal tax rates as well as any federal and state tax credits the student claims. Before deciding, look at the to- tal amount of your federal and state tax refunds or taxes owed and, if the student is your dependent, the student’s tax refunds or taxes owed. For example, if you are the stu- dent and you also claim the EIC, choosing to apply a scholarship or fellowship grant to nonqualified expenses by including the amount in your income may benefit you if the increase to your American opportunity credit is more than the decrease to your EIC.

Expenses That Don't Qualify Qualified education expenses don't 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 institu- tion as a condition of enrollment or attendance.

Chapter 2 American Opportunity Credit Page 17

Page 18 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Sports, games, hobbies, and noncredit courses. Qualified education expenses generally don't include ex- penses that relate to any course of instruction or other ed- ucation 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. Comprehensive or bundled fees. Some eligible educa- tional institutions combine all of their fees for an academic period into one amount. If you don't receive or don't 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 earlier, contact the institution. The institution is generally required to make this allocation and provide you with the amount you paid for qualified education expenses on Form 1098-T, Tuition Statement. See Figuring the Credit, later, for more infor- mation about Form 1098-T.

Who Is an Eligible Student? To claim the American opportunity credit, the student for whom you pay qualified education expenses must be an eligible student. This is a student who meets all of the fol- lowing requirements.

• The student didn't have expenses that were used to figure an American opportunity credit in any 4 earlier tax years. This includes any tax year(s) in which you claimed the Hope scholarship credit for the same stu- dent.

• The student hadn't completed the first 4 years of post- secondary education (generally, the freshman, sopho- more, junior, and senior years of college) before 2019.

• For at least one academic period beginning in 2019 (or the first 3 months of 2020 if the qualified expenses were paid in 2019), the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.

• The student hasn't been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of 2019.

These requirements are also shown in Figure 2-2. Completion of first 4 years. A student has completed the first 4 years of postsecondary education if the institu- tion at which the student is enrolled awards the student 4 years of academic credit at that institution for coursework completed by the student before 2019. This student gen- erally wouldn't be an eligible student for purposes of the American opportunity credit.

Exception. Any academic credit awarded solely on the basis of the student's performance on proficiency ex- aminations is disregarded in determining whether the stu- dent has completed 4 years of postsecondary education.

Enrolled at least half-time. A student was enrolled at least half-time if the student was taking at least half the normal full-time workload for his or her course of study.

The standard for what is half of the normal full-time workload is determined by each eligible educational insti- tution. However, the standard may not be lower than any of those established by the U.S. Department of Education under the Higher Education Act of 1965.

Example 1. Mack graduated from high school in June 2018. In September, he enrolled in an undergraduate de- gree program at College U, and attended full-time for both the 2018 fall and 2019 spring semesters. For the 2019 fall semester, Mack was enrolled less than half-time. Be- cause Mack was enrolled in an undergraduate degree program on at least a half-time basis for at least one aca- demic period that began during 2018 and at least one academic period that began during 2019, he is an eligible student for tax years 2018 and 2019 (including the 2019 fall semester when he enrolled at College U on less than a half-time basis).

Example 2. After taking classes at College V on a part-time basis for a few years, Shelly became a full-time student for the 2019 spring semester. College V classified Shelly as a second-semester senior (fourth year) for the 2019 spring semester and as a first-semester graduate student (fifth year) for the 2019 fall semester. Because College V didn't classify Shelly as having completed the first 4 years of postsecondary education as of the begin- ning of 2019, Shelly is an eligible student for tax year 2019. Therefore, the qualified education expenses paid for the 2019 spring semester and the 2019 fall semester are taken into account in figuring the American opportu- nity credit for 2019.

Example 3. During the 2018 fall semester, Larry was a high school student who took classes on a half-time basis at College X. Larry wasn't enrolled as part of a degree pro- gram at College X because College X only admits stu- dents to a degree program if they have a high school di- ploma or equivalent. Because Larry wasn't enrolled in a degree program at College X during 2018, Larry wasn't an eligible student for tax year 2018.

Example 4. The facts are the same as in Example 3. During the 2019 spring semester, Larry again attended College X but not as part of a degree program. Larry grad- uated from high school in June 2019. For the 2019 fall se- mester, Larry enrolled as a full-time student in College X as part of a degree program, and College X awarded Larry credit for his prior coursework at College X. Because Larry was enrolled in a degree program at College X for the 2019 fall term on at least a half-time basis, Larry is an eligible student for all of tax year 2019. Therefore, the qualified education expenses paid for classes taken at College X during both the 2019 spring semester (during which Larry wasn't enrolled in a degree program) and the 2019 fall semester are taken into account in figuring any American opportunity credit.

Page 18 Chapter 2 American Opportunity Credit

Page 19 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Example 5. Dee graduated from high school in June 2018. In January 2019, Dee enrolled in a 1-year postse- condary certificate program on a full-time basis to obtain a certificate as a travel agent. Dee completed the program in December 2019 and was awarded a certificate. In Jan- uary 2020, she enrolled in a 1-year postsecondary certifi- cate program on a full-time basis to obtain a certificate as a computer programmer. Dee is an eligible student for both tax years 2019 and 2020 because she meets the de- gree requirement, the workload requirement, and the year of study requirement for those years.

Who Can Claim a Dependent's Expenses? If there are qualified education expenses for your depend- ent during a tax year, either you or your dependent, but not both of you, can claim an American opportunity credit for your dependent's expenses for that year.

For you to claim an American opportunity credit for your dependent's expenses, you must also claim your

Figure 2-2. Who Is an Eligible Student for the American Opportunity Credit?

No

Yes

No

Yes

Yes

Yes

No

No

This chart is provided to help you quickly decide whether a student is eligible for the American opportunity credit. See the text for more details.

Was either the American opportunity credit or Hope scholarship credit (or a combination of both) claimed in at least 4 prior tax years for this student?

The student is an eligible student.

The student isn’t an eligible student.

Did the student complete the �rst 4 years of postsecondary education before the beginning of the tax year?

Was the student enrolled at least half-time in a program leading to a degree, certi�cate, or other recognized educational credential for at least one academic period beginning during 2019 (or the �rst 3 months of 2020 if the quali�ed expenses were paid in 2019)?

Is the student free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year?

Chapter 2 American Opportunity Credit Page 19

Page 20 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

dependent on your tax return. You do this by listing your dependent's name and other required information on Form 1040 or 1040-SR.

IF you... THEN only... claim on your tax return a dependent who is an eligible student

you can claim the American opportunity credit based on that dependent's expenses. The dependent can't claim the credit.

don't claim on your tax return a dependent who is an eligible student (even if entitled to claim the dependent)

the dependent can claim the American opportunity credit. You can't claim the credit based on this dependent's expenses.

Expenses paid by dependent. If you claim on your tax return an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Include these expenses when figuring the amount of your American opportunity credit.

Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are trea-

ted as paid by your dependent.

Expenses paid by you. If you claim a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the American oppor- tunity credit. If neither you nor anyone else claims the de- pendent, only the dependent can include any expenses you paid when figuring the American opportunity credit. Expenses paid by others. Someone other than you, your spouse, or your dependent (such as a relative or for- mer spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's quali- fied education expenses. In this case, the student is trea- ted as receiving the payment from the other person and, in turn, paying the institution. If you claim the student as a dependent on your tax return, you are considered to have paid the expenses.

Example. In 2019, Ms. Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. For purposes of claiming an American opportunity credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself.

Unless Todd is claimed as a dependent on someone else's 2019 tax return, only Todd can use the payment to claim an American opportunity credit.

If anyone, such as Todd's parents, claims Todd on his or her 2019 tax return, whoever claims him may be able to use the expenses to claim an American opportunity credit. If anyone else claims Todd, Todd can't claim an American opportunity credit.

TIP

Tuition reduction. When an eligible educational institu- tion provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. If it is taxable, the employee is treated as receiving a pay- ment of that amount and, in turn, paying it to the educa- tional institution on behalf of the student. For more infor- mation on tuition reductions, see Qualified Tuition Reduction in chapter 1.

Figuring the Credit The amount of the American opportunity credit (per eligi- ble student) is the sum of:

1. 100% of the first $2,000 of qualified education expen- ses you paid for the eligible student, and

2. 25% of the next $2,000 of qualified education expen- ses you paid for that student.

The maximum amount of American opportunity credit you can claim in 2019 is $2,500 multiplied by the number of eligible students. You can claim the full $2,500 for each eligible student for whom you paid at least $4,000 of ad- justed qualified education expenses. However, the credit may be reduced based on your MAGI. See Effect of the Amount of Your Income on the Amount of Your Credit, later.

Example. Jack and Kay Ford are married and file a joint tax return. For 2019, they claim their dependent daughter on their tax return. Their MAGI is $70,000. Their daughter is in her junior (third) year of studies at the local university. Jack and Kay paid qualified education expen- ses of $4,300 in 2019.

Jack and Kay, their daughter, and the local university meet all of the requirements for the American opportunity credit. Jack and Kay can claim a $2,500 American oppor- tunity credit in 2019. This is 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000. Form 1098-T. To help you figure your American opportu- nity credit, the student may receive Form 1098-T, Tuition Statement. Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by Jan- uary 31, 2020. An institution will report payments received (box 1) for qualified education expenses. However, the amount on Form 1098-T might be different from what you paid. When figuring the credit, use only the amounts you paid or are deemed to have paid in 2019 for qualified edu- cation expenses.

In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimburse- ments or refunds, and whether the student was enrolled at least half-time or was a graduate student.

The eligible educational institution may ask for a com- pleted Form W-9S, Request for Student's or Borrower's Taxpayer Identification Number and Certification, or

Page 20 Chapter 2 American Opportunity Credit

Page 21 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

similar statement to obtain the student's name, address, and TIN.

To claim the American opportunity credit, you must provide the educational institution's em- ployer identification number (EIN) on your Form

8863. You should be able to obtain this information from Form 1098-T or the educational institution.

Effect of the Amount of Your Income on the Amount of Your Credit The amount of your American opportunity credit is phased out (gradually reduced) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint re- turn). You can't claim an American opportunity credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return). Modified adjusted gross income (MAGI). For most taxpayers, MAGI is adjusted gross income (AGI) as fig- ured on their federal income tax return.

MAGI when using Form 1040 or 1040-SR. If you file Form 1040 or 1040-SR, your MAGI is the AGI on line 8b of that form, modified by adding back any:

1. Foreign earned income exclusion, 2. Foreign housing exclusion, 3. Foreign housing deduction, 4. Exclusion of income by bona fide residents of Ameri-

can Samoa, and 5. Exclusion of income by bona fide residents of Puerto

Rico. You can use Worksheet 2-1 to figure your MAGI.

MAGI for the American Opportunity Credit

Worksheet 2-1.

1. Enter your adjusted gross income (Form 1040 or 1040-SR, line 8b) . . . . . . . . . . 1.

2. Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45) . . . . . . . . . . . 2.

3. Enter your foreign housing deduction (Form 2555, line 50) . . . . 3.

4. Enter the amount of income from Puerto Rico you are excluding . . . . 4.

5. Enter the amount of income from American Samoa you are excluding (Form 4563, line 15) . . . . . . . . . . . 5.

6. Add the amounts on lines 2, 3, 4, and 5 . . . . . . . . . . . . . . . . . . . . 6.

7. Add the amounts on lines 1 and 6. This is your modified adjusted gross income. Enter here and on Form 8863, line 3 . . . . . . . . . . . . . . . . . . 7.

CAUTION !

Phaseout. If your MAGI is within the range of incomes where the credit must be reduced, you will figure your re- duced credit using lines 2–7 of Form 8863, Part I. The same method is shown in the following example.

Example. You are filing a joint return and your MAGI is $165,000. In 2019, you paid $5,000 of qualified education expenses.

You figure a tentative American opportunity credit of $2,500 (100% of the first $2,000 of qualified education ex- penses, plus 25% of the next $2,000 of qualified educa- tion expenses).

Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($2,500) by a fraction. The numerator (top part) of the fraction is $180,000 (the upper limit for those filing a joint return) minus your MAGI. The denominator (bottom part) is $20,000, the range of incomes for the phaseout ($160,000 to $180,000). The result is the amount of your phased out (reduced) American opportu- nity credit ($1,875).

$2,500 × $180,000-$165,000

= $1,875$20,000

Refundable Part of Credit Forty percent of the American opportunity credit is refund- able for most taxpayers. However, if you were under age 24 at the end of 2019 and the conditions listed below ap- ply to you, you can't claim any part of the American op- portunity credit as a refundable credit on your tax return. Instead, your allowed credit (figured on Form 8863, Part II) will be used to reduce your tax as a nonrefundable credit only.

You don't qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you.

1. You were: a. Under age 18 at the end of 2019, or b. Age 18 at the end of 2019 and your earned in-

come (defined below) was less than one-half of your support (defined below), or

c. Over age 18 and under age 24 at the end of 2019 and a full-time student (defined below) and your earned income (defined below) was less than one-half of your support (defined below).

2. At least one of your parents was alive at the end of 2019.

3. You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2019.

Earned income. Earned income includes wages, salar- ies, professional fees, and other payments received for personal services actually performed. Earned income in- cludes the part of any scholarship or fellowship grant that

Chapter 2 American Opportunity Credit Page 21

Page 22 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

represents payment for teaching, research, or other serv- ices performed by the student that are required as a con- dition for receiving the scholarship or fellowship grant. Earned income doesn't include that part of the compensa- tion for personal services rendered to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered.

If you are a sole proprietor or a partner in a trade or business in which both personal services and capital are material income-producing factors, earned income also includes a reasonable allowance for compensation for personal services, but not more than 30% of your share of the net profits from that trade or business (after subtract- ing the deduction for one-half of self-employment tax). However, if capital isn't an income-producing factor and your personal services produced the business income, the 30% limit doesn't apply. Support. Your support includes food, shelter, clothing, medical and dental care, education, and the like. Gener- ally, the amount of the item of support will be the amount of expenses incurred by the one furnishing such item. If the item of support is in the form of property or lodging, measure the amount of such item of support by its fair market value. However, a scholarship received by you isn't considered support if you are a full-time student. See Pub. 501 for details. Full-time student. You are a full-time student for 2019 if during any part of any 5 calendar months during the year you were enrolled as a full-time student at an eligible edu- cational institution (defined earlier), or took a full-time, on-farm training course given by such an institution or by a state, county, or local government agency.

Claiming the Credit You claim the American opportunity credit by completing Form 8863 and submitting it with your Form 1040 or 1040-SR. Enter the nonrefundable part of the credit on Schedule 3 (Form 1040 or 1040-SR), line 3. Enter the re- fundable part of the credit on Form 1040 or 1040-SR, line 18c. A filled-in Form 8863 is shown at the end of this publication.

Note. In Appendix A at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return.

3.

Lifetime Learning Credit

What’s New Modified adjusted gross income (MAGI) limits. For 2019, the amount of your lifetime learning credit is gradu- ally reduced (phased out) if your MAGI is between $58,000 and $68,000 ($116,000 and $136,000 if you file a joint return). You can't claim the credit if your MAGI is $68,000 or more ($136,000 or more if you file a joint re- turn). For more information, see Figuring the Credit.

Reminders Form 1098-T requirement. To be eligible to claim the lifetime learning credit, the law requires a taxpayer (or a dependent) to have received Form 1098-T, Tuition State- ment, from an eligible educational institution, whether do- mestic or foreign.

However, you may claim the credit if the student doesn't receive a Form 1098-T because the student's ed- ucational institution isn't required to furnish a Form 1098-T to the student under existing rules (for example, if the stu- dent is a qualified nonresident alien, has qualified educa- tion expenses paid entirely with scholarships, has quali- fied education expenses paid under a formal billing arrangement, or is enrolled in courses for which no aca- demic credit is awarded). If a student's educational institu- tion isn't required to provide a Form 1098-T to the student, you may claim the credit without a Form 1098-T if you oth- erwise qualify, can demonstrate that you (or a dependent) were enrolled at an eligible educational institution, and can substantiate the payment of qualified tuition and rela- ted expenses.

You may also claim the credit if the student attended an eligible educational institution required to furnish Form 1098-T but the student doesn't receive Form 1098-T be- fore you file your tax return (for example, if the institution is otherwise required to furnish the Form 1098-T and doesn't furnish it or refuses to do so) and you take the following required steps: After January 31, 2020, but before the due date for your 2019 tax return, you or the student must re- quest that the educational institution furnish a Form 1098-T. You must fully cooperate with the educational in- stitution's efforts to gather the information needed to fur- nish the Form 1098-T. You must also otherwise qualify for the benefit, be able to demonstrate that you (or a depend- ent) were enrolled at an eligible educational institution,

Page 22 Chapter 3 Lifetime Learning Credit

Page 23 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

and substantiate the payment of qualified tuition and rela- ted expenses.

Introduction For 2019, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. They are the American oppor- tunity credit and the lifetime learning credit. This chapter discusses the lifetime learning credit. The American op- portunity credit is discussed in chapter 2.

This chapter explains: • Who can claim the lifetime learning credit, • What expenses qualify for the credit, • Who is an eligible student, • Who can claim a dependent's expenses, • How to figure the credit, • How to claim the credit, and • When the credit must be repaid.

What is the tax benefit of the lifetime learning credit? For the tax year, you may be able to claim a lifetime learn- ing credit of up to $2,000 for qualified education expenses paid for all eligible students. There is no limit on the num- ber of years the lifetime learning credit can be claimed for each student.

A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. The lifetime learning credit is a nonrefunda- ble credit. This means that it can reduce your tax to zero, but if the credit is more than your tax, the excess won't be refunded to you.

Your allowable lifetime learning credit may be limited by the amount of your income and the amount of your tax. Can you claim more than one education credit this year? For each student, you can elect for any year only one of the credits. For example, if you elect to claim the lifetime learning credit for a child on your 2019 tax return, you can't, for that same child, also claim the American op- portunity credit for 2019.

If you are eligible to claim the lifetime learning credit and you are also eligible to claim the American opportu- nity credit for the same student in the same year, you can choose to claim either credit, but not both.

If you claim the American opportunity credit for any student, you can choose between using that student's adjusted qualified education expenses

for the American opportunity credit or the lifetime learning credit. If you have the choice, the American opportunity credit will always be greater than the lifetime learning credit.

If you pay qualified education expenses for more than one student in the same year, you can choose to claim certain credits on a per-student, per-year basis. This means that, for example, you can claim the American

TIP

opportunity credit for one student and the lifetime learning credit for another student in the same year. Differences between the American opportunity and lifetime learning credits. There are several differences between these two credits. For example, you can claim the American opportunity credit for the same student for no more than 4 tax years, but any year in which the Hope scholarship credit was claimed counts toward the 4 years. However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. The differences between these credits are shown in Appendix B near the end of this publi- cation. Overview of the lifetime learning credit for 2019. See Table 3-1 for the basics of the credit. The details are dis- cussed in this chapter.

Can You Claim the Credit? The following rules will help you determine if you are eligi- ble to claim the lifetime learning credit on your tax return.

Who Can Claim the Credit? Generally, you can claim the lifetime learning credit if all three of the following requirements are met.

• You pay qualified education expenses of higher edu- cation.

• You pay the education expenses for an eligible stu- dent.

• The eligible student is either yourself, your spouse, or a dependent you claim on your tax return.

Chapter 3 Lifetime Learning Credit Page 23

Page 24 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Overview of the Lifetime Learning Credit for 2019

Maximum credit Up to $2,000 credit per return Limit on modified adjusted gross income (MAGI)

$136,000 if married filling jointly; $68,000 if single, head of household, or qualifying widow(er)

Refundable or nonrefundable

Nonrefundable—credit limited to the amount of tax you must pay on your taxable income

Number of years of postsecondary education

Available for all years of postsecondary education and for courses to acquire or improve job skills

Number of tax years credit available

Available for an unlimited number of tax years

Type of program required Student doesn't need to be pursuing a program leading to a degree or other recognized education credential

Number of courses Available for one or more courses Felony drug conviction Felony drug convictions don't make

the student ineligible Qualified expenses Tuition and fees required for

enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment)

Payments for academic periods

Payments made in 2019 for academic periods beginning in 2019 or beginning in the first 3 months of 2020

Note. Qualified education expenses paid by a depend- ent you claim on your tax return, or by a third party for that dependent, are considered paid by you.

“Qualified education expenses” are defined later under Qualified Education Expenses. “Eligible students” are de- fined later under Who Is an Eligible Student. A dependent you claim on your tax return is defined later under Who Can Claim a Dependent's Expenses.

You may find Figure 3-1 helpful in determining if you can claim a lifetime learning credit on your tax return.

Who Can't Claim the Credit? You can't claim the lifetime learning credit for 2019 if any of the following apply.

• Your filing status is married filing separately. • You are listed as a dependent on another person's tax

return (such as your parents'). See Who Can Claim a Dependent's Expenses, later.

• Your modified adjusted gross income (MAGI) is $68,000 or more ($136,000 or more if filing married fil- ing jointly). MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit.

• You (or your spouse) were a nonresident alien for any part of 2019 and the nonresident alien didn't elect to be treated as a resident alien for tax purposes. More

Table 3-1. information on nonresident aliens can be found in Pub. 519.

• You claim the American opportunity credit (see chap- ter 2) or a tuition and fees deduction (see chapter 6) for the same student in 2019.

What Expenses Qualify? The lifetime learning credit is based on qualified education expenses you pay for yourself, your spouse, or a depend- ent you claim on your tax return. Generally, the credit is al- lowed for qualified education expenses paid in 2019 for an academic period beginning in 2019 or in the first 3 months of 2020.

For example, if you paid $1,500 in December 2019 for qualified tuition for the spring 2020 semester beginning in January 2020, you may be able to use that $1,500 in figur- ing your 2019 credit. Academic period. An academic period includes a se- mester, 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 doesn't have aca- demic terms, each payment period can be treated as an academic period. Paid with borrowed funds. You can claim a lifetime learning credit for qualified education expenses paid with the proceeds of a loan. You use the expenses to figure the lifetime learning credit for the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan disbursements sent directly to the educational institu- tion as paid on the date the institution credits the student's account. Student withdraws from class(es). You can claim a lifetime learning credit for qualified education expenses not refunded when a student withdraws.

Qualified Education Expenses For purposes of the lifetime learning credit, qualified edu- cation expenses are tuition and certain related expenses required for enrollment in a course at an eligible educa- tional institution. The course must be either part of a post- secondary degree program or taken by the student to ac- quire or improve job skills. Eligible educational institution. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to par- ticipate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredi- ted public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible edu- cational institution.

Page 24 Chapter 3 Lifetime Learning Credit

Page 25 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Certain educational institutions located outside the Uni- ted States also participate in the U.S. Department of Edu- cation's Federal Student Aid (FSA) programs. Related expenses. Student activity fees and expenses for course-related books, supplies, and equipment are in- cluded in qualified education expenses only if the fees and expenses must be paid to the institution for enroll- ment or attendance. Prepaid expenses. Qualified education expenses paid in 2019 for an academic period that begins in the first 3 months of 2020 can be used in figuring an education credit for 2019 only. See Academic period, earlier. For ex- ample, if you pay $2,000 in December 2019 for qualified tuition for the 2020 winter quarter that begins in January 2020, you can use that $2,000 in figuring an education credit for 2019 only (if you meet all the other require- ments).

You can't use any amount you paid in 2018 or 2020 to figure the qualified education expenses you use to figure your 2019 education credit(s).

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

Example 1. Jackson is a sophomore in University V's degree program in dentistry. This year, in addition to tui- tion, 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 fee must be paid to Univer- sity V for enrollment and attendance, Jackson's equip- ment rental fee is a qualified expense.

Example 2. Donna and Charles, both first-year stu- dents 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 re- ceive a bill directly from the college. Charles bought his books from a friend, so what he paid for them isn't a quali- fied education expense. Donna bought hers at College W's bookstore. Although Donna paid College W directly for her first-year books and materials, her payment isn't a qualified expense because the books and materials aren't required to be purchased from College W for enrollment or attendance at the institution.

Example 3. When Marci 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 organi- zations and activities run by students, such as the student newspaper and student government. No portion of the fee covers personal expenses. Although labeled as a student activity fee, the fee is required for Marci's enrollment and attendance at College X. Therefore, it is a qualified ex- pense.

CAUTION !

No Double Benefit Allowed You can't do any of the following.

• Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim a lifetime learning credit based on those same expenses.

• Claim a lifetime learning credit in the same year that you are claiming a tuition and fees deduction (see chapter 6) for the same student.

• Claim a lifetime learning credit for any student and use any of that student's expenses in figuring your Ameri- can opportunity credit.

• Claim a lifetime learning credit based on the same ex- penses used to figure the tax-free portion of a distribu- tion from a Coverdell education savings account (ESA) or qualified tuition program (QTP). See Coordi- nation With American Opportunity and Lifetime Learn- ing Credits in chapter 7 and Coordination With Ameri- can Opportunity and Lifetime Learning Credits in chapter 8.

• Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an em- ployer. See Adjustments to Qualified Education Ex- penses next.

Adjustments to Qualified Education Expenses For each student, reduce the qualified education expen- ses paid by or on behalf of that student under the follow- ing rules. The result is the amount of adjusted qualified education expenses for each student. Tax-free educational assistance. For tax-free educa- tional assistance received in 2019, 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.

Some tax-free educational assistance received after 2019 may be treated as a refund of qualified education ex- penses paid in 2019. This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2019 for qualified education expenses paid on behalf of a student in 2019 (or attributable to en- rollment at an eligible educational institution during 2019).

If this tax-free educational assistance is received after 2019 but before you file your 2019 income tax return, see Refunds received after 2019 but before your income tax return is filed, later. If this tax-free educational assistance is received after 2019 and after you file your 2019 income tax return, see Refunds received after 2019 and after your income tax return is filed, later.

Tax-free educational assistance includes: • The tax-free part of scholarships and fellowship grants

(see Tax-Free Scholarships and Fellowship Grants in chapter 1);

Chapter 3 Lifetime Learning Credit Page 25

Page 26 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Figure 3-1. Can You Claim the Lifetime Learning Credit for 2019?

Did you pay quali�ed education expenses in 2019 for an eligible student?*

Did the academic period for which you paid quali�ed education expenses begin in 2019 or the �rst 3 months of 2020?

Is the eligible student you, your spouse (if married �ling jointly), or your dependent you claim on your tax return?

Are you listed as a dependent on another person’s tax return?

Is your �ling status married �ling separately?

For any part of 2019, were you (or your spouse) a nonresident alien who didn’t elect to be treated as a resident alien for tax purposes?

Is your modi�ed adjusted gross income (MAGI) less than $68,000 ($136,000 if married �ling jointly)?

Are you claiming an American opportunity credit or a tuition and fees deduction (see chapter 6) for the same student?

Did you use the same expenses to claim a deduction or credit?

Were the same expenses paid with a tax-free scholarship, grant, or employer-provided educational assistance?

Did you, or someone else, receive a refund of all the expenses?

Do you have a tax liability (Form 1040 or 1040-SR, line 12b, minus Schedule 3 (Form 1040 or 1040-SR), lines 1 and 2, and the amount from Schedule R (Form 1040 or 1040-SR), line 22)?

No

No

No

Yes

Yes

Yes

No

No

Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

No

No

Yes

Yes

No

No

No

No

**Your education credits may be limited to your tax liability minus certain credits. See Form 8863 for more details.

You can claim the lifetime

learning credit for 2019.**

You can’t claim the lifetime learning credit for

2019.

*Qualified education expenses paid by a dependent you claim on your tax return, or by a third party for that dependent, are considered paid by you.

Page 26 Chapter 3 Lifetime Learning Credit

Page 27 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

• The tax-free part of Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chap- ter 1);

• Employer-provided educational assistance (see chap- ter 11);

• Veterans' educational assistance (see Veterans' Ben- efits in chapter 1); and

• Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assis- tance.

Generally, any scholarship or fellowship grant is treated as tax free. However, a scholarship or fellowship grant isn't treated as tax free to the extent the student includes it in gross income (the student may or may not be required to file a tax return for the year the scholarship or fellowship grant is received) and either of the following is true.

• The scholarship or fellowship grant (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education ex- penses as defined in Qualified education expenses in chapter 1.

• The scholarship or fellowship grant (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education ex- penses as defined in Qualified education expenses in chapter 1.

A student can't choose to include in income a scholarship or fellowship grant provided by an In- dian tribal government that is excluded from in-

come under the Tribal General Welfare Exclusion Act of 2014 or benefits provided by an educational program de- scribed in Revenue Procedure 2014-35, section 5.02(2) (b)(ii), available at IRS.gov/irb/2014-26_IRB#RP-2014-35.

You may be able to increase the combined value of an education credit if the student includes some or all of a scholarship or fellowship grant in

income in the year it is received. For examples, see Coor- dination with Pell grants and other scholarships, later.

Refunds. A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Some tax-free educational assistance received after 2019 may be treated as a refund. See Tax-free educational assistance, earlier.

Refunds received in 2019. For each student, figure the adjusted qualified education expenses for 2019 by adding all the qualified education expenses for 2019 and subtracting any refunds of those expenses received from the eligible educational institution during 2019.

Refunds received after 2019 but before your in- come tax return is filed. If anyone receives a refund af- ter 2019 of qualified education expenses paid on behalf of a student in 2019 and the refund is paid before you file an

CAUTION !

TIP

income tax return for 2019, the amount of qualified educa- tion expenses for 2019 is reduced by the amount of the refund.

Refunds received after 2019 and after your income tax return is filed. If anyone receives a refund after 2019 of qualified education expenses paid on behalf of a stu- dent in 2019 and the refund is paid after you file an in- come tax return for 2019, you may need to repay some or all of the credit. See Credit recapture next. Credit recapture. If any tax-free educational assistance for the qualified education expenses paid in 2019 or any refund of your qualified education expenses paid in 2019 is received after you file your 2019 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2019 by reducing the expenses by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2019 and figure the amount by which your 2019 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.

Example. You pay $9,300 in tuition and fees in De- cember 2019, and your child began college in January 2020. You filed your 2019 tax return on February 14, 2020, and claimed a lifetime learning credit of $1,860. You claimed no other tax credits. After you filed your return, your child withdrew from two courses and you received a refund of $2,900. You must refigure your 2019 lifetime learning credit using $6,400 of qualified education expen- ses instead of $9,300. The refigured credit is $1,280 and your tax liability increased by $580. See the instructions for your 2020 income tax return to determine where to in- clude this tax.

If you pay qualified education expenses in both 2019 and 2020 for an academic period that be- gins in the first 3 months of 2020 and you receive

tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified educa- tion expenses for 2020 instead of reducing your expenses for 2019.

Amounts that don't reduce qualified education ex- penses. Don't 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.

Don't reduce the qualified education expenses by any scholarship or fellowship grant 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 grant, to costs of attendance (such as room and board) other than qualified

TIP

Chapter 3 Lifetime Learning Credit Page 27

Page 28 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

education expenses, as defined in Qualified education expenses in chapter 1.

• The use of the money isn't restricted. For examples, see Adjustments to Qualified Education Expenses in chapter 2. Coordination with Pell grants and other scholar- ships. You may be able to increase your lifetime learning credit when the student (you, your spouse, or your de- pendent) includes certain scholarships or fellowship grants in the student’s gross income. Your credit may in- crease only if the amount of the student's qualified educa- tion expenses minus the total amount of scholarships and fellowship grants is less than $10,000. If this situation ap- plies, consider including some or all of the scholarship or fellowship grant in the student's income in order to treat the included amount as paying nonqualified expenses in- stead of qualified education expenses. Nonqualified ex- penses are expenses such as room and board that aren't qualified education expenses such as tuition and related fees.

Scholarships and fellowship grants that the student in- cludes in income don't reduce the student's qualified edu- cation expenses available to figure your lifetime learning credit. Thus, including enough of the scholarship or fellow- ship grant in the student's income to report up to $10,000 in qualified education expenses for your lifetime learning credit may increase the credit by enough to increase your tax refund or reduce the amount of tax you owe even con- sidering any increased tax liability from the additional in- come. However, the increase in tax liability as well as the loss of other tax credits may be greater than the additional lifetime learning credit and may cause your tax refund to decrease or the amount of tax you owe to increase. Your specific circumstances will determine what amount, if any, of the scholarship or fellowship grant to include in income to maximize your tax refund or minimize the amount of tax you owe.

The scholarship or fellowship grant must be one that may qualify as a tax-free scholarship under the rules dis- cussed in chapter 1. Also, the scholarship or fellowship grant must be one that may (by its terms) be used for non- qualified expenses. Finally, the amount of the scholarship or fellowship grant that is applied to nonqualified expen- ses can't exceed the amount of the student's actual non- qualified expenses that are paid in the tax year. This amount may differ from the student's living expenses esti- mated by the student's school in figuring the official cost of attendance under student aid rules.

The fact that the educational institution applies the scholarship or fellowship grant to qualified education ex- penses, such as tuition and related fees, doesn't prevent the student from choosing to apply certain scholarships or fellowship grants to the student's actual nonqualified ex- penses. By making this choice (that is, by including the part of the scholarship or fellowship grant applied to the student's nonqualified expenses in income), the student may increase taxable 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.

Example 1—No scholarship. Judy Green, who is un- married, is taking courses at a public community college to be recertified to teach in public schools. Her adjusted gross income (AGI) and her MAGI, for purposes of the credit, are $27,400. Judy claims the standard deduction of $12,200, resulting in taxable income of $15,200 and a tax liability before credits of $1,633. Judy claims no credits other than the lifetime learning credit. In July 2019, she paid $700 for the summer 2019 semester; in August 2019, she paid $1,900 for the fall 2019 semester; and in Decem- ber 2019, she paid another $1,900 for the spring semester beginning in January 2020. Judy and the college meet all requirements for the lifetime learning credit. She can use all of the $4,500 tuition she paid in 2019 when figuring her 2019 lifetime learning credit. She claims a $900 lifetime learning credit and her tax liability after credits is $733.

Example 2—Scholarship excluded from income. The facts are the same as in Example 1—No scholarship, except that Judy was awarded a $1,500 scholarship. Un- der the terms of her scholarship, it may be used to pay any educational expenses, including room and board. If Judy excludes the scholarship from income, she will be deemed (for purposes of figuring her education credit) to have applied the scholarship to pay for tuition, required fees, and course materials. Only $3,000 of the $4,500 tui- tion she paid in 2019 could be used when figuring her 2019 lifetime learning credit. Her lifetime learning credit would be reduced to $600 and her tax liability after credits would be $1,033.

Example 3—Scholarship included in income. The facts are the same as in Example 2—Scholarship exclu- ded from income. If, unlike Example 2, Judy includes the $1,500 scholarship in income, she will be deemed to have applied the entire scholarship to pay for room and board. Judy's AGI and MAGI would increase to $28,900, her tax- able income would be $16,700, and her tax liability before credits would be $1,813. She would be able to use the $4,500 of adjusted qualified education expenses to figure her credit. Judy could claim a $900 lifetime learning credit and her tax liability after credits would be $913.

Example 4—Scholarship applied by the postse- condary school to tuition. The facts are the same as in Example 3—Scholarship included in income, except the $1,500 scholarship is paid directly to the public commun- ity college. The fact that the public community college ap- plies the scholarship to Judy's tuition and related fees doesn't prevent Judy from including the $1,500 scholar- ship in income. As in Example 3, by doing so, she will be deemed to have applied the entire scholarship to pay for room and board. Judy could claim the $900 lifetime learn- ing credit and her tax liability after credits would be $913.

Note. Whether you will benefit from applying a schol- arship or fellowship grant to nonqualified expenses will depend on the amount of the student's qualified education expenses, the amount of the scholarship or fellowship

Page 28 Chapter 3 Lifetime Learning Credit

Page 29 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

grant, and whether the scholarship or fellowship grant may (by its terms) be used for nonqualified expenses. Any benefit will also depend on the student's federal and state marginal tax rates as well as any federal and state tax credits the student claims. Before deciding, look at the to- tal amount of your federal and state tax refunds or taxes owed and, if the student is your dependent, the student's tax refunds or taxes owed. For example, if you are the stu- dent and you also claim the earned income credit, choos- ing to apply a scholarship or fellowship grant to nonquali- fied expenses by including the amount in your income may not benefit you if the decrease to your earned income credit as a result of including the scholarship or fellowship grant in income is more than the increase to your lifetime learning credit as a result of including this amount in in- come.

Expenses That Don't Qualify Qualified education expenses don't 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 institu- tion as a condition of enrollment or attendance. Sports, games, hobbies, and noncredit courses. Qualified education expenses generally don't include ex- penses that relate to any course of instruction or other ed- ucation 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 or is taken by the student to acquire or improve job skills, these expenses can qualify. Comprehensive or bundled fees. Some eligible educa- tional institutions combine all of their fees for an academic period into one amount. If you don't receive or don't 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 generally required to make this allocation and provide you with the amount you paid for qualified education expenses on Form 1098-T. See Figuring the Credit, later, for more information about Form 1098-T.

Who Is an Eligible Student? For purposes of the lifetime learning credit, an eligible stu- dent is a student who is enrolled in one or more courses at an eligible educational institution (as defined under Quali- fied Education Expenses, earlier).

Who Can Claim a Dependent's Expenses? If there are qualified education expenses for your depend- ent during a tax year, either you or your dependent, but not both of you, can claim a lifetime learning credit for your dependent's expenses for that year.

For you to claim a lifetime learning credit for your de- pendent's expenses, you must also claim your dependent on your tax return. You do this by listing your dependent's name and other required information on Form 1040 or 1040-SR.

IF you... THEN only... claim on your tax return a dependent who is an eligible student

you can claim the lifetime learning credit based on that dependent's expenses. The dependent can't claim the credit.

don't claim on your tax return a dependent who is an eligible student (even if entitled to claim the dependent)

the dependent can claim the lifetime learning credit. You can't claim the credit based on this dependent's expenses.

Expenses paid by dependent. If you claim on your tax return an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Include these expenses when figuring the amount of your lifetime learning credit.

Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are trea-

ted as paid by your dependent.

Expenses paid by you. If you claim a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the lifetime learning credit. If neither you nor anyone else claims the depend- ent, only the dependent can include any expenses you paid when figuring the lifetime learning credit. Expenses paid by others. Someone other than you, your spouse, or your dependent (such as a relative or for- mer spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's quali- fied education expenses. In this case, the student is trea- ted as receiving the payment from the other person and, in turn, paying the institution. If you claim the student as a dependent on your tax return, you are considered to have paid the expenses.

Example. In 2019, Ms. Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. For purposes of

TIP

Chapter 3 Lifetime Learning Credit Page 29

Page 30 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

claiming a lifetime learning credit, Todd is treated as re- ceiving the money from his grandmother and, in turn, pay- ing his qualified education expenses himself.

Unless Todd is claimed as a dependent on someone else's 2019 tax return, only Todd can use the payment to claim a lifetime learning credit.

If anyone, such as Todd's parents, claims Todd on his or her 2019 tax return, whoever claims him may be able to use the expenses to claim a lifetime learning credit. If any- one else claims Todd, Todd can't claim a lifetime learning credit. Tuition reduction. When an eligible educational institu- tion provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. If it is taxable, the employee is treated as receiving a pay- ment of that amount and, in turn, paying it to the educa- tional institution on behalf of the student. For more infor- mation on tuition reductions, see Qualified Tuition Reduction in chapter 1.

Figuring the Credit The amount of the lifetime learning credit is 20% of the first $10,000 of qualified education expenses you paid for all eligible students. The maximum amount of lifetime learning credit you can claim for 2019 is $2,000 (20% × $10,000). However, that amount may be reduced based on your MAGI. See Effect of the Amount of Your Income on the Amount of Your Credit, later.

Example. Bruce and Toni Harper are married and file a joint tax return. For 2019, their MAGI is $75,000. Toni is attending a local college (an eligible educational institu- tion) to earn credits toward a degree in nursing. She al- ready has a bachelor's degree in history and wants to be- come a nurse. In August 2019, Toni paid $5,000 of qualified education expenses for her fall 2019 semester. Bruce and Toni can claim a $1,000 (20% × $5,000) life- time learning credit on their 2019 joint tax return. Form 1098-T. To help you figure your lifetime learning credit, the student may receive Form 1098-T. Generally, an eligible educational institution (such as a college or uni- versity) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2020. An institu- tion will report payments received (box 1) for qualified ed- ucation expenses. However, the amount on Form 1098-T might be different from what you paid. When figuring the credit, use only the amounts you paid or are deemed to have paid in 2019 for qualified education expenses.

In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimburse- ments or refunds, and whether the student was enrolled at least half-time or was a graduate student.

The eligible educational institution may ask for a com- pleted Form W-9S or similar statement to obtain the stu- dent's name, address, and taxpayer identification number.

Effect of the Amount of Your Income on the Amount of Your Credit The amount of your lifetime learning credit is phased out (gradually reduced) if your MAGI is between $58,000 and $68,000 ($116,000 and $136,000 if you file a joint return). You can't claim a lifetime learning credit if your MAGI is $68,000 or more ($136,000 or more if you file a joint re- turn). Modified adjusted gross income (MAGI). For most taxpayers, MAGI is adjusted gross income (AGI) as fig- ured on their federal income tax return.

MAGI when using Form 1040 or 1040-SR. If you file Form 1040 or 1040-SR, your MAGI is the AGI on line 8b of that form, modified by adding back any:

1. Foreign earned income exclusion, 2. Foreign housing exclusion, 3. Foreign housing deduction, 4. Exclusion of income by bona fide residents of Ameri-

can Samoa, and 5. Exclusion of income by bona fide residents of Puerto

Rico. You can use Worksheet 3-1 to figure your MAGI.

MAGI for the Lifetime Learning Credit

1. Enter your adjusted gross income (Form 1040 or 1040-SR, line 8b) . . . . . . 1.

2. Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45) . . . . . . . . . . 2.

3. Enter your foreign housing deduction (Form 2555, line 50) . . . . . . . . . . . . . . . 3.

4. Enter the amount of income from Puerto Rico you’re excluding . . . . . . . . 4.

5. Enter the amount of income from American Samoa you’re excluding (Form 4563, line 15) . . . . . . . . . . . . . . . 5.

6. Add the amounts on lines 2, 3, 4, and 5 . . . . . . . . . . . . . . . . . . 6.

7. Add the amounts on lines 1 and 6. This is your modified adjusted gross income. Enter this amount on Form 8863, line 14 . . . . . . . . . . . . . . . 7.

Phaseout. If your MAGI is within the range of incomes where the credit must be reduced, you will figure your re- duced credit using lines 10–18 of Form 8863. The same method is shown in the following example.

Worksheet 3-1.

Page 30 Chapter 3 Lifetime Learning Credit

Page 31 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Example. You are filing a joint return with a MAGI of $117,000. In 2019, you paid $6,600 of qualified education expenses.

You figure the tentative lifetime learning credit (20% of the first $10,000 of qualified education expenses you paid for all eligible students). The result is a $1,320 (20% x $6,600) tentative credit.

Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($1,320) by a fraction. The numerator (top part) of the fraction is $136,000 (the upper limit for those filing a joint return) minus your MAGI. The denominator (bottom part) is $20,000, the range of incomes for the phaseout ($116,000 to $136,000). The result is the amount of your phased out (reduced) lifetime learning credit ($1,254).

$1,320 × $136,000-$117,000

= $1,254$20,000

Claiming the Credit You claim the lifetime learning credit by completing Form 8863 and submitting it with your Form 1040 or 1040-SR. Enter the credit on Schedule 3 (Form 1040 or 1040-SR), line 3.

Note. In Appendix A at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return.

4.

Student Loan Interest Deduction

What’s New Modified adjusted gross income (MAGI) limits. For 2019, the amount of your student loan interest deduction is gradually reduced (phased out) if your MAGI is between $70,000 and $85,000 ($140,000 and $170,000 if you file a joint return). You can’t claim the deduction if your MAGI is $85,000 or more ($170,000 or more if you file a joint re- turn). For more information, see Figuring the Deduction. No double benefit allowed. You can’t deduct as interest on a student loan any amount paid from a distribution of earnings made from a qualified tuition program (QTP) af- ter 2018 to the extent the earnings are treated as tax free

because they were used to pay student loan interest. See No Double Benefit Allowed.

Introduction Generally, personal interest you pay, other than certain mortgage interest, isn't deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $85,000 ($170,000 if filing a joint return), you may be allowed a special deduction for paying interest on a student loan (also known as an education loan) used for higher education. For most taxpayers, MAGI is the adjus- ted gross income as figured on their federal income tax re- turn before subtracting any deduction for student loan in- terest. This deduction can reduce the amount of your income subject to tax by up to $2,500.

The student loan interest deduction is claimed as an adjustment to income. This means you can claim this de- duction even if you don't itemize deductions on Sched- ule A (Form 1040 or 1040-SR).

This chapter explains: • What type of loan interest you can deduct, • Whether you can claim the deduction, • What expenses you must have paid with the student

loan, • Who is an eligible student, • How to figure the deduction, and • How to claim the deduction.

Student Loan Interest Deduction at a Glance

This table summarizes the features of the student loan interest deduction. Don't rely on this table alone. Refer to the text for more details.

Feature Description Maximum benefit You can reduce your income subject to tax by

up to $2,500. Loan qualifications Your student loan:

• must have been taken out solely to pay qualified education expenses, and • can't be from a related person or made under a qualified employer plan.

Student qualifications The student must be: • you, your spouse, or your dependent (as defined later for this purpose); and • enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential at an eligible educational institution.

Limit on modified adjusted gross income (MAGI)

$170,000 if married filing a joint return; $85,000 if single, head of household, or qualifying widow(er).

Table 4-1.

Chapter 4 Student Loan Interest Deduction Page 31

Page 32 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Student Loan Interest Defined Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.

Qualified Student Loan This is a loan you took out solely to pay qualified educa- tion expenses (defined later) that were:

• For you, your spouse, or a person who was your de- pendent (as defined later for this purpose) when you took out the loan;

• Paid or incurred within a reasonable period of time be- fore or after you took out the loan; and

• For education provided during an academic period for an eligible student.

Loans from the following sources aren't qualified stu- dent loans.

• A related person. • A qualified employer plan.

Your dependent. Generally, your dependent is someone who is either a:

• Qualifying child, or • Qualifying relative.

You can find more information about dependents in Pub. 501.

For this purpose, the term “dependent” also includes any person you could have claimed as a dependent on your return except that:

• You, or your spouse if filing jointly, could be claimed as a dependent of another taxpayer (like on your pa- rent’s tax return);

• The person filed a joint return; or • The person had gross income for the year that was

equal to or more than $4,200 (for 2019). Reasonable period of time. Qualified education expen- ses are treated as paid or incurred within a reasonable pe- riod of time before or after you take out the loan if they are paid with the proceeds of student loans that are part of a federal postsecondary education loan program.

Even if not paid with the proceeds of that type of loan, the expenses are treated as paid or incurred within a rea- sonable period of time if both of the following require- ments are met.

• The expenses relate to a specific academic period. • The loan proceeds are disbursed within a period that

begins 90 days before the start of that academic pe- riod and ends 90 days after the end of that academic period.

If neither of the above situations applies, the reasona- ble period of time is usually determined based on all the relevant facts and circumstances. Academic period. An academic period includes a se- mester, 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 doesn't have aca- demic terms, each payment period can be treated as an academic period. Eligible student. An eligible student is a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational cre- dential.

Enrolled at least half-time. A student was enrolled at least half-time if the student was taking at least half the normal full-time workload for his or her course of study.

The standard for what is half of the normal full-time workload is determined by each eligible educational insti- tution. However, the standard may not be lower than any of those established by the U.S. Department of Education under the Higher Education Act of 1965. Related person. You can't deduct interest on a loan you get from a related person. Related persons include:

• Your spouse; • Your brothers and sisters; • Your half brothers and half sisters; • Your ancestors (parents, grandparents, etc.); • Your lineal descendants (children, grandchildren,

etc.); and • Certain corporations, partnerships, trusts, and exempt

organizations. Qualified employer plan. You can't deduct interest on a loan made under a qualified employer plan or under a contract purchased under such a plan.

Qualified Education Expenses For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible edu- cational institution. They include amounts paid for the fol- lowing items.

• Tuition and fees. • Room and board. • Books, supplies, and equipment. • Other necessary expenses (such as transportation).

The cost of room and board qualifies only to the extent it isn't more than:

• The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purpo- ses) for a particular academic period and living arrangement of the student; or

Page 32 Chapter 4 Student Loan Interest Deduction

Page 33 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

• If greater, the actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

Eligible educational institution. An eligible educational institution is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, uni- versity, vocational school, or other postsecondary educa- tional institution. Also, the institution must be eligible to participate in a student aid program administered by the U.S. Department of Education. Virtually all accredited postsecondary institutions meet this definition.

An eligible educational institution also includes certain educational institutions located outside the United States that are eligible to participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.

For purposes of the student loan interest deduction, an eligible educational institution also includes an institution conducting an internship or residency program leading to a degree or certificate from an institution of higher educa- tion, a hospital, or a health care facility that offers post- graduate training.

An educational institution must meet the above criteria only during the academic period(s) for which the student loan was incurred. The deductibility of interest on the loan isn't affected by the institution's subsequent loss of eligibil- ity.

The educational institution should be able to tell you if it is an eligible educational institution.

Adjustments to Qualified Education Expenses You must reduce your qualified education expenses by the total amount paid for them with the following tax-free items.

• Employer-provided educational assistance. See chap- ter 11.

• Tax-free distribution of earnings from a Coverdell edu- cation savings account (ESA). See Tax-Free Distribu- tions in chapter 7.

• Tax-free distribution of earnings from a qualified tui- tion program (QTP). See Figuring the Taxable Portion of a Distribution in chapter 8.

• U.S. savings bond interest that you exclude from in- come because it is used to pay qualified education ex- penses. See chapter 10.

• The tax-free part of scholarships and fellowship grants. See Tax-Free Scholarships and Fellowship Grants in chapter 1.

• Veterans' educational assistance. See Veterans' Ben- efits in chapter 1.

• Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assis- tance.

TIP

Include as Interest In addition to simple interest on the loan, if all other re- quirements are met, the items discussed below can be student loan interest. Loan origination fee. In general, this is a one-time fee charged by the lender when a loan is made. To be deduc- tible as interest, a loan origination fee must be for the use of money rather than for property or services (such as commitment fees or processing costs) provided by the lender. A loan origination fee treated as interest accrues over the life of the loan.

Loan origination fees weren't required to be reported on Form 1098-E, Student Loan Interest Statement, for loans made before September 1, 2004. If loan origination fees aren't included in the amount reported on your Form 1098-E, you can use any reasonable method to allocate the loan origination fees over the term of the loan. Capitalized interest. This is unpaid interest on a student loan that is added by the lender to the outstanding princi- pal balance of the loan. Capitalized interest is treated as interest for tax purposes and is deductible as payments of principal are made on the loan. No deduction for capital- ized interest is allowed in a year in which no loan pay- ments were made. Interest on revolving lines of credit. This interest, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) only to pay qualified education expenses. See Qualified Education Expenses, earlier. Interest on refinanced and consolidated student loans. This includes interest on a loan used solely to refi- nance a qualified student loan of the same borrower. It also includes a single consolidation loan used solely to re- finance two or more qualified student loans of the same borrower.

If you refinance a qualified student loan for more than your original loan and you use the additional amount for any purpose other than qualified edu-

cation expenses, you can't deduct any interest paid on the refinanced loan.

Allocating Payments Between Interest and Principal The allocation of payments between interest and principal for tax purposes might not be the same as the allocation shown on the Form 1098-E or other statement you receive from the lender or loan servicer. To make the allocation for tax purposes, a payment generally applies first to stated interest that remains unpaid as of the date the payment is due, second to any loan origination fees allocable to the payment, third to any capitalized interest that remains un- paid as of the date the payment is due, and fourth to the outstanding principal.

CAUTION !

Chapter 4 Student Loan Interest Deduction Page 33

Page 34 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Example. In August 2018, Peg took out a $10,000 stu- dent loan to pay the tuition for her senior year of college. The lender charged a 3% loan origination fee ($300) that was withheld from the funds Peg received. The interest (5% simple) on this loan accrued while she completed her senior year and for 6 months after she graduated. At the end of that period, the lender determined the amount to be repaid by capitalizing all accrued but unpaid interest ($625 interest accrued from August 2018 through October 2019) and adding it to the outstanding principal balance of the loan. The loan is payable over 60 months, with a pay- ment of $200.51 due on the first of each month, beginning November 2019.

Peg didn't receive a Form 1098-E for 2019 from her lender because the amount of interest she paid didn't re- quire the lender to issue an information return. However, she did receive an account statement from the lender that showed the following 2019 payments on her outstanding loan of $10,625 ($10,000 principal + $625 accrued but un- paid interest).

Payment Date Payment Stated Interest Principal November 2019 $200.51 $44.27 $156.24 December 2019 $200.51 $43.62 $156.89 Totals $401.02 $87.89 $313.13

To determine the amount of interest that could be de- ducted on the loan for 2019, Peg starts with the total amount of stated interest she paid, $87.89. Next, she allo- cates the loan origination fee over the term of the loan ($300 ÷ 60 months = $5 per month). A total of $10 ($5 of each of the two principal payments) should be treated as interest for tax purposes. Peg then applies the unpaid capitalized interest ($625) to the two principal payments in the order in which they were made, and determines that the remaining amount of principal of both payments is treated as interest for tax purposes. Assuming that Peg qualifies to claim the student loan interest deduction, she can deduct $401.02 ($87.89 + $10 + $303.13).

For 2020, Peg will continue to allocate $5 of the loan origination fee to the principal portion of each monthly payment she makes and treat that amount as interest for tax purposes. She will also apply the remaining amount of capitalized interest ($625 − $303.13 = $321.87) to the principal payments in the order in which they are made until the balance is zero, and treat those amounts as inter- est for tax purposes.

Don't Include as Interest You can't claim a student loan interest deduction for any of the following items.

• Interest you paid on a loan if, under the terms of the loan, you aren't legally obligated to make interest pay- ments.

• Loan origination fees that are payments for property or services provided by the lender, such as commitment fees or processing costs.

• Interest you paid on a loan to the extent payments were made through your participation in the National Health Service Corps Loan Repayment Program (the “NHSC Loan Repayment Program”) or certain other loan repayment assistance programs. For more infor- mation, see Student Loan Repayment Assistance in chapter 5.

When Must Interest Be Paid? You can deduct all interest you paid during the year on your student loan, including voluntary payments, until the loan is paid off.

Can You Claim the Deduction? Generally, you can claim the deduction if all of the follow- ing requirements are met.

• Your filing status is any filing status except married fil- ing separately.

• No one else is claiming you as a dependent on his or her tax return.

• You are legally obligated to pay interest on a qualified student loan.

• You paid interest on a qualified student loan. Claiming you as a dependent. Another taxpayer is claiming you as a dependent if he or she lists your name and other required information on page 1 of his or her Form 1040 or 1040-SR or on Form 1040-NR, line 7.

Example 1. During 2019, Josh paid $600 interest on his qualified student loan. Only he is legally obligated to make the payments. No one claimed Josh as a dependent for 2019. Assuming all other requirements are met, Josh can deduct the $600 of interest he paid on his 2019 Form 1040 or 1040-SR.

Example 2. During 2019, Jo paid $1,100 interest on her qualified student loan. Only she is legally obligated to make the payments. Jo's parents claimed her as a de- pendent on their 2019 tax return. In this case, neither Jo nor her parents may deduct the student loan interest Jo paid in 2019. Interest paid by others. If you are the person legally ob- ligated to make interest payments and someone else makes a payment of interest on your behalf, you are trea- ted as receiving the payments from the other person and, in turn, paying the interest.

Example 1. Darla obtained a qualified student loan to attend college. After Darla's graduation from college, she worked as an intern for a nonprofit organization. As part of the internship program, the nonprofit organization made an interest payment on behalf of Darla. This payment was treated as additional compensation and reported on her Form W-2, box 1. Assuming all other qualifications are

Page 34 Chapter 4 Student Loan Interest Deduction

Page 35 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

met, Darla can deduct this payment of interest on her tax return.

Example 2. Ethan obtained a qualified student loan to attend college. After graduating from college, the first monthly payment on his loan was due in December. As a gift, Ethan's mother made this payment for him. No one is claiming Ethan as a dependent on his or her tax return. Assuming all other qualifications are met, Ethan can de- duct this payment of interest on his tax return.

No Double Benefit Allowed You can't deduct as interest on a student loan any amount that is an allowable deduction under any other provision of the tax law (for example, home mortgage interest).

You also can't deduct as interest on a student loan any amount paid from a distribution of earnings made from a qualified tuition program (QTP) after 2018 to the extent the earnings are treated as tax free because they were used to pay student loan interest. For more information, see chapter 8.

Figuring the Deduction Your student loan interest deduction is generally the smaller of:

• $2,500, or • The interest you paid during the tax year.

However, the amount determined above may be phased out (gradually reduced) or eliminated based on your filing status and MAGI as explained below. You can use Work- sheet 4-1 (at the end of this chapter) to figure both your MAGI and your deduction. Form 1098-E. To help you figure your student loan inter- est deduction, you should receive Form 1098-E, Student Loan Interest Statement. Generally, an institution (such as a bank or governmental agency) that received interest payments of $600 or more during 2019 on one or more qualified student loans must send Form 1098-E (or an ac- ceptable substitute) to each borrower by January 31, 2020.

For qualified student loans taken out before September 1, 2004, the institution is required to include on Form 1098-E only payments of stated interest. Other interest payments, such as certain loan origination fees and capi- talized interest, may not appear on the form you receive. However, if you pay qualifying interest that isn't included on Form 1098-E, you can also deduct those amounts. See Allocating Payments Between Interest and Principal, ear- lier.

The lender may ask for a completed Form W-9S or sim- ilar statement to obtain the borrower's name, address, and taxpayer identification number. The form may also be used by the borrower to certify that the student loan was incurred solely to pay for qualified education expenses.

Effect of the Amount of Your Income on the Amount of Your Deduction The amount of your student loan interest deduction is phased out (gradually reduced) if your MAGI is between $70,000 and $85,000 ($140,000 and $170,000 if you file a joint return). You can't claim a student loan interest deduc- tion if your MAGI is $85,000 or more ($170,000 or more if you file a joint return). Modified adjusted gross income (MAGI). For most taxpayers, MAGI is adjusted gross income (AGI) as fig- ured on their federal income tax return before subtracting any deduction for student loan interest. However, as dis- cussed below, there may be other modifications.

Table 4-2 shows how the amount of your MAGI can af- fect your student loan interest deduction.

Effect of MAGI on Student Loan Interest Deduction

IF your filing status is... AND your MAGI is...

THEN your student loan interest deduction is...

single, head of household, or qualifying widow(er)

not more than $70,000 not affected by the phaseout. more than $70,000 but less than $85,000

reduced because of the phaseout.

$85,000 or more eliminated by the phaseout. married filing joint return

not more than $140,000 not affected by the phaseout. more than $140,000 but less than $170,000

reduced because of the phaseout.

$170,000 or more eliminated by the phaseout.

MAGI when using Form 1040 or 1040-SR. If you file Form 1040 or 1040-SR, your MAGI is the AGI on line 8b of that form figured without taking into account any amount on Schedule 1 (Form 1040 or 1040-SR), line 20 (student loan interest deduction) or line 21 (if used for the tuition and fees deduction—see chapter 6), and modified by adding back any:

1. Foreign earned income exclusion, 2. Foreign housing exclusion, 3. Foreign housing deduction, 4. Exclusion of income by bona fide residents of Ameri-

can Samoa, and 5. Exclusion of income by bona fide residents of Puerto

Rico. MAGI when using Form 1040-NR. If you file Form

1040-NR, your MAGI is the AGI on line 35 of that form fig- ured without taking into account any amount on line 33 (student loan interest deduction).

MAGI when using Form 1040-NR-EZ. If you file Form 1040-NR-EZ, your MAGI is the AGI on line 10 of that form figured without taking into account any amount on line 9 (student loan interest deduction). Phaseout. If your MAGI is within the range of incomes where the credit must be reduced, you must figure your

Table 4-2.

Chapter 4 Student Loan Interest Deduction Page 35

Page 36 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

reduced deduction. To figure the phaseout, multiply your interest deduction (before the phaseout, but not more than $2,500) by a fraction. The numerator (top part) is your MAGI minus $70,000 ($140,000 in the case of a joint re- turn). The denominator (bottom part) is $15,000 ($30,000 in the case of a joint return). Subtract the result from your deduction (before the phaseout) to give you the amount you can deduct.

Example 1. During 2019, you paid $800 interest on a qualified student loan. Your 2019 MAGI is $155,000 and you are filing a joint return. You must reduce your deduc- tion by $400, figured as follows.

$800 × $155,000 − $140,000$30,000 = $400

Your reduced student loan interest deduction is $400 ($800 − $400).

Example 2. The facts are the same as in Example 1, except that you paid $2,750 interest. Your maximum de- duction for 2019 is $2,500. You must reduce your maxi- mum deduction by $1,250, figured as follows.

$2,500 × $155,000 − $140,000$30,000 = $1,250

In this example, your reduced student loan interest deduc- tion is $1,250 ($2,500 − $1,250).

Which Worksheet To Use Generally, you figure the deduction using the Student Loan Interest Deduction Worksheet in the Form 1040 or 1040-SR, Form 1040-NR, or Form 1040-NR-EZ instruc- tions. However, if you are filing Form 2555, Foreign Earned Income; Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa; or you are excluding income from sources within Puerto Rico, you must com- plete Worksheet 4-1.

Claiming the Deduction The student loan interest deduction is an adjustment to in- come. To claim the deduction, enter the allowable amount on Schedule 1 (Form 1040 or 1040-SR), line 20; Form 1040-NR, line 33; or Form 1040-NR-EZ, line 9.

Page 36 Chapter 4 Student Loan Interest Deduction

Page 37 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Student Loan Interest Deduction Worksheet Keep for Your Records

Use this worksheet instead of the worksheet in the Form 1040 or 1040-SR instructions if you are filing Form 2555 or 4563, or you are excluding income from sources within Puerto Rico. Before using this worksheet, you must complete Form 1040 or 1040-SR, line 7b, and Schedule 1 (Form 1040 or 1040-SR), lines 10 through 19, plus any amount to be entered on the dotted line next to line 22.

 1. Enter the total interest you paid in 2019 on qualified student loans. Don't enter more than $2,500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.

 2. Enter the amount from Form 1040 or 1040-SR, line 7b . . . . . . . . . . . . . . . . . . . 2.  3. Enter the total of the amounts from Schedule 1 (Form

1040 or 1040-SR), lines 10 through 19 . . . . . . . . . . . 3.  4. Enter the total of any amounts entered on the dotted

line next to Schedule 1 (Form 1040 or 1040-SR), line 22, other than any amount identified as “DPAD” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.

 5. Add lines 3 and 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.  6. Subtract line 5 from line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.  7. Enter any foreign earned income exclusion and/or housing

exclusion (Form 2555, line 45) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.  8. Enter any foreign housing deduction (Form 2555, line 50) . . . . . . . . . . . . . . . . . 8.  9. Enter the amount of income from Puerto Rico you are excluding . . . . . . . . . . . 9. 10. Enter the amount of income from American Samoa you are

excluding (Form 4563, line 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. 11. Add lines 6 through 10. This is your modified adjusted gross income . . . . . . . . . . . . . . . . . . . . . . . . . . 11. 12. Enter the amount shown below for your filing status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.

• Single, head of household, or qualifying widow(er)—$70,000 • Married filing jointly—$140,000

13. Is the amount on line 11 more than the amount on line 12? No. Skip lines 13 and 14, enter -0- on line 15, and go to line 16. Yes. Subtract line 12 from line 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.

14. Divide line 13 by $15,000 ($30,000 if married filing jointly). Enter the result as a decimal (rounded to at least three places). If the result is 1.000 or more, enter 1.000 . . . . . . . . . . . . . . . . . . . . . . . 14. .

15. Multiply line 1 by line 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15. 16. Student loan interest deduction. Subtract line 15 from line 1. Enter the result here

and on Schedule 1 (Form 1040 or 1040-SR), line 20. Don't include this amount in figuring any other deduction on your return (such as on Schedule A, C, E, etc.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.

Worksheet 4-1.

Chapter 4 Student Loan Interest Deduction Page 37

Page 38 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

5.

Student Loan Cancellations and Repayment Assistance

Introduction Generally, if you are responsible for making loan pay- ments, and the loan is canceled or repaid by someone else, you must include the amount that was canceled or paid on your behalf in your gross income for tax purposes. However, in certain circumstances, you may be able to exclude amounts from gross income as a result of:

• Student loan cancellation due to meeting certain work requirements,

• Student loan cancellation due to death or total and permanent disability, or

• Student loan repayment assistance.

Student Loan Cancellation If your student loan is canceled in part or in whole in 2019, you may not have to include the canceled debt in your in- come. To exclude canceled student loan debt from your income, your loan must have been made by a qualified lender to assist you in attending an eligible educational in- stitution. In addition, the cancellation must be due to death or total and permanent disability or pursuant to a provision in the loan that all or part of the debt will be canceled if you work:

• For a certain period of time, • In certain professions, and • For any of a broad class of employers.

The cancellation of your loan won't qualify for tax-free treatment if it is canceled because of services you performed for the educational institu-

tion that made the loan or other organization that provided the funds. See Exception, later.

Eligible educational institution. This is an educational 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. Qualified lenders. These include the following.

1. The United States, or an instrumentality or agency thereof.

CAUTION !

2. A state, territory, or possession of the United States; or the District of Columbia; or any political subdivision thereof.

3. A public benefit corporation that is tax exempt under section 501(c)(3); and that has assumed control of a state, county, or municipal hospital; and whose em- ployees are considered public employees under state law.

4. An eligible educational institution, if the loan is made: a. As part of an agreement with an entity described

in (1), (2), or (3) under which the funds to make the loan were provided to the educational institu- tion; or

b. Under a program of the educational institution that is designed to encourage its students to serve in occupations with unmet needs or in areas with un- met needs where the services provided by the stu- dents (or former students) are for or under the di- rection of a governmental unit or a tax-exempt section 501(c)(3) organization.

5. In addition to (1)–(4) above, for loans canceled on ac- count of the death or total and permanent disability of the student only, the lender of a private education loan (as defined in section 140(7) of the Consumer Credit Protection Act).

Section 501(c)(3) organization. This is any corpora- tion, community chest, fund, or foundation organized and operated exclusively for one or more of the following pur- poses.

• Charitable. • Religious. • Educational. • Scientific. • Literary. • Testing for public safety. • Fostering national or international amateur sports

competition (but only if none of its activities involve providing athletic facilities or equipment).

• The prevention of cruelty to children or animals. Exception. In most cases, the cancellation of a student loan made by an educational institution because of serv- ices you performed for that institution or another organiza- tion that provided the funds for the loan must be included in gross income on your tax return. Refinanced loan. If you refinanced a student loan with another loan from an eligible educational institution or a tax-exempt organization, that loan may also be consid- ered as made by a qualified lender. The refinanced loan is considered made by a qualified lender if it is made under a program of the refinancing organization that is designed to encourage students to serve in occupations with unmet needs or in areas with unmet needs where the services required of the students are for or under the direction of a

Page 38 Chapter 5 Student Loan Cancellations and Repayment Assistance

Page 39 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

governmental unit or a tax-exempt section 501(c)(3) or- ganization.

Student Loan Repayment Assistance Student loan repayments made to you are tax free if you received them for any of the following.

• The National Health Service Corps Loan Repayment Program.

• A state education loan repayment program eligible for funds under the Public Health Service Act.

• Any other state loan repayment or loan forgiveness program that is intended to provide for the increased availability of health services in underserved or health professional shortage areas (as determined by such state).

You can't deduct the interest you paid on a stu- dent loan to the extent payments were made through your participation in the above programs.

6.

Tuition and Fees Deduction

What’s New Tuition and fees deduction. The tuition and fees de- duction has been extended to cover qualified education expenses paid in 2018, 2019, and 2020.

Introduction You may be able to deduct qualified education expenses paid during the year for yourself, your spouse, or your de- pendent(s). You can't claim this deduction if your filing sta- tus is married filing separately or if another person can claim you as a dependent on his or her tax return. The qualified expenses must be for higher education, as ex- plained later under Qualified Education Expenses.

What is the tax benefit of the tuition and fees de- duction? The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000.

This deduction is claimed as an adjustment to income on Schedule 1 (Form 1040 or 1040-SR). This deduction may be beneficial to you if you don't qualify for the Ameri- can opportunity or lifetime learning credits.

CAUTION !

You can choose the education benefit that will give you the lowest tax. You may want to com- pare the tuition and fees deduction to the educa-

tion credits. See chapter 2 (American opportunity credit) and chapter 3 (lifetime learning credit) for more informa- tion on the education credits.

Table 6-1 summarizes the features of the tuition and fees deduction.

Can You Claim the Deduction? The following rules will help you determine if you can claim the tuition and fees deduction.

Who Can Claim the Deduction? Generally, you can claim the tuition and fees deduction if all three of the following requirements are met.

1. You pay qualified education expenses of higher edu- cation.

2. You pay the education expenses for an eligible stu- dent.

3. The eligible student is yourself, your spouse, or your dependent you claim on your tax return.

The term “qualified education expenses” is defined later under Qualified Education Expenses, “Eligible Stu- dent” is defined later under Who Is an Eligible Student?. For more information on claiming the deduction for a de- pendent, see Who Can Claim a Dependent's Expenses?, later.

Tuition and Fees Deduction at a Glance

Don't rely on this table alone. Refer to the text for complete details.

Question Answer What is the maximum benefit?

You can reduce your income subject to tax by up to $4,000.

What is the limit on modified adjusted gross income (MAGI)?

$160,000 if married filing a joint return; $80,000 if single, head of household, or qualifying widow(er).

Where is the deduction taken?

As an adjustment to income on Schedule 1 (Form 1040 or 1040-SR).

For whom must the expenses be paid?

A student enrolled in an eligible educational institution who is either: • you, • your spouse, or • your dependent you claim on your tax return.

What tuition and fees are deductible?

Tuition and fees required for enrollment or attendance at an eligible postsecondary educational institution, but not including personal, living, or family expenses, such as room and board.

TIP

Table 6-1.

Chapter 6 Tuition and Fees Deduction Page 39

Page 40 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Who Can't Claim the Deduction? You can't claim the tuition and fees deduction if any of the following apply.

• Your filing status is married filing separately. • Another person can claim you as a dependent on his

or her tax return. You can't take the deduction even if the other person doesn't actually claim you as a de- pendent.

• Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return).

• You (or your spouse) were a nonresident alien for any part of 2019 and the nonresident alien didn't elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Pub. 519.

What Expenses Qualify? The tuition and fees deduction is based on qualified edu- cation expenses you pay for yourself, your spouse, or a dependent you claim on your tax return. Generally, the de- duction is allowed for qualified education expenses paid in 2019 in connection with enrollment at an institution of higher education during 2019 or for an academic period beginning in 2019 or in the first 3 months of 2020.

For example, if you paid $1,500 in December 2019 for qualified tuition for the spring 2020 semester beginning in January 2020, you may be able to use that $1,500 in figur- ing your 2019 deduction. Academic period. An academic period includes a se- mester, 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 doesn't have aca- demic terms, each payment period can be treated as an academic period. Paid with borrowed funds. You can claim a tuition and fees deduction for qualified education expenses paid with the proceeds of a loan. Use the expenses to figure the de- duction for the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan disburse- ments sent directly to the educational institution as paid on the date the institution credits the student's account. Student withdraws from class(es). You can claim a tuition and fees deduction for qualified education expen- ses not refunded when a student withdraws.

Qualified Education Expenses For purposes of the tuition and fees deduction, qualified education expenses are tuition and certain related expen- ses required for enrollment or attendance at an eligible educational institution.

Eligible educational institution. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to par- ticipate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredi- ted public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.

An eligible educational institution also includes certain educational institutions located outside the United States that are eligible to participate in a student aid program ad- ministered by the U.S. Department of Education.

The educational institution should be able to tell you if it is an eligible educational institution.

Related expenses. Student activity fees and expenses for course-related books, supplies, and equipment are in- cluded in qualified education expenses only if the fees and expenses must be paid to the institution as a condi- tion of enrollment or attendance. Prepaid expenses. Qualified education expenses paid in 2019 for an academic period that begins in the first 3 months of 2020 can be used in figuring an education credit for 2019 only. See Academic period, earlier. For ex- ample, if you pay $2,000 in December 2019 for qualified tuition for the 2020 winter quarter that begins in January 2020, you can use that $2,000 in figuring an education credit for 2019 only (if you meet all the other require- ments).

You can't use any amount you paid in 2018 or 2020 to figure the qualified education expenses you use to figure your 2019 education credit(s).

In the following examples, assume that each student is an eligible student and each college or university an eligi- ble educational institution.

Example 1. Jackson is a sophomore in University V's degree program in dentistry. This year, in addition to tui- tion, 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 fee must be paid to Univer- sity V for enrollment and attendance, Jackson's equip- ment rental fee is a qualified education expense.

Example 2. Donna and Charles, both first-year stu- dents 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 re- ceive a bill directly from the college. Charles bought his books from a friend, so what he paid for them isn't a quali- fied education expense. Donna bought hers at College W's bookstore. Although Donna paid College W directly for her first-year books and materials, her payment isn't a qualified education expense because the books and ma- terials aren't required to be purchased from College W for enrollment or attendance at the institution.

TIP

CAUTION !

Page 40 Chapter 6 Tuition and Fees Deduction

Page 41 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Example 3. When Marci 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 organi- zations 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 stu- dent activity fee, the fee is required for Marci's enrollment and attendance at College X. Therefore, it is a qualified expense.

No Double Benefit Allowed You can't do any of the following.

• Deduct qualified education expenses you deduct un- der any other provision of the law, for example, as a business expense.

• Deduct qualified education expenses for a student on your income tax return if you or anyone else claims an American opportunity or lifetime learning credit for that same student in the same year.

• Deduct qualified education expenses that have been used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or a qualified tuition program (QTP). For a QTP, this ap- plies only to the amount of tax-free earnings that were distributed, not to the recovery of contributions to the program. See Coordination With Tuition and Fees De- duction in chapter 8.

• Deduct qualified education expenses that have been paid with tax-free interest on U.S. savings bonds (Form 8815). See Figuring the Tax-Free Amount in chapter 10.

• Deduct qualified education expenses that have been paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an em- ployer. See the following section on Adjustments to Qualified Education Expenses.

Adjustments to Qualified Education Expenses For each student, reduce the qualified education expen- ses paid by or on behalf of that student under the follow- ing rules. The result is the amount of adjusted qualified education expenses for each student. You must also re- duce qualified education expenses by the other amounts referred to in No Double Benefit Allowed, earlier. Tax-free educational assistance. For tax-free educa- tional assistance received in 2019, 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.

Some tax-free educational assistance received after 2019 may be treated as a refund of qualified education ex- penses paid in 2019. This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2019 for qualified education expenses

paid on behalf of a student in 2019 (or attributable to en- rollment at an eligible educational institution during 2019).

If this tax-free educational assistance is received after 2019 but before you file your 2019 income tax return, see Refunds received after 2019 but before your income tax return is filed, later. If this tax-free educational assistance is received after 2019 and after you file your 2019 income tax return, see Refunds received after 2019 and after your income tax return is filed., later.

This tax-free educational assistance includes: • The tax-free part of scholarships and fellowship grants

(see Tax-Free Scholarships and Fellowship Grants in chapter 1);

• The tax-free part of Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chap- ter 1);

• Employer-provided educational assistance (see chap- ter 11);

• Veterans' educational assistance (see Veterans' Ben- efits in chapter 1); and

• Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assis- tance.

Generally, any scholarship or fellowship grant is treated as tax free. However, a scholarship or fellowship grant isn't treated as tax free to the extent the student includes it in gross income (the student may or may not be required to file a tax return for the year the scholarship or fellowship grant is received) and either of the following is true.

• The scholarship or fellowship grant (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education ex- penses as defined in Qualified education expenses. in chapter 1.

• The scholarship or fellowship grant (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education ex- penses as defined in Qualified education expenses. in chapter 1.

You may be able to increase the combined value of an education credit and certain educational as- sistance if the student includes some or all of the

educational assistance in income in the year it is received. For details, see Adjustments to Qualified Education Ex- penses in chapters 2 and 3.

Refunds. A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Some tax-free educational assistance received after 2019 may be treated as a refund. See Tax-free educational assistance, earlier.

Refunds received in 2019. For each student, figure the adjusted qualified education expenses for 2019 by adding all the qualified education expenses for 2019 and

TIP

Chapter 6 Tuition and Fees Deduction Page 41

Page 42 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

subtracting any refunds of those expenses received from the eligible educational institution during 2019.

Refunds received after 2019 but before your in- come tax return is filed. If anyone receives a refund af- ter 2019 of qualified education expenses paid on behalf of a student in 2019 and the refund is paid before you file an income tax return for 2019, the amount of qualified educa- tion expenses for 2019 is reduced by the amount of the refund.

Refunds received after 2019 and after your income tax return is filed. If anyone receives a refund after 2019 of qualified education expenses paid on behalf of a stu- dent in 2019 and the refund is paid after you file an in- come tax return for 2019, you may need to repay some or all of the credit. See Credit recapture., later. Coordination with education savings bond, Coverdell education savings account, and qualified tuition pro- grams. Reduce your qualified education expenses by any qualified education expenses used to figure the exclu- sion from gross income of (a) interest received under an education savings bond program, or (b) any distribution from a Coverdell education savings account or qualified tuition program (QTP). For a QTP, this applies only to the amount of tax-free earnings that were distributed, not to the recovery of contributions to the program. Credit recapture. If any tax-free educational assistance for the qualified education expenses paid in 2019 or any refund of your qualified education expenses paid in 2019 is received after you file your 2019 income tax return, you must recapture (repay) any excess credit. You do this by refiguring the amount of your adjusted qualified education expenses for 2019 by reducing that amount by the amount of the refund or tax-free educational assistance. You then refigure your education credit(s) for 2019 and figure the amount by which your 2019 tax liability would have in- creased 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.

Example. You paid $3,500 of qualified education ex- penses in December 2019, and your child began college in January 2020. You claimed $3,500 as the tuition and fees deduction on your 2019 income tax return. The re- duction reduced your taxable income by $3,500. Also, you claimed no tax credits in 2019. Your child withdrew from two classes and you received a refund of $2,000 in 2020 after you filed your 2019 tax return. Refigure your 2019 tui- tion and fees deduction using $1,500 of qualified educa- tion expenses instead of the $3,500. The refigured tuition and fees deduction is $1,500. Don't file an amended 2019 tax return to account for this adjustment. Instead, include the difference of $2,000 (but only to the extent this differ- ence would have increased your 2019 tax) on the “Other income” line in Part I of your 2020 Schedule 1 (Form 1040 or 1040-SR).

Amounts that don't reduce qualified education ex- penses. Don't 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.

Don't reduce the qualified education expenses by any scholarship or fellowship grant 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 grant, to costs of attendance (such as room and board) other than qualified educa- tion expenses as defined in Qualified education ex- penses. in chapter 1.

• The use of the money isn't restricted. Example 1. In 2019, Jackie paid $3,000 for tuition and

$5,000 for room and board at University X. The university didn't 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 Jackie's college expen- ses.

University X applies the $2,000 scholarship against Jackie's $8,000 total bill, and Jackie pays the $6,000 bal- ance of her bill from University X with a combination of her student loan and her savings. Jackie doesn't report any portion of the scholarship as income on her tax return.

In figuring the tuition and fees deduction, Jackie 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 isn't tax-free educational assistance, so she doesn't need to reduce her qualified expenses by any part of the loan pro- ceeds. Jackie is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship) in 2019.

Example 2. The facts are the same as in Example 1, except that Jackie reports her entire scholarship as in- come on her tax return. Because Jackie reported the en- tire $2,000 scholarship in her income, she doesn't need to reduce her qualified education expenses. Jackie is trea- ted as having paid $3,000 in qualified education expen- ses.

Expenses That Don't Qualify Qualified education expenses don't include amounts paid for:

• Insurance; • Medical expenses (including student health fees); • Room and board; • Transportation; or

Page 42 Chapter 6 Tuition and Fees Deduction

Page 43 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

• Similar personal, living, or family expenses. This is true even if the amount must be paid to the institu- tion as a condition of enrollment or attendance. Sports, games, hobbies, and noncredit courses. Qualified education expenses generally don't include ex- penses that relate to any course of instruction or other ed- ucation that involves sports, games, hobbies, or any non- credit course. However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify. Comprehensive or bundled fees. Some eligible educa- tional institutions combine all of their fees for an academic period into one amount. If you don't receive, or don't 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 generally required to make this allocation and provide you with the amount you paid for qualified education expenses on Form 1098-T. See Figuring the Deduction, later, for more information about Form 1098-T.

Who Is an Eligible Student? For purposes of the tuition and fees deduction, an eligible student is a student who is enrolled in one or more cour- ses at an eligible educational institution (as defined under Qualified Education Expenses, earlier).

Who Can Claim a Dependent's Expenses? Generally, in order to claim the tuition and fees deduction for qualified education expenses for a dependent, you must:

1. Have paid the expenses, and 2. Claim the student as a dependent.

For you to be able to deduct qualified education expen- ses for your dependent, you must list your dependent's name and other required information on page 1 of Form 1040 or 1040-SR.

IF your dependent is an eligible student and you... AND... THEN... claim your dependent on your tax return

you paid all qualified education expenses for your dependent

only you can deduct the qualified education expenses that you paid. Your dependent can't take a deduction.

claim your dependent on your tax return

your dependent paid all qualified education expenses

no one is allowed to take a deduction.

don't claim your dependent on your tax return

you paid all qualified education expenses

no one is allowed to take a deduction.

don't claim your dependent on your tax return

your dependent paid all qualified education expenses

no one is allowed to take a deduction.

Expenses paid by dependent. If your dependent pays qualified education expenses, no one can take a tuition and fees deduction for those expenses. Neither you nor your dependent can deduct the expenses. For purposes of the tuition and fees deduction, you aren't treated as paying any expenses actually paid by a dependent you or anyone other than you can claim on their return. This rule applies even if you don't claim your dependent on your tax return. Expenses paid by you. If you claim a dependent who is an eligible student on your tax return, only you can include any expenses you paid when figuring your tuition and fees deduction. Expenses paid under divorce decree. Qualified edu- cation expenses paid directly to an eligible educational in- stitution for a student under a court-approved divorce de- cree are treated as paid by the student. Only the student would be eligible to take a tuition and fees deduction for that payment, and then only if no one else could claim the student as a dependent on their tax return. Expenses paid by others. Someone other than you, your spouse, or your dependent (such as a relative or for- mer spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's quali- fied education expenses. In this case, the student is trea- ted as receiving the payment from the other person and, in turn, paying the institution. If you claim, or can claim, the student as a dependent on your tax return, you aren't con- sidered to have paid the expenses and you can't deduct them. If the student isn't a dependent, only the student can deduct payments made directly to the institution for his or her expenses. If the student is your dependent, no one can deduct the payments.

Chapter 6 Tuition and Fees Deduction Page 43

Page 44 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Example. In 2019, Ms. Baker makes a payment di- rectly to an eligible educational institution for her grandson Dan's qualified education expenses. For purposes of de- ducting tuition and fees, Dan is treated as receiving the money from his grandmother and, in turn, paying his own qualified education expenses.

If Dan can't be claimed as a dependent on anyone else's tax return, only Dan can claim a tuition and fees de- duction for his grandmother's payment. If someone else can claim Dan, no one will be allowed a deduction for Ms. Baker's payment. Tuition reduction. When an eligible educational institu- tion provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. If it is taxable, the employee is treated as receiving a pay- ment of that amount and, in turn, paying it to the educa- tional institution on behalf of the student. For more infor- mation on tuition reductions, see Qualified Tuition Reduction in chapter 1.

Figuring the Deduction The maximum tuition and fees deduction in 2019 is $4,000, $2,000, or $0, depending on the amount of your MAGI. See Effect of the Amount of Your Income on the Amount of Your Deduction, later. Form 1098-T. To help you figure your tuition and fees de- duction, the student may receive Form 1098-T (see Ap- pendix A for a completed example of Form 1098-T). Gen- erally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable sub- stitute) to each enrolled student by January 31, 2020, to report payments received (box 1) for qualified education expenses. However, the amount on Form 1098-T might be different than what you paid. When figuring the deduc- tion, use only the amounts you paid in 2019 for qualified education expenses.

In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimburse- ments or refunds, and whether the student was enrolled at least half-time or was a graduate student.

The eligible educational institution may ask for a com- pleted Form W-9S or similar statement to obtain the stu- dent's name, address, and taxpayer identification number.

Effect of the Amount of Your Income on the Amount of Your Deduction If your MAGI isn't more than $65,000 ($130,000 if you are married filing jointly), your maximum tuition and fees de- duction is $4,000. If your MAGI is larger than $65,000 ($130,000 if you are married filing jointly), but isn't more than $80,000 ($160,000 if you are married filing jointly), your maximum deduction is $2,000. No tuition and fees deduction is allowed if your MAGI is larger than $80,000 ($160,000 if you are married filing jointly). Modified adjusted gross income (MAGI). For most taxpayers, MAGI is adjusted gross income (AGI) as fig- ured on their federal income tax return before subtracting any deduction for tuition and fees. However, as discussed below, there may be other modifications.

MAGI when using Form 1040 or 1040-SR. If you file Form 1040 or 1040-SR, your MAGI is the AGI on line 8b of that form, figured without taking into account any amount on Schedule 1 (Form 1040 or 1040-SR), line 21 (tuition and fees deduction), and modified by adding back any:

1. Foreign earned income exclusion, 2. Foreign housing exclusion, 3. Foreign housing deduction, 4. Exclusion of income by bona fide residents of Ameri-

can Samoa, and 5. Exclusion of income by bona fide residents of Puerto

Rico. Table 6-2 shows how the amount of your MAGI can af-

fect your tuition and fees deduction. You can use Worksheet 6-1 to figure your MAGI.

Claiming the Deduction You claim a tuition and fees deduction by completing Form 8917 and submitting it with your Form 1040 or

Effect of MAGI on Maximum Tuition and Fees Deduction IF your filing status is... AND your MAGI is...

THEN your maximum tuition and fees deduction is...

single, head of household, or qualifying widow(er)

not more than $65,000 $4,000. more than $65,000 but not more than $80,000

$2,000.

more than $80,000 $0. married filing joint return not more than $130,000 $4,000.

more than $130,000 but not more than $160,000

$2,000.

more than $160,000 $0.

Table 6-2.

Page 44 Chapter 6 Tuition and Fees Deduction

Page 45 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

1040-SR. Enter the deduction on Schedule 1 (Form 1040 or 1040-SR), line 21.

MAGI for the Tuition and Fees Deduction Keep for Your Records

Use this worksheet if you are filing Form 2555 or Form 4563 or you are excluding income from sources within Puerto Rico. Before using this worksheet, you must complete Form 1040 or 1040-SR, lines 1 through 7b; Schedule 1 (Form 1040 or 1040-SR), lines 10 through 20; and figure any amount to be entered on the dotted line next to Schedule 1 (Form 1040 or 1040-SR), line 22.

 1. Enter the amount from Form 1040 or 1040-SR, line 7b . . . . . . . . . . . . . . . .  1.  2. Enter the total from Schedule 1 (Form 1040 or

1040-SR), lines 10 through 20 . . . . . . . . . . . . . . 2.  3. Enter the total of any amounts entered on the

dotted line next to Schedule 1 (Form 1040 or 1040-SR), line 22 . . . . . . . . . . . . . . . . . . . . . . . . . 3.

 4. Add lines 2 and 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.  5. Subtract line 4 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5.  6. Enter your foreign earned income exclusion and/or housing

exclusion (Form 2555, line 45) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6.  7. Enter your foreign housing deduction (Form 2555, line 50) . . . . . . . . . . . .  7.  8. Enter the amount of income from Puerto Rico you are excluding . . . . . . . .  8.  9. Enter the amount of income from American Samoa you are

excluding (Form 4563, line 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  9. 10. Add lines 5 through 9. This is your modified adjusted gross income . . . . . . . . . . . . . . . . . . . . . . . . 10.

Note. If the amount on line 10 is more than $80,000 ($160,000 if married filing jointly), you can't take the deduction for tuition and fees.

Worksheet 6-1.

7.

Coverdell Education Savings Account (ESA)

Introduction If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the quali- fied education expenses of a designated beneficiary. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return.

Total contributions for the beneficiary in any year can't be more than $2,000, no matter how many separate Cov- erdell ESAs have been established for the beneficiary. See Contributions, later.

This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses.

TIP

What is the tax benefit of the Coverdell ESA? Contri- butions to a Coverdell ESA aren't deductible, but amounts deposited in the account grow tax free until distributed.

If, for a year, distributions from an account aren't more than a designated beneficiary's qualified education expen- ses at an eligible educational institution, the beneficiary won't owe tax on the distributions. See Tax-Free Distribu- tions, later.

Table 7-1 summarizes the main features of the Cover- dell ESA.

Chapter 7 Coverdell Education Savings Account (ESA) Page 45

Page 46 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Coverdell ESA at a Glance Don't rely on this table alone. It provides only general highlights. See the text for definitions of terms and for more complete explanations.

Table 7-1.

Question Answer What is a Coverdell ESA?

A savings account that is set up to pay the qualified education expenses of a designated beneficiary.

Where can it be established?

It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs.

Who can have a Coverdell ESA?

Any beneficiary who is under age 18 or is a special needs beneficiary.

Who can contribute to a Coverdell ESA?

Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return).

Are distributions tax free?

Yes, if the distributions aren't more than the beneficiary's adjusted qualified education expenses for the year.

What Is a Coverdell ESA? A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of pay- ing the qualified education expenses of the Designated beneficiary (defined later) of the account.

When the account is established, the designated bene- ficiary must be under age 18 or a special needs benefi- ciary.

To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created.

The document creating and governing the account must be in writing and must satisfy the following require- ments.

1. The trustee or custodian must be a bank or an entity approved by the IRS.

2. The document must provide that the trustee or custo- dian can only accept a contribution that meets all of the following conditions. a. The contribution is in cash. b. The contribution is made before the beneficiary

reaches age 18, unless the beneficiary is a special needs beneficiary.

c. The contribution wouldn't result in total contribu- tions for the year (not including rollover contribu- tions) being more than $2,000.

3. Money in the account can't be invested in life insur- ance contracts.

4. Money in the account can't be combined with other property except in a common trust fund or common investment fund.

5. The balance in the account generally must be distrib- uted within 30 days after the earlier of the following events. a. The beneficiary reaches age 30, unless the bene-

ficiary is a special needs beneficiary. b. The beneficiary's death.

Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. The expenses can be either quali- fied higher education expenses or qualified elementary and secondary education expenses. Designated beneficiary. This is the individual named in the document creating the trust or custodial account to re- ceive the benefit of the funds in the account. Contributions to a qualified tuition program (QTP). A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. In the case of a change in benefi- ciary, this is a qualified expense only if the new benefi- ciary is a family member of that designated beneficiary. See chapter 8.

Eligible Educational Institution An eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secon- dary school. Eligible postsecondary school. An eligible postsecon- dary school is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, uni- versity, vocational school, or other postsecondary educa- tional institution. Also, the institution must be eligible to participate in a student aid program administered by the U.S. Department of Education. Virtually all accredited postsecondary institutions meet this definition. The edu- cational institution should be able to tell you if it is an eligi- ble educational institution.

An eligible educational institution also includes certain educational institutions located outside the United States that are eligible to participate in a student aid program ad- ministered by the U.S. Department of Education. Eligible elementary or secondary school. An eligible elementary or secondary school is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law.

Page 46 Chapter 7 Coverdell Education Savings Account (ESA)

Page 47 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. As shown in the fol- lowing list, to be qualified, some of the expenses must be required by the school and some must be incurred by stu- dents who are enrolled at least half-time.

1. The following expenses must be required for enroll- ment or attendance of a designated beneficiary at an eligible postsecondary school. a. Tuition and fees. b. Books, supplies, and equipment.

2. Expenses for special needs services needed by a special needs beneficiary must be incurred in connec- tion with enrollment or attendance at an eligible post- secondary school.

3. Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below).

The expense for room and board qualifies only to the extent that it isn't more than the greater of the fol- lowing two amounts. a. The allowance for room and board, as determined

by the school, that was included in the cost of at- tendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

b. The actual amount charged if the student is resid- ing in housing owned or operated by the school.

You may need to contact the eligible educational insti- tution for qualified room and board costs.

4. The purchase of computer or peripheral equipment, computer software, or Internet access and related services if it is to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn’t in- clude expenses for computer software for sports, games, or hobbies unless the software is predomi- nantly educational in nature.)

Half-time student. A student is enrolled “at least half-time” if he or she 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.

Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. There are special rules for computer-related expenses.

1. The following expenses must be incurred by a desig- nated beneficiary in connection with enrollment or

attendance at an eligible elementary or secondary school. a. Tuition and fees. b. Books, supplies, and equipment. c. Academic tutoring. d. Special needs services for a special needs benefi-

ciary. 2. The following expenses must be required or provided

by an eligible elementary or secondary school in con- nection with attendance or enrollment at the school. a. Room and board. b. Uniforms. c. Transportation. d. Supplementary items and services (including ex-

tended day programs). 3. The purchase of computer or peripheral equipment,

computer software, fiber optic cables related to com- puter use, or Internet access and related services is a qualified elementary and secondary education ex- pense if it is to be used by the beneficiary and the beneficiary's family during any of the years the benefi- ciary is in elementary or secondary school. (This doesn't include expenses for computer software de- signed for sports, games, or hobbies unless the soft- ware is predominantly educational in nature.)

Contributions Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (de- fined later under Contribution Limits) for the year is less than $110,000. For individuals filing joint returns, that amount is $220,000.

Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. There is no require- ment that an organization's income be below a certain level.

Contributions must meet all of the following require- ments.

1. They must be in cash. 2. They can't be made after the beneficiary reaches age

18, unless the beneficiary is a special needs benefi- ciary.

3. They must be made by the due date of the contribu- tor's tax return (not including extensions).

Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions aren't more than the contribution limits (defined later) for a year.

Chapter 7 Coverdell Education Savings Account (ESA) Page 47

Page 48 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary.

Table 7-2 summarizes many of the features of contribu- ting to a Coverdell ESA.

Coverdell ESA Contributions at a Glance Don't rely on this table alone. It provides only general highlights. See the text for more complete explanations.

Question Answer Are contributions deductible?

No.

What is the annual contribution limit per designated beneficiary?

$2,000 for each designated beneficiary.

What if more than one Coverdell ESA has been opened for the same designated beneficiary?

The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary.

What if more than one individual makes contributions for the same designated beneficiary?

The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute.

Can contributions other than cash be made to a Coverdell ESA?

No.

When must contributions stop?

No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary.

When contributions are considered made. Contribu- tions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. They must be made by the due date (not including extensions) for filing your return for the preced- ing year.

For example, if you make a contribution to a Coverdell ESA in February 2020, and you designate it as a contribu- tion for 2019, you are considered to have made that con- tribution on December 31, 2019.

Contribution Limits There are two yearly limits.

1. One on the total amount that can be contributed for each designated beneficiary in any year.

2. One on the amount that any individual can contribute for any one designated beneficiary for a year.

Table 7-2.

Limit for each designated beneficiary. For 2019, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary can't be more than $2,000. This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Rollovers are discussed under Rollovers and Other Transfers, later.

Example. When Maria Luna was born in 2018, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. In 2019, the total of all contributions to Maria's three Cover- dell ESAs can't be more than $2,000. For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three ac- counts. Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. These contributions could be put into any of Maria's Coverdell ESA accounts. Limit for each contributor. Generally, you can contrib- ute up to $2,000 for each designated beneficiary for 2019. This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary.

Example. The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2019, he could also contribute $2,000 to Edgar's Coverdell ESA.

Reduced limit. Your contribution limit may be re- duced. If your MAGI (defined later) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated benefi- ciary is gradually reduced (see Figuring the limit, later). If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you can't contribute to anyone's Coverdell ESA. Modified adjusted gross income (MAGI). For most taxpayers, MAGI is adjusted gross income (AGI) as fig- ured on their federal income tax return.

MAGI when using Form 1040 or 1040-SR. If you file Form 1040 or 1040-SR, your MAGI is the AGI on line 8b of that form, modified by adding back any:

1. Foreign earned income exclusion, 2. Foreign housing exclusion, 3. Foreign housing deduction, 4. Exclusion of income by bona fide residents of Ameri-

can Samoa, and 5. Exclusion of income by bona fide residents of Puerto

Rico. MAGI when using Form 1040-NR. If you file Form

1040-NR, your MAGI is the AGI on line 35 of that form. MAGI when using Form 1040-NR-EZ. If you file

Form 1040-NR-EZ, your MAGI is the AGI on line 10 of that form.

Page 48 Chapter 7 Coverdell Education Savings Account (ESA)

Page 49 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

If you have any of these adjustments, you can use Worksheet 7-1 to figure your MAGI for Form 1040 or 1040-SR.

Worksheet 7-1. MAGI for a Coverdell ESA 1. Enter your adjusted gross income

(Form 1040 or 1040-SR, line 8b) . . . . . . 1. 2. Enter your foreign earned

income exclusion and/or housing exclusion (Form 2555, line 45) . . . . . . . . . . 2.

3. Enter your foreign housing deduction (Form 2555, line 50) . . . . . . . . . . . . . . . 3.

4. Enter the amount of income from Puerto Rico you are excluding . . . . . . . 4.

5. Enter the amount of income from American Samoa you are excluding (Form 4563, line 15) . . . . . . . . . . . . . . . 5.

6. Add lines 2, 3, 4, and 5 . . . . . . . . . . . . . . 6. 7. Add lines 1 and 6. This is your modified

adjusted gross income . . . . . . . . . . . . . 7.

Figuring the limit. To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. The numerator (top part) is your MAGI minus $95,000 ($190,000 if filing a joint return). The denominator (bottom part) is $15,000 ($30,000 if filing a joint return). Subtract the result from $2,000. This is the amount you can contribute for each beneficiary. You can use Worksheet 7-2 to figure the limit on contributions.

Coverdell ESA Contribution Limit

1. Maximum contribution . . . . . . . . . . . . . . . 1. $ 2,000 2. Enter your modified adjusted gross

income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1) . . . . . . 2.

3. Enter $190,000 if married filing jointly; $95,000 for all other filers . . . . . . . . . . . . 3.

4. Subtract line 3 from line 2. If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8 . . . . . . . . . . . . 4.

5. Enter $30,000 if married filing jointly; $15,000 for all other filers . . . . . . . . . . . . 5. Note. If the amount on line 4 is greater than or equal to the amount on line 5, stop here. You aren't allowed to contribute to a Coverdell ESA for 2019.

6. Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.   .

7. Multiply line 1 by line 6 . . . . . . . . . . . . . . . 7. 8. Subtract line 7 from line 1 . . . . . . . . . . . . 8. Note. The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000.

Example. Paul, who is single, had MAGI of $96,500 for 2019. Paul can contribute up to $1,800 in 2019 for each beneficiary, as shown in the illustrated Worksheet 7-2.

Worksheet 7-2.

Chapter 7 Coverdell Education Savings Account (ESA) Page 49

Page 50 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Coverdell ESA Contribution Limit—Illustrated

1. Maximum contribution . . . . . . . . . . . . . . . 1. $ 2,000 2. Enter your modified adjusted gross

income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1) . . . . . . 2. 96,500

3. Enter $190,000 if married filing jointly; $95,000 for all other filers . . . . . . . . . . . . 3. 95,000

4. Subtract line 3 from line 2. If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8 . . . . . . . . . . . . 4. 1,500

5. Enter $30,000 if married filing jointly; $15,000 for all other filers . . . . . . . . . . . . 5. 15,000 Note. If the amount on line 4 is greater than or equal to the amount on line 5, stop here. You aren't allowed to contribute to a Coverdell ESA for 2019.

6. Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.   .100

7. Multiply line 1 by line 6 . . . . . . . . . . . . . . . 7. 200 8. Subtract line 7 from line 1 . . . . . . . . . . . . 8. 1,800 Note.The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000.

Additional Tax on Excess Contributions The beneficiary may owe a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. Excess contributions are the total of the following two amounts.

1. Contributions to any designated beneficiary's Cover- dell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier).

2. Excess contributions for the preceding year, reduced by the total of the following two amounts. a. Distributions (other than those rolled over as dis-

cussed later) during the year. b. The contribution limit for the current year minus

the amount contributed for the current year. Exceptions. The excise tax doesn't apply if excess con- tributions made during 2019 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2020, for a calendar year tax- payer).

However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Box 2 of

Worksheet 7-2. that form will show the amount of earnings on your excess contributions. Code “2” or “3” entered in the blank box be- low boxes 5 and 6 indicates the year in which the earnings are taxable. See Instructions for Recipient of your Form 1099-Q, on the back of Copy B. Enter the amount of earn- ings on Schedule 1 (Form 1040 or 1040-SR), line 8, or Form 1040-NR, line 21, for the applicable tax year. For more information, see Taxable Distributions, later.

The excise tax doesn't apply to any rollover contribu- tion.

Note. Contributions made in one year for the preced- ing tax year are considered to have been made on the last day of the preceding year.

Example. In 2018, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Because Greta didn't withdraw the excess before June 1, 2019, she had to pay an additional tax of $18 (6% × $300) when she filed her 2018 tax return.

In 2019, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. Using the steps shown earlier under Additional Tax on Excess Contributions, Greta figures the excess contribution in her account at the end of 2019 as follows.

(1) $500 excess contributions made in 2019

+ (2) $300 excess contributions in ESA at end of 2018

− (2a) $250 distribution during 2019 $550 excess at end of 2019 × 6% = $33

If Greta limits 2020 contributions to $1,450 ($2,000 maxi- mum allowed − $550 excess contributions from 2019), she won't owe any additional tax in 2020 for excess contri- butions. Figuring and reporting the additional tax. You figure this excise tax on Form 5329, Part V. Report the additional tax on Schedule 2 (Form 1040 or 1040-SR), line 6 (or Form 1040-NR, line 57).

Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to an- other or the designated beneficiary can be changed. The beneficiary's interest can be transferred to a spouse or former spouse because of divorce.

Rollovers Any amount distributed from a Coverdell ESA isn't taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under

Page 50 Chapter 7 Coverdell Education Savings Account (ESA)

Page 51 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

age 30. This age limitation doesn't apply if the new benefi- ciary is a special needs beneficiary.

An amount is rolled over if it is paid to another Cover- dell ESA within 60 days after the date of the distribution.

Don't report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040, 1040-SR, or 1040-NR. These aren't taxable distributions. Members of the beneficiary's family. For these purpo- ses, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary.

1. Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.

2. Brother, sister, stepbrother, or stepsister. 3. Father or mother or ancestor of either. 4. Stepfather or stepmother. 5. Son or daughter of a brother or sister. 6. Brother or sister of father or mother. 7. Son-in-law, daughter-in-law, father-in-law,

mother-in-law, brother-in-law, or sister-in-law. 8. The spouse of any individual listed above. 9. First cousin.

Example. When Aaron graduated from college last year, he had $5,000 left in his Coverdell ESA. He wanted to give this money to his younger sister, who was still in high school. In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution.

You can make only one rollover from a Coverdell ESA to another Coverdell ESA in any 12-month period regardless of the number of Coverdell

ESAs you own. However, you can make unlimited trans- fers from one Coverdell ESA trustee directly to another Coverdell ESA trustee because such transfers aren't con- sidered to be distributions or rollovers. The limit of one rollover during any 12-month period doesn't apply to the rollover of a military death gratuity or Servicemembers' Group Life Insurance (SGLI) payment.

Military death gratuity. If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Mem- bers of the beneficiary's family, earlier). Such payments are made to an eligible survivor upon the death of a mem- ber of the U.S. Armed Forces. The contribution to a Cov- erdell ESA from survivor benefits received can't be made later than 1 year after the date on which you receive the gratuity or SGLI payment.

This rollover contribution isn't subject to (but is in addi- tion to) the contribution limits discussed earlier under Con- tribution Limits. The amount you roll over can't exceed the

CAUTION !

total survivor benefits you received, reduced by contribu- tions from these benefits to a Roth IRA or other Coverdell ESAs.

The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and won't be taxed when distributed. See Distributions, later.

The limit of one rollover during any 12-month pe- riod doesn't apply to the rollover of a military death gratuity or SGLI payment.

Changing the Designated Beneficiary The designated beneficiary can be changed. See Mem- bers of the beneficiary's family, earlier. There aren't any tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs benefi- ciary.

Example. Assume the same situation for Aaron as in the last example (see Rollovers, earlier). Instead of clos- ing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister.

Transfer Because of Divorce If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it isn't a taxable transfer. After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own.

Example. In their divorce settlement, Peg received her ex-husband's Coverdell ESA. In this process, the account was transferred into her name. Peg now treats the funds in this Coverdell ESA as if she were the original owner.

Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified edu- cation expenses (defined later) the beneficiary has in the same tax year.

See Table 7-3 for highlights.

CAUTION !

Chapter 7 Coverdell Education Savings Account (ESA) Page 51

Page 52 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Coverdell ESA Distributions at a Glance Don't rely on this table alone. It provides only general highlights. See the text for definitions of terms and for more complete explanations.

Table 7-3.

Question Answer Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free?

Generally, yes, to the extent the amount of the distribution isn't more than the designated beneficiary's adjusted qualified education expenses.

After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed?

Yes. Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. Also, certain transfers to members of the beneficiary's family are permitted.

Does the designated beneficiary need to be enrolled for a minimum number of courses to claim tax-free distribution?

No.

Adjusted qualified education expenses. To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified ed- ucation expenses by any tax-free educational assistance. Tax-free educational assistance includes:

• The tax-free part of scholarships and fellowship grants (see Tax-Free Scholarships and Fellowship Grants in chapter 1);

• Veterans' educational assistance (see Veterans' Ben- efits in chapter 1);

• The tax-free part of Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chap- ter 1);

• Employer-provided educational assistance (see chap- ter 11); and

• Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assis- tance.

The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses.

Tax-Free Distributions Generally, distributions are tax free if they aren't more than the beneficiary's adjusted qualified education expen- ses for the year. Don't report tax-free distributions (includ- ing qualifying rollovers) on your tax return.

Taxable Distributions A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the ben- eficiary's adjusted qualified education expenses for the year. Excess distribution. This is the part of the total distribu- tion that is more than the beneficiary's adjusted qualified education expenses for the year. Earnings and basis. You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was dis- tributed in 2019. The amount of your gross distribution will be shown in box 1. For 2019, instead of dividing the gross distribution between your earnings (box 2) and your basis (amount already taxed) (box 3), the payer or trustee may report the fair market value (account balance) of the Cov- erdell ESA as of December 31, 2019. This will be shown in the blank box below boxes 5 and 6.

The amount contributed from survivor benefits (see Military death gratuity, earlier) is treated as part of your basis and won't be taxed when distributed.

Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribu- tion that represents earnings that have accumulated tax free in the account. Figure the taxable portion for 2019 as shown in the following steps.

1. Multiply the total amount distributed by a fraction. The numerator (top part) is the basis (contributions not previously distributed) at the end of 2018, plus total contributions for 2019, and the denominator (bottom part) is the value (balance) of the account at the end of 2019 plus the amount distributed during 2019.

2. Subtract the amount figured in (1) from the total amount distributed during 2019. The result is the amount of earnings included in the distribution(s).

3. Multiply the amount of earnings figured in (2) by a fraction. The numerator (top part) is the adjusted qualified education expenses paid during 2019 and the denominator (bottom part) is the total amount dis- tributed during 2019.

4. Subtract the amount figured in (3) from the amount figured in (2). The result is the amount the beneficiary must include in income.

The taxable amount must be reported on Schedule 1 (Form 1040 or 1040-SR), line 8, or Form 1040-NR, line 21.

Example. You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed be- fore 2019. There were no contributions in 2019. This is your first distribution from the account, so your basis in the account on December 31, 2018, was $1,500. The value (balance) of your account on December 31, 2019, was $950. You had $700 of adjusted qualified education

Page 52 Chapter 7 Coverdell Education Savings Account (ESA)

Page 53 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

expenses (AQEE) for the year. Using the steps in Figuring the Taxable Portion of a Distribution, earlier, figure the tax- able portion of your distribution as follows.

1. $850 (distribution) × $1,500 basis + $0 contributions$950 value + $850 distribution = $708 (basis portion of distribution)

2. $850 (distribution) − $708 (basis portion of distribution) = $142 (earnings included in distribution)

3. $142 (earnings) ×   $700 AQEE   $850 distribution

= $117 (tax-free earnings)

4. $142 (earnings) − $117 (tax-free earnings) = $25 (taxable earnings)

You must include $25 in income as distributed earnings not used for qualified education expenses. Report this amount on Schedule 1 (Form 1040 or 1040-SR), line 8, listing the type and amount of income on the dotted line.

Worksheet 7-3, at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s).

Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses aren't used for both benefits. This means the beneficiary must reduce qualified higher education ex- penses by tax-free educational assistance, and then fur- ther reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit.

Example. Derek Green had $5,800 of qualified higher education expenses for 2019, his first year in college. He paid his college expenses from the following sources.

Partial tuition scholarship (tax free) $1,500 Coverdell ESA distribution 1,000 Gift from parents 2,100 Earnings from part-time job 1,200

Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also quali- fied for an American opportunity credit. Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return.

Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total quali- fied higher education expenses.

Total qualified higher education expenses $5,800 Minus: Tax-free educational assistance −1,500 Minus: Expenses taken into account in

figuring American opportunity credit − 4,000 Equals: Adjusted qualified higher education

expenses (AQHEE) $ 300

Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. The bal- ance in Derek's account was $1,800 on December 31, 2019. Prior to 2019, $2,100 had been contributed to this account. Contributions for 2019 totaled $400. Using the four steps outlined earlier, Derek figures the taxable por- tion of his distribution as shown below.

1. $1,000 (distribution) × $2,100 basis + $400 contributions $1,800 value + $1,000 distribution

= $893 (basis portion of distribution)

2. $1,000 (distribution) − $893 (basis portion of distribution) = $107 (earnings included in distribution)

3. $107 (earnings) ×    $300 AQHEE   $1,000 distribution = $32 (tax-free earnings)

4. $107 (earnings) − $32 (tax-free earnings) = $75 (taxable earnings)

Derek must include $75 in income (Schedule 1 (Form 1040 or 1040-SR), line 8). This is the amount of distrib- uted earnings not used for adjusted qualified higher edu- cation expenses.

Coordination With Qualified Tuition Program (QTP) Distributions If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjus- ted qualified higher education expenses, those expenses must be allocated between the distribution from the Cov- erdell ESA and the distribution from the QTP before figur- ing how much of each distribution is taxable. The following two examples illustrate possible allocations.

Example 1. In 2019, Beatrice graduated from high school and began her first semester of college. That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for col- lege. Her QESEE doesn't include tuition. To pay these ex- penses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. No one claimed Beatrice as a dependent, nor was she eligible for an education credit. She didn't receive any tax-free educational assistance in 2019. Beatrice must allocate her total qualified education expenses between the two distributions.

Chapter 7 Coverdell Education Savings Account (ESA) Page 53

Page 54 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

1. Beatrice knows that tax-free treatment will be availa- ble if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. The qualified expenses are greater than the distribution, making the $800 Coverdell ESA dis- tribution tax free.

2. Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). She can't use the extra $200 of high school expenses (from (1) above) against the QTP distribu- tion because those expenses are not high school tui- tion expenses and don't qualify a QTP for tax-free treatment.

3. Finally, Beatrice figures the taxable and tax-free por- tions of her QTP distribution based on her $3,000 of QHEE. (See Figuring the Taxable Portion of a Distri- bution in chapter 8 for more information.)

Example 2. Assume the same facts as in Example 1, except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. In this case, she allocates her qualified education expenses as follows.

1. Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribu- tion remaining.

2. Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total).

$3,000 QHEE ×

$800 ESA distribution $4,000 total distribution =

$600 QHEE (ESA)

$3,000 QHEE ×

$3,200 QTP distribution $4,000 total distribution =

$2,400 QHEE (QTP)

3. Beatrice then figures the taxable part of the following. a. Coverdell ESA distribution based on qualified edu-

cation expenses of $1,600 ($1,000 QESEE + $600 QHEE). See Figuring the Taxable Portion of a Distribution, earlier, in this chapter.

b. QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8). The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. However, you don't have to allocate your

expenses in the same way. You can use any reasonable method.

Losses on Coverdell ESA Investments For tax years beginning after 2017 and before 2026, if you have a loss on your investment in a Coverdell ESA, you

TIP

can’t deduct the loss on your income tax return. You have a loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Your basis is the total amount of con- tributions to that Coverdell ESA.

Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Exceptions. The 10% additional tax doesn't apply to the following distributions.

1. Paid to a beneficiary (or to the estate of the designa- ted beneficiary) on or after the death of the designa- ted beneficiary.

2. Made because the designated beneficiary is disabled. A person is considered to be disabled if he or she shows proof that he or she can't do any substantial gainful activity because of his or her physical or men- tal condition. A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration.

3. Included in income because the designated benefi- ciary received: a. A tax-free scholarship or fellowship grant (see

Tax-Free Scholarships and Fellowship Grants in chapter 1);

b. Veterans' educational assistance (see Veterans' Benefits in chapter 1);

c. Employer-provided educational assistance (see chapter 11); or

d. Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

4. Made on account of the attendance of the designated beneficiary at a U.S. military academy (such as the USMA at West Point). This exception applies only to the extent that the amount of the distribution doesn't exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U.S. Code) at- tributable to such attendance.

5. Included in income only because the qualified educa- tion expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits, earlier).

6. Made before June 1, 2020, of an excess 2019 contri- bution (and any earnings on it). The distributed earn- ings must be included in gross income for the year in which the excess contribution was made.

Exception (3) applies only to the extent the distribution isn't more than the scholarship, allowance, or payment.

Page 54 Chapter 7 Coverdell Education Savings Account (ESA)

Page 55 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Figuring the additional tax. Use Part II of Form 5329, to figure any additional tax. Report the amount on Schedule 2 (Form 1040 or 1040-SR), line 6, or Form 1040-NR, line 57.

When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distrib- uted when either one of the following two events occurs.

1. The designated beneficiary reaches age 30. In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. How- ever, this rule doesn't apply if the beneficiary is a spe- cial needs beneficiary.

2. The designated beneficiary dies. In this case, the re- maining assets must generally be distributed within 30 days after the date of death.

Exception for Transfer to Surviving Spouse or Family Member If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the des- ignated beneficiary, the Coverdell ESA retains its status. (“Family member” was defined earlier under Rollovers.) This means the spouse or other family member can treat the Coverdell ESA as his or her own and doesn't need to withdraw the assets until he or she reaches age 30. This

age limitation doesn't apply if the new beneficiary is a spe- cial needs beneficiary. There are no tax consequences as a result of the transfer.

How To Figure the Taxable Earnings When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. You determine these earnings as shown in the following two steps.

1. Multiply the amount distributed by a fraction. The nu- merator (top part) is the basis (contributions not previ- ously distributed) at the end of 2018 plus total contri- butions for 2019, and the denominator (bottom part) is the balance in the account at the end of 2019 plus the amount distributed during 2019.

2. Subtract the amount figured in (1) from the total amount distributed during 2019. The result is the amount of earnings included in the distribution.

For an example, see steps 1 and 2 of the Example under Figuring the Taxable Portion of a Distribution, earlier.

The beneficiary or other person receiving the distribu- tion must report this amount on Schedule 1 (Form 1040 or 1040-SR), line 8, or Form 1040-NR, line 21, listing the type and amount of income on the dotted line.

Coverdell ESA—Taxable Distributions and Basis Line G. Enter the total distributions received from all Coverdell ESAs during 2019. Don't include amounts rolled over to another ESA

within 60 days (only one rollover is allowed during any 12-month period). Also, don't include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made.

Line 2. Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2018, is the total of: • All contributions to this Coverdell ESA before 2019, • Minus the tax-free portion of any distributions from this Coverdell ESA before 2019.

If your last distribution from this Coverdell ESA was before 2019, you must start with the basis in your account as of the end of the last year in which you took a distribution. For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. For years after 2001, you can find that amount by using the ending basis from the worksheet in Pub. 970 for that year. You can determine your basis in this Coverdell ESA as of December 31, 2018, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2019.

Line 4. Enter the total distributions received from this Coverdell ESA in 2019. Don't include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). Also, don't include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions.

Line 7. Enter the total value of this Coverdell ESA as of December 31, 2019, plus any outstanding rollovers contributed to the account after 2018, but before the end of the 60-day rollover period. A statement should be sent to you by January 31, 2020, for this Coverdell ESA showing the value on December 31, 2019. A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. An outstanding rollover is any amount withdrawn within 60 days before the end of 2019 (November 2 through December 31) that was rolled over after December 31, 2019, but within the 60-day rollover period.

Worksheet 7-3 Instructions.

Chapter 7 Coverdell Education Savings Account (ESA) Page 55

Page 56 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Coverdell ESA—Taxable Distributions and Basis

Worksheet 7-3. Keep for Your Records

How to complete this worksheet.   •   •   •

Complete Part I, lines A through H, on only one worksheet. Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. Complete Part III, the Summary (line 16), on only one worksheet.

Caution. If you had a distribution from a Qualified Tuition Program (QTP), see Coordination With Qualified Tuition Program (QTP) Distributions. Part I. Qualified Education Expenses (Complete for total expenses.)  A. Enter your total qualified education expenses for 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  A.  B. Enter those qualified education expenses paid for with tax-free

educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  B.

 C. Enter those qualified higher education expenses deducted on Schedule C (Form 1040 or 1040-SR), Schedule F (Form 1040 or 1040-SR), or Schedule 1 (Form 1040 or 1040-SR), line 11 (or Form 1040-NR, line 34) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C.

 D. Enter those qualified higher education expenses on which an American opportunity or lifetime learning credit was based . . . . . . .  D.

 E. Add lines B, C, and D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  E.  F. Subtract line E from line A. This is your adjusted qualified education expense for 2019 . . . . . . . . . . . .  F.  G. Enter your total distributions from all Coverdell ESAs during 2019. Don't include rollovers

or the return of excess contributions (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G.  H. Divide line F by line G. Enter the result as a decimal (rounded to at least 3 places). If the

result is 1.000 or more, enter 1.000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  H. .

Part II. Taxable Distributions and Basis (Complete separately for each account.)  1. Enter the amount contributed to this Coverdell ESA for 2019, including contributions made for 2019

from January 1, 2020, through April 15, 2020. Don't include rollovers or the return of excess contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1.

 2. Enter your basis in this Coverdell ESA as of December 31, 2018 (see instructions) . . . . . . . . . . . . . . .  2.  3. Add lines 1 and 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  3.  4. Enter the total distributions from this Coverdell ESA during 2019. Don't include rollovers

or the return of excess contributions (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.  5. Multiply line 4 by line H. This is the amount of adjusted qualified

education expense attributable to this Coverdell ESA . . . . . . . . . . . . . .  5.  6. Subtract line 5 from line 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6.  7. Enter the total value of this Coverdell ESA as of December 31, 2019,

plus any outstanding rollovers (see instructions) . . . . . . . . . . . . . . . . . .  7.  8. Add lines 4 and 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  8.  9. Divide line 3 by line 8. Enter the result as a decimal (rounded to

at least 3 places). If the result is 1.000 or more, enter 1.000 . . . . . . . . .  9. . 10. Multiply line 4 by line 9. This is the amount of basis allocated to your

distributions, and is tax free . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. Note. If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15.

11. Subtract line 10 from line 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11. 12. Divide line 5 by line 4. Enter the result as a decimal (rounded to

at least 3 places). If the result is 1.000 or more, enter 1.000 . . . . . . . . . 12. . 13. Multiply line 11 by line 12. This is the amount of qualified education

expenses allocated to your distributions, and is tax free . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. 14. Subtract line 13 from line 11. This is the portion of the distributions from this

Coverdell ESA in 2019 that you must include in income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14. 15. Subtract line 10 from line 3. This is your basis in this Coverdell ESA as of December

31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.

Part III. Summary (Complete only once.) 16. Taxable amount. Add together all amounts on line 14 for all your Coverdell ESAs. Enter here

and include on Schedule 1 (Form 1040 or 1040-SR), line 8; or Form 1040-NR, line 21, listing the type and amount of income on the dotted line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.

Page 56 Chapter 7 Coverdell Education Savings Account (ESA)

Page 57 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

8.

Qualified Tuition Program (QTP)

What’s New Qualified higher education expenses. For distributions made from qualified tuition programs (QTPS) after 2018, qualified higher education expenses may include:

• Certain expenses required for a designated benefi- ciary’s participation in certain apprenticeship pro- grams.

• No more than $10,000 paid as principal or interest on a qualified student loan of the designated beneficiary or the designated beneficiary’s sibling.

See Qualified Higher Education Expenses.

Introduction Qualified tuition programs (QTPs) are also called “529 plans.”

States may establish and maintain programs that allow you to either prepay or contribute to an account for paying a student's qualified education expenses at an eligible ed- ucational institution. Eligible educational institutions may establish and maintain programs that allow you to prepay a student's qualified education expenses. If you prepay tuition, the student (designated beneficiary) will be entitled to a waiver or a payment of qualified education expenses. You can't deduct either payments or contributions to a QTP. For information on a specific QTP, you will need to contact the state agency or eligible educational institution that established and maintains it.

This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses.

What is the tax benefit of a QTP? No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. See Are Distributions Taxable, later, for more information.

Even if a QTP is used to finance a student's edu- cation, the student or the student's parents still may be eligible to claim the American opportunity

credit or the lifetime learning credit. See Coordination With American Opportunity and Lifetime Learning Credits, later.

TIP

TIP

What Is a Qualified Tuition Program? A qualified tuition program is a program set up to allow you to either prepay or contribute to an account estab- lished for paying a student's qualified education expenses at an eligible educational institution. QTPs can be estab- lished and maintained by states (or agencies or instru- mentalities of a state) and eligible educational institutions. The program must meet certain requirements. Your state government or the eligible educational institution in which you are interested can tell you whether or not they partici- pate in a QTP.

Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. For purposes of QTPs, the expen- ses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Designated beneficiary. The designated beneficiary is generally the student (or future student) for whom the QTP is intended to provide benefits. The designated benefi- ciary can be changed after participation in the QTP be- gins. If a state or local government or certain tax-exempt organizations purchase an interest in a QTP as part of a scholarship program, the designated beneficiary is the person who receives the interest as a scholarship.

Eligible Educational Institution For purposes of a QTP, an eligible educational institution can be either an eligible postsecondary school or an eligi- ble elementary or secondary school. Eligible postsecondary school. An eligible postsecon- dary school is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, uni- versity, vocational school, or other postsecondary educa- tional institution. Also, the institution must be eligible to participate in a student aid program administered by the U.S. Department of Education. Virtually all accredited postsecondary institutions meet this definition. The edu- cational institution should be able to tell you if it’s an eligi- ble educational institution.

An eligible educational institution also includes certain educational institutions located outside the United States that are eligible to participate in a student aid program ad- ministered by the U.S. Department of Education. Eligible elementary or secondary school. An eligible elementary or secondary school is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law.

Chapter 8 Qualified Tuition Program (QTP) Page 57

Page 58 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. As shown in the fol- lowing list, to be qualified, some of the expenses must be required by the school and some must be incurred by stu- dents who are enrolled at least half-time, defined later.

1. The following expenses must be required for enroll- ment or attendance of a designated beneficiary at an eligible postsecondary school. a. Tuition and fees. b. Books, supplies, and equipment.

2. Expenses for special needs services needed by a special needs beneficiary must be incurred in connec- tion with enrollment or attendance at an eligible post- secondary school.

3. Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below).

The expense for room and board qualifies only to the extent that it isn't more than the greater of the fol- lowing two amounts. a. The allowance for room and board, as determined

by the school, that was included in the cost of at- tendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

b. The actual amount charged if the student is resid- ing in housing owned or operated by the school.

You may need to contact the eligible educational insti- tution for qualified room and board costs.

4. The purchase of computer or peripheral equipment, computer software, or Internet access and related services if it's to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible postsecondary school. (This doesn't in- clude expenses for computer software for sports, games, or hobbies unless the software is predomi- nantly educational in nature.)

5. For distributions made from QTPs after 2018, expen- ses for fees, books, supplies, and equipment required for the designated beneficiary’s participation in an ap- prenticeship program registered and certified with the Secretary of Labor under section 1 of the National Ap- prenticeship Act.

6. For distributions made from QTPs after 2018, no more than $10,000 paid as principal or interest on qualified student loans of the designated beneficiary or the designated beneficiary’s sibling. A sibling in- cludes a brother, sister, stepbrother, or stepsister. For purposes of the $10,000 limitation, amounts treated as a qualified higher education expense for the loans of a sibling are taken into account for the sibling and not for the designated beneficiary. You can’t deduct as interest on a student loan (see chapter 4) any amount paid from a distribution of earnings from a

QTP after 2018 to the extent the earnings are treated as a tax free because they were used to pay student loan interest.

Half-time student. A student is enrolled “at least half-time” if he or she 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.

Qualified Elementary and Secondary Education Expenses These are expenses for no more than $10,000 of tuition, incurred by a designated beneficiary, in connection with enrollment or attendance at an eligible elementary or sec- ondary school.

How Much Can You Contribute? Contributions to a QTP on behalf of any beneficiary can't be more than the amount necessary to provide for the qualified education expenses of the beneficiary. There are no income restrictions on the individual contributors.

You can contribute to both a QTP and a Coverdell ESA in the same year for the same designated beneficiary.

Recontribution of Refunded Amounts If a student receives a refund of qualified education ex- penses that were treated as paid by a QTP distribution, the student can recontribute these amounts into any QTP for which they are the beneficiary within 60 days after the date of the refund to avoid the need to figure the taxable part of the QTP distribution.

Are Distributions Taxable? The part of a distribution representing the amount paid or contributed to a QTP doesn't have to be included in in- come. This is a return of the investment in the plan.

The designated beneficiary generally doesn't have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted quali- fied education expenses (defined under Figuring the Tax- able Portion of a Distribution, later). Earnings and return of investment. You will receive a Form 1099-Q from each of the programs from which you received a QTP distribution in 2019. The amount of your

Page 58 Chapter 8 Qualified Tuition Program (QTP)

Page 59 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

gross distribution (box 1) shown on each form will be divi- ded between your earnings (box 2) and your basis, or re- turn of investment (box 3). Form 1099-Q should be sent to you by January 31, 2020.

Figuring the Taxable Portion of a Distribution To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP distributions for the tax year to the adjusted qualified education expenses. Adjusted qualified education expenses. This amount is the total qualified education expenses reduced by any tax-free educational assistance. Tax-free educational as- sistance includes:

• The tax-free part of scholarships and fellowship grants (see Tax-Free Scholarships and Fellowship Grants in chapter 1);

• Veterans' educational assistance (see Veterans' Ben- efits in chapter 1);

• The tax-free part of Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chap- ter 1);

• Employer-provided educational assistance (see chap- ter 11); and

• Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assis- tance.

Taxable earnings. Use the following steps to figure the taxable part.

1. Multiply the total distributed earnings shown on Form 1099-Q, box 2, by a fraction. The numerator (top part) is the adjusted qualified education expenses paid dur- ing the year and the denominator (bottom part) is the total amount distributed during the year.

2. Subtract the amount figured in (1) from the total dis- tributed earnings. The result is the amount the benefi- ciary must include in income. Report it on Schedule 1 (Form 1040 or 1040-SR), line 8, or Form 1040-NR, line 21.

Example 1. In 2011, Sara Clarke's parents opened a savings account for her with a QTP maintained by their state government. Over the years they contributed $18,000 to the account. The total balance in the account was $27,000 on the date the distribution was made. In the summer of 2019, Sara enrolled in college and had $8,300 of qualified education expenses for the rest of the year. She paid her college expenses from the following sour- ces.

Gift from parents $1,600 Partial tuition scholarship (tax free) 3,100 QTP distribution 5,300

Before Sara can determine the taxable part of her QTP distribution, she must reduce her total qualified education expenses by any tax-free educational assistance.

Total qualified education expenses $8,300 Minus: Tax-free educational assistance − 3,100 Equals: Adjusted qualified education expenses (AQEE) $5,200

Since the remaining expenses ($5,200) are less than the QTP distribution, part of the earnings will be taxable.

Sara's Form 1099-Q shows that $950 of the QTP distri- bution is earnings. Sara figures the taxable part of the dis- tributed earnings as follows.

1. $950 (earnings) × $5,200 AQEE$5,300 distribution = $932 (tax-free earnings)

2. $950 (earnings) − $932 (tax-free earnings) = $18 (taxable earnings)

Sara must include $18 in income (Schedule 1 (Form 1040 or 1040-SR), line 8) as distributed QTP earnings not used for adjusted qualified education expenses.

Coordination With American Opportunity and Lifetime Learning Credits An American opportunity or lifetime learning credit (edu- cation credit) can be claimed in the same year the benefi- ciary takes a tax-free distribution from a QTP, as long as the same expenses aren't used for both benefits. This means that after the beneficiary reduces qualified educa- tion expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit.

Example 2. Assume the same facts as in Example 1, except that Sara's parents claimed an American opportu- nity credit of $2,500 (based on $4,000 expenses).

Total qualified education expenses $8,300 Minus: Tax-free educational assistance − 3,100 Minus: Expenses taken into account in figuring American opportunity credit − 4,000 Equals: Adjusted qualified education expenses (AQEE) $1,200

The taxable part of the distribution is figured as follows.

1. $950 (earnings) × $1,200 AQEE  $5,300 distribution = $215 (tax-free earnings)

2. $950 (earnings) − $215 (tax-free earnings) = $735 (taxable earnings)

Sara must include $735 in income (Schedule 1 (Form 1040 or 1040-SR), line 8). This represents distributed

Chapter 8 Qualified Tuition Program (QTP) Page 59

Page 60 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

earnings not used for adjusted qualified education expen- ses.

Coordination With Coverdell ESA Distributions If a designated beneficiary receives distributions from both a QTP and a Coverdell ESA in the same year, and the total of these distributions is more than the benefi- ciary's adjusted qualified higher education expenses, the expenses must be allocated between the distributions.

Example 3. Assume the same facts as in Example 2, except that instead of receiving a $5,300 distribution from her QTP, Sara received $4,600 from that account and $700 from her Coverdell ESA. In this case, Sara must allo- cate her $1,200 of adjusted qualified higher education ex- penses (AQHEE) between the two distributions.

$1,200 AQHEE ×

$700 ESA distribution $5,300 total distribution =

$158 AQHEE (ESA)

$1,200 AQHEE ×

$4,600 QTP distribution $5,300 total distribution =

$1,042 AQHEE (QTP)

Sara then figures the taxable portion of her Coverdell ESA distribution based on qualified higher education ex- penses of $158, and the taxable portion of her QTP distri- bution based on the other $1,042.

Note. If you are required to allocate your expenses be- tween Coverdell ESA and QTP distributions, and you have adjusted qualified elementary and secondary educa- tion expenses, see the examples in chapter 7 under Coor- dination With Qualified Tuition Program (QTP) Distribu- tions.

Coordination With Tuition and Fees Deduction A tuition and fees deduction (see chapter 6) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses aren't used for both benefits.

Losses on QTP Investments For tax years beginning after 2017 and before 2026, if you have a loss on your investment in a QTP account, you can’t claim the loss on your income tax return. You have a loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Your basis is the total amount of con- tributions to that QTP account.

The aggregation rules that applied if you had dis- tributions from more than one QTP account dur- ing a year were eliminated for distributions after

2014. For more information, see Notice 2016-13 available at IRS.gov/IRB/2016-07_IRB#NOT-2016-13.

CAUTION !

Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Exceptions. The 10% additional tax doesn't apply to the following distributions.

1. Paid to a beneficiary (or to the estate of the designa- ted beneficiary) on or after the death of the designa- ted beneficiary.

2. Made because the designated beneficiary is disabled. A person is considered to be disabled if he or she shows proof that he or she can't do any substantial gainful activity because of his or her physical or men- tal condition. A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration.

3. Included in income because the designated benefi- ciary received: a. A tax-free scholarship or fellowship grant (see

Tax-Free Scholarships and Fellowship Grants in chapter 1);

b. Veterans' educational assistance (see Veterans' Benefits in chapter 1);

c. Employer-provided educational assistance (see chapter 11); or

d. Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

4. Made on account of the attendance of the designated beneficiary at a U.S. military academy (such as the USNA at Annapolis). This exception applies only to the extent that the amount of the distribution doesn't exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U.S. Code) at- tributable to such attendance.

5. Included in income only because the qualified educa- tion expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits, earlier).

Exception (3) applies only to the extent the distribution isn't more than the scholarship, allowance, or payment. Figuring the additional tax. Use Part II of Form 5329 to figure any additional tax. Report the amount on Schedule 2 (Form 1040 or 1040-SR), line 6, or Form 1040-NR, line 57.

Rollovers and Other Transfers Assets can be rolled over or transferred from one QTP to another or from a QTP to an ABLE account. In addition,

Page 60 Chapter 8 Qualified Tuition Program (QTP)

Page 61 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

the designated beneficiary can be changed without trans- ferring accounts.

Rollovers Any amount distributed from a QTP isn't taxable if it's rol- led over to either:

• Another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse), or

• An ABLE account for the benefit of the same benefi- ciary or for the benefit of a member of the beneficiary’s family (including the beneficiary’s spouse). But this doesn’t apply to the extent the amount distributed when added to other amounts contributed to the ABLE account exceeds the annual contribution limit. For more information about ABLE accounts, see Publica- tion 907, Tax Highlights for Persons With Disabilities.

You should contact the qualified ABLE program before contributing any funds to the ABLE ac- count to ensure that the contribution limit will not

be exceeded.

An amount is rolled over if it's paid to an ABLE account or another QTP within 60 days after the date of the distri- bution.

Don't report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040, 1040-SR, or 1040-NR. These aren't taxable distributions. Members of the beneficiary's family. For these purpo- ses, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary.

1. Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.

2. Brother, sister, stepbrother, or stepsister. 3. Father or mother or ancestor of either. 4. Stepfather or stepmother. 5. Son or daughter of a brother or sister. 6. Brother or sister of father or mother. 7. Son-in-law, daughter-in-law, father-in-law,

mother-in-law, brother-in-law, or sister-in-law. 8. The spouse of any individual listed above. 9. First cousin.

Example. When Aaron graduated from college last year, he had $5,000 left in his QTP. He wanted to give this money to his younger brother, who was in junior high school. In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his brother's QTP within 60 days of the distribution.

CAUTION !

If the rollover is to another QTP for the same ben- eficiary, only one rollover is allowed within 12 months of a previous transfer to any QTP for that

designated beneficiary.

Changing the Designated Beneficiary There are no income tax consequences if the designated beneficiary of an account is changed to a member of the beneficiary's family. See Members of the beneficiary's family, earlier.

Example. Assume the same situation as in the last ex- ample. Instead of closing his QTP and paying the distribu- tion into his brother's QTP, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his brother.

9.

Education Exception to Additional Tax on Early IRA Distributions

Introduction Generally, if you take a distribution from your IRA before you reach age 591/2, you must pay a 10% additional tax on the early distribution. This applies to any IRA you own, whether it is a traditional IRA (including a SEP-IRA), a Roth IRA, or a SIMPLE IRA. The additional tax on an early distribution from a SIMPLE IRA may be as high as 25%. See Pub. 560, Retirement Plans for Small Business, for information on SEP-IRAs, and Pub. 590-B for information about distributions from all other IRAs.

However, you can take distributions from your IRAs for qualified higher education expenses without having to pay the 10% additional tax. You may owe income tax on at least part of the amount distributed, but you may not have to pay the 10% additional tax.

Generally, if the taxable part of the distribution is less than or equal to the adjusted qualified education expen- ses (AQEE), none of the distribution is subject to the addi- tional tax. If the taxable part of the distribution is more than the AQEE, only the excess is subject to the additional tax.

Who Is Eligible? You can take a distribution from your IRA before you reach age 591/2 and not have to pay the 10% additional

CAUTION !

Chapter 9 Education Exception to Additional Tax on Early IRA Distributions Page 61

Page 62 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

tax if, for the year of the distribution, you pay qualified ed- ucation expenses for:

• yourself; • your spouse; • your or your spouse's child, foster child, or adopted

child; or • your or your spouse’s grandchild.

Qualified education expenses. For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their en- rollment or attendance.

In addition, if the student is at least a half-time student, room and board are qualified education expenses.

The expense for room and board qualifies only to the extent that it isn't more than the greater of the following two amounts.

1. The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid pur- poses) for a particular academic period and living ar- rangement of the student.

2. The actual amount charged if the student is residing in housing owned or operated by the eligible educa- tional institution.

You may need to contact the eligible educational institu- tion for qualified room and board costs. Eligible educational institution. An eligible educational institution is generally any accredited public, nonprofit, or proprietary (privately owned profit making) college, univer- sity, vocational school, or other postsecondary educa- tional institution. Also, the institution must be eligible to participate in a student aid program administered by the U.S. Department of Education. Virtually all accredited postsecondary institutions meet this definition. The edu- cational institution should be able to tell you if it is an eligi- ble educational institution.

An eligible educational institution also includes certain educational institutions located outside the United States that are eligible to participate in a student aid program ad- ministered by the U.S. Department of Education. Half-time student. A student is enrolled “at least half-time” if he or she 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.

Figuring the Amount Not Subject to the 10% Tax To determine the amount of your distribution that isn't sub- ject to the 10% additional tax, first figure your adjusted qualified education expenses (AQEE). You do this by re- ducing your total qualified education expenses by any tax-free educational assistance, which includes:

• Expenses used to figure the tax-free portion of distri- butions from a Coverdell education savings account (ESA) (see Distributions in chapter 7);

• The tax-free part of scholarships and fellowship grants (see Tax-Free Scholarships and Fellowship Grants in chapter 1);

• The tax-free part of Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chap- ter 1);

• Veterans' educational assistance (see Veterans' Ben- efits in chapter 1);

• Employer-provided educational assistance (see chap- ter 11); and

• Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assis- tance.

Don't reduce the qualified education expenses by amounts paid with funds the student receives as:

• Payment for services, such as wages; • A loan; • A gift; • An inheritance given to either the student or the indi-

vidual making the withdrawal; or • A withdrawal from personal savings (including savings

from a qualified tuition program (QTP)). If your IRA distribution is equal to or less than your AQEE, you aren't subject to the 10% additional tax.

Example 1. In 2019, Erin (age 32) took a year off from teaching to attend graduate school full-time. She paid $5,800 of qualified education expenses from the following sources.

Employer-provided educational assistance (tax free) $5,000

Early distribution from IRA (taxable part is $500) 3,200

Before Erin can determine if she must pay the 10% ad- ditional tax on her IRA distribution, she must reduce her total qualified education expenses.

Page 62 Chapter 9 Education Exception to Additional Tax on Early IRA Distributions

Page 63 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Total qualified education expenses $5,800 Minus: Tax-free educational assistance −5,000 Equals: AQEE $  800

Because Erin's AQEE ($800) are more than the taxable part of her IRA distribution ($500), she doesn't have to pay the 10% additional tax on any part of this distribution. However, she must include the $500 taxable earnings in her gross income subject to income tax.

Example 2. Assume the same facts as in Example 1, except that Erin deducted some of the contributions to her IRA, so the taxable part of her early distribution is higher by $1,000. This must be included in her income subject to income tax.

The taxable part of Erin's IRA distribution ($1,000) is larger than her $800 AQEE. Therefore, she must pay the 10% additional tax on $200, the taxable part of her distri- bution ($1,000) that is more than her AQEE ($800). She doesn't have to pay the 10% additional tax on the remain- ing $800 of her taxable distribution.

Reporting Early Distributions By January 31, 2020, the payer of your IRA distribution should send you Form 1099-R, Distributions From Pen- sions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The information on this form will help you determine how much of your distribution is taxa- ble for income tax purposes and how much is subject to the 10% additional tax.

If you received an early distribution from your IRA, you must report the taxable part of the distribution on Form 1040 or 1040-SR, line 4b; or Form 1040-NR, line 17b. Then, if you qualify for an exception for qualified higher education expenses, you must file Form 5329 to show how much, if any, of your early distribution is subject to the 10% additional tax. See the Instructions for Form 5329, Part I, for help in completing the form and entering the re- sults on Form 1040, 1040-SR, or 1040-NR.

There are many other situations in which Form 5329 is required. If, during 2019, you had other distributions from IRAs or qualified retirement plans, or have made excess contributions to certain tax-favored accounts, see the in- structions for Schedule 2 (Form 1040 or 1040-SR), line 6; or Form 1040-NR, line 57, to determine if you must file Form 5329.

10.

Education Savings Bond Program

What's New Modified adjusted gross income (MAGI) limits. For 2019, the amount of your education savings bond interest exclusion is gradually reduced (phased out) if your MAGI is between $81,100 and $96,100 ($121,600 and $151,600 if you file a joint return). You can't exclude any of the inter- est if your MAGI is $96,100 or more ($151,600 or more if you file a joint return).

Introduction Generally, you must pay tax on the interest earned on U.S. savings bonds. If you don't include the interest in in- come in the years it is earned, you must include it in your income in the year in which you cash in the bonds.

However, when you cash in certain savings bonds un- der an education savings bond program, you may be able to exclude the interest from income.

Who Can Cash in Bonds Tax Free? You may be able to cash in qualified U.S. savings bonds without having to include in your income some or all of the interest earned on the bonds if you meet the following conditions.

• You pay qualified education expenses for yourself, your spouse, or a dependent.

• Your modified adjusted gross income (MAGI) is less than $96,100 ($151,600 if married filing jointly).

• Your filing status isn't married filing separately. Qualified U.S. savings bonds. A qualified U.S. savings bond is a series EE bond issued after 1989 or a series I bond. The bond must be issued either in your name (as the sole owner) or in the name of both you and your spouse (as co-owners).

The owner must be at least 24 years old before the bond's issue date. The issue date is printed on the front of the savings bond.

The issue date isn't necessarily the date of pur- chase—it will be the first day of the month in which the bond is purchased (or posted, if bought

electronically). CAUTION

!

Chapter 10 Education Savings Bond Program Page 63

Page 64 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Qualified education expenses. These include the fol- lowing items you pay for either yourself, your spouse, or a dependent.

1. Tuition and fees required to enroll at or attend an eligi- ble educational institution. Qualified education expen- ses don't include expenses for room and board or for courses involving sports, games, or hobbies that aren't part of a degree or certificate-granting program.

2. Contributions to a qualified tuition program (QTP) (see How Much Can You Contribute in chapter 8).

3. Contributions to a Coverdell education savings ac- count (ESA) (see Contributions in chapter 7).

Adjusted qualified education expenses. You must reduce your qualified education expenses by all of the fol- lowing tax-free benefits.

1. Tax-free part of scholarships and fellowship grants (see Tax-Free Scholarships and Fellowship Grants in chapter 1).

2. Expenses used to figure the tax-free portion of distri- butions from a Coverdell ESA (see Qualified Educa- tion Expenses in chapter 7).

3. Expenses used to figure the tax-free portion of distri- butions from a QTP (see Qualified Education Expen- ses in chapter 8).

4. Any tax-free payments (other than gifts or inheritan- ces) received as educational assistance, such as: a. Veterans' educational assistance benefits (see

Veterans' Benefits in chapter 1); b. Qualified tuition reductions (see Qualified Tuition

Reduction in chapter 1); or c. Employer-provided educational assistance (see

chapter 11). 5. Any expenses used in figuring the American opportu-

nity and lifetime learning credits. See What Expenses Qualify in chapter 2 (American opportunity credit), and What Expenses Qualify in chapter 3 (lifetime learning credit), for more information.

Eligible educational institution. An eligible educa- tional institution is any college, university, vocational school, or other postsecondary educational institution eli- gible 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 edu- cational institution should be able to tell you if it is an eligi- ble educational institution.

Certain educational institutions located outside the Uni- ted States also participate in the U.S. Department of Edu- cation's Federal Student Aid (FSA) programs.

Dependent. A person who qualifies as your depend- ent will be listed by name in the Dependents section of your Form 1040 or 1040-SR. See the Instructions for Forms 1040 and 1040-SR.

Modified adjusted gross income (MAGI). For most taxpayers, MAGI is adjusted gross income (AGI) as fig- ured on their federal income tax return without taking into account this interest exclusion. However, as discussed below, there may be other modifications.

Your MAGI is the AGI on line 8b of Form 1040 or 1040-SR figured 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 by bona fide residents of Ameri-

can Samoa, 5. Exclusion of income by bona fide residents of Puerto

Rico, 6. Exclusion for adoption benefits received under an em-

ployer's adoption assistance program, 7. Deduction for student loan interest, and 8. Deduction for tuition and fees (see chapter 6).

Use the worksheet in the instructions for line 9 of Form 8815 to figure your MAGI. If you claim any of the exclusion or deduction items (1)–(6) listed above, add the amount of the exclusion or deduction to the amount on line 5 of the worksheet. Don't add in the deduction for (7) student loan interest or (8) tuition and fees, because line 4 of the work- sheet already includes these amounts. Enter the total on Form 8815, line 9, as your MAGI.

Because the deduction for interest expenses at- tributable to royalties and other investments is limited to your net investment income, you can't

figure the deduction until you have figured this interest ex- clusion. Therefore, if you had interest expenses attributa- ble to royalties and deductible on Schedule E (Form 1040 or 1040-SR), Supplemental Income and Loss, you must make a special computation of your deductible interest without regard to this exclusion to figure the net royalty in- come included in your MAGI. See Royalties included in MAGI under Education Savings Bond Program in Pub. 550, chapter 1.

Figuring the Tax-Free Amount If the total you receive when you cash in the bonds isn't more than the adjusted qualified education expenses for the year, all of the interest on the bonds may be tax free. However, if the total you receive when you cash in the bonds is more than the adjusted expenses, only part of the interest may be tax free.

To determine the tax-free amount, multiply the interest part of the proceeds by a fraction. The numerator (top part) of the fraction is the adjusted qualified education ex- penses (AQEE) you paid during the year. The denomina- tor (bottom part) of the fraction is the total proceeds you received during the year.

CAUTION !

Page 64 Chapter 10 Education Savings Bond Program

Page 65 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Example. In February 2019, Mark and Joan Washing- ton, a married couple, cashed a qualified series EE U.S. savings bond. They received proceeds of $9,000, repre- senting principal of $6,000 and interest of $3,000. In 2019, they paid $7,650 of their daughter's college tuition. They aren't claiming an American opportunity or lifetime learn- ing credit for those expenses, and their daughter doesn't have any tax-free educational assistance. Their MAGI for 2019 was $80,000.

$3,000 interest ×

$7,650 AQEE = $2,550tax-free interest$9,000 proceeds

They can exclude $2,550 of interest in 2019. They must pay tax on the remaining $450 ($3,000 − $2,550) of inter- est.

Effect of the Amount of Your Income on the Amount of Your Exclusion The amount of your interest exclusion is gradually re- duced (phased out) if your MAGI is between $81,100 and $96,100 (between $121,600 and $151,600 if your filing status is married filing jointly). You can’t exclude any of the interest if your MAGI is equal to or more than the up- per limit.

The phaseout, if any, is figured for you when you fill out Form 8815.

Claiming the Exclusion Use Form 8815 to figure your education savings bond in- terest exclusion. Enter your exclusion on line 3 of Sched- ule B (Form 1040 or 1040-SR), Interest and Ordinary Divi- dends. Attach Form 8815 to your tax return.

11.

Employer-Provided Educational Assistance

Introduction If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer shouldn't include those bene- fits with your wages, tips, and other compensation shown on your Form W-2, box 1. This also means that you don't have to include the benefits on your income tax return.

You can't use any of the tax-free education ex- penses paid for by your employer as the basis for any other deduction or credit, including the Ameri-

can opportunity credit and lifetime learning credit.

Educational assistance program. To qualify as an edu- cational assistance program, the plan must be written and must meet certain other requirements. Your employer can tell you whether there is a qualified program where you work. Educational assistance benefits. Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. Edu- cation generally includes any form of instruction or training that improves or develops your capabilities. The pay- ments don't have to be for work-related courses or cour- ses that are part of a degree program.

Educational assistance benefits don't include payments for the following items.

1. Meals, lodging, or transportation. 2. Tools or supplies (other than textbooks) that you can

keep after completing the course of instruction. 3. Courses involving sports, games, or hobbies unless

they: a. Have a reasonable relationship to the business of

your employer, or b. Are required as part of a degree program.

Benefits over $5,250. If your employer pays more than $5,250 in educational assistance benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (Form W-2, box 1) the amount that you must include in in- come.

Working condition fringe benefit. However, if the benefits over $5,250 also qualify as a working condition fringe benefit, your employer doesn't have to include them in your wages. A working condition fringe benefit is a ben- efit that, had you paid for it, would be allowable as a busi- ness expense deduction. For more information on working condition fringe benefits, see Working Condition Benefits in chapter 2 of Pub. 15-B, Employer's Tax Guide to Fringe Benefits.

CAUTION !

Chapter 11 Employer-Provided Educational Assistance Page 65

Page 66 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

12.

Business Deduction for Work-Related Education

What's New Standard mileage rate. Generally, if you claim a busi- ness deduction for work-related education and you drive your car to and from school, the amount you can deduct for miles driven from January 1, 2019, through December 31, 2019, is 58 cents a mile. For more information, see Transportation Expenses under What Expenses Can Be Deducted.

Reminders Miscellaneous itemized deductions. For tax years be- ginning after 2017 and before 2026, you no longer deduct work-related education expenses as a miscellaneous itemized deduction subject to a 2%-of-adjusted-gross-in- come floor.

Introduction This chapter discusses work-related education expenses you may be able to deduct as business expenses.

To claim such a deduction, you must: • File Schedule C (Form 1040 or 1040-SR), Profit or

Loss From Business, or Schedule F (Form 1040 or 1040-SR), Profit or Loss From Farming, if you are self-employed;

• File Form 2106, Employee Business Expenses, if you are a qualified performing artist or fee-based state or local government official;

• Itemize your deductions on Schedule A (Form 1040 or 1040-SR) or 1040-NR, Schedule A, if you are a disa- bled individual with impairment-related education ex- penses; and

• Have expenses for education that meet the require- ments discussed under Qualifying Work-Related Edu- cation, later.

What is the tax benefit of taking a business deduc- tion for work-related education? If you are self-em- ployed, you deduct your expenses for qualifying work-re- lated education directly from your self-employment income. This reduces the amount of your income subject to both income tax and self-employment tax.

If you are a qualified performing artist or fee-based state or local government official, you deduct your expen- ses for qualifying work-related education directly from your income as you figure your adjusted gross income.

If you are a disabled individual and can itemize your de- ductions, you deduct your impairment-related education expenses as an itemized deduction. An itemized deduc- tion reduces the amount of your income subject to tax.

Your work-related education expenses may also qualify you for other tax benefits, such as the American opportu- nity and lifetime learning credits. You may qualify for these other benefits even if you don't meet the requirements lis- ted above.

Also, your work-related education expenses may qual- ify you to claim more than one tax benefit. Generally, you may claim any number of benefits as long as you use dif- ferent expenses to figure each one.

Qualifying Work-Related Education As discussed earlier, self-employed individuals, certain artists, and certain government officials can deduct the costs of qualifying work-related education as business ex- penses. Disabled individuals can deduct impairment ex- penses related to this education as an itemized deduction. This is education that meets at least one of the following two tests.

• The education is required by your employer or the law to keep your present salary, status, or job. The re- quired education must serve a bona fide business pur- pose of your employer.

• The education maintains or improves skills needed in your present work.

However, even if the education meets one or both of the above tests, it isn't qualifying work-related education if it:

• Is needed to meet the minimum educational require- ments of your present trade or business, or

• Is part of a program of study that will qualify you for a new trade or business.

You can deduct the costs of qualifying work-related ed- ucation as a business expense even if the education could lead to a degree.

Use Figure 12-1 as a quick check to see if your educa- tion qualifies.

Education Required by Employer or by Law Once you have met the minimum educational require- ments for your job, your employer or the law may require you to get more education. This additional education is qualifying work-related education if all three of the follow- ing requirements are met.

• It is required for you to keep your present salary, sta- tus, or job.

• The requirement serves a bona fide business purpose of your employer.

Page 66 Chapter 12 Business Deduction for Work-Related Education

Page 67 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

• The education isn't part of a program that will qualify you for a new trade or business.

When you get more education than your employer or the law requires, the additional education can be qualify- ing work-related education only if it maintains or improves skills required in your present work. See Education To Maintain or Improve Skills, later.

Example. You are a teacher who has satisfied the minimum requirements for teaching. Your employer re- quires you to take an additional college course each year to keep your teaching job. If the courses won't qualify you for a new trade or business, they are qualifying work-rela- ted education even if you eventually receive a master's degree and an increase in salary because of this extra ed- ucation.

Education To Maintain or Improve Skills If your education isn't required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. This could include refresher courses, courses on current developments, and academic or vocational courses.

Example. You repair televisions, radios, and stereo systems for XYZ Store. To keep up with the latest changes, you take special courses in radio and stereo service. These courses maintain and improve skills re- quired in your work. Maintaining skills vs. qualifying for new job. Educa- tion to maintain or improve skills needed in your present work isn't qualifying education if it will also qualify you for a new trade or business.

Education during temporary absence. If you stop working for a year or less in order to get education to maintain or improve skills needed in your present work and then return to the same general type of work, your ab- sence is considered temporary. Education that you get during a temporary absence is qualifying work-related ed- ucation if it maintains or improves skills needed in your present work.

Example. You quit your biology research job to be- come a full-time biology graduate student for 1 year. If you return to work in biology research after completing the courses, the education is related to your present work even if you don't go back to work with the same employer.

Education during indefinite absence. If you stop work for more than a year, your absence from your job is

Figure 12-1. Does Your Work-Related Education Qualify? Start Here

Yes

Is the education required by your employer or the law to keep your present salary, status, or job?

Does the requirement serve a bona �de business requirement of your employer?

Is the education needed to meet the minimum educational requirements of your present trade or business?

Is the education part of a program of study that will qualify you for a new trade or business?

Does the education maintain or improve skills needed in your present work?

Your education isn’t qualifying work-related education.

No

No

No

Yes

Yes

No

Yes Yes

Your education is qualifying work-related education.

No

Chapter 12 Business Deduction for Work-Related Education Page 67

Page 68 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

considered indefinite. Education during an indefinite ab- sence, even if it maintains or improves skills needed in the work from which you are absent, is considered to qualify you for a new trade or business. Therefore, it isn't qualify- ing work-related education.

Education To Meet Minimum Requirements Education you need to meet the minimum educational re- quirements for your present trade or business isn't qualify- ing work-related education. The minimum educational re- quirements are determined by:

• Laws and regulations; • Standards of your profession, trade, or business; and • Your employer.

Once you have met the minimum educational require- ments that were in effect when you were hired, you don't have to meet any new minimum educational require- ments. This means that if the minimum requirements change after you were hired, any education you need to meet the new requirements can be qualifying education.

You haven't necessarily met the minimum educa- tional requirements of your trade or business sim- ply because you are already doing the work.

Example 1. You are a full-time engineering student. Although you haven't received your degree or certification, you work part time as an engineer for a firm that will em- ploy you as a full-time engineer after you finish college. Al- though your college engineering courses improve your skills in your present job, they are also needed to meet the minimum job requirements for a full-time engineer. The education isn't qualifying work-related education.

Example 2. You are an accountant and you have met the minimum educational requirements of your employer. Your employer later changes the minimum educational re- quirements and requires you to take college courses to keep your job. These additional courses can be qualifying work-related education because you have already satis- fied the minimum requirements that were in effect when you were hired.

Requirements for Teachers States or school districts usually set the minimum educa- tional requirements for teachers. The requirement is the college degree or the minimum number of college hours usually required of a person hired for that position.

If there are no requirements, you will have met the mini- mum educational requirements when you become a fac- ulty member. The determination of whether you are a fac- ulty member of an educational institution must be made on the basis of the particular practices of the institution. You will generally be considered a faculty member when one or more of the following occurs.

• You have tenure.

CAUTION !

• Your years of service count toward obtaining tenure. • You have a vote in faculty decisions. • Your school makes contributions for you to a retire-

ment plan other than social security or a similar pro- gram.

Example 1. The law in your state requires beginning secondary school teachers to have a bachelor's degree, including 10 professional education courses. In addition, to keep the job, a teacher must complete a fifth year of training within 10 years from the date of hire. If the em- ploying school certifies to the state Department of Educa- tion that qualified teachers can't be found, the school can hire persons with only 3 years of college. However, to keep their jobs, these teachers must get a bachelor's de- gree and the required professional education courses within 3 years.

Under these facts, the bachelor's degree, whether or not it includes the 10 professional education courses, is considered the minimum educational requirement for qualification as a teacher in your state.

If you have all the required education except the fifth year, you have met the minimum educational require- ments. The fifth year of training is qualifying work-related education unless it is part of a program of study that will qualify you for a new trade or business.

Example 2. Assume the same facts as in Example 1, except that you have a bachelor's degree and only six professional education courses. The additional four edu- cation courses can be qualifying work-related education. Although you don't have all the required courses, you have already met the minimum educational requirements.

Example 3. Assume the same facts as in Example 1, except that you are hired with only 3 years of college. The courses you take that lead to a bachelor's degree (includ- ing those in education) aren't qualifying work-related edu- cation. They are needed to meet the minimum educational requirements for employment as a teacher.

Example 4. You have a bachelor's degree and you work as a temporary instructor at a university. At the same time, you take graduate courses toward an advanced de- gree. The rules of the university state that you can be- come a faculty member only if you get a graduate degree. Also, you can keep your job as an instructor only as long as you show satisfactory progress toward getting this de- gree. You haven't met the minimum educational require- ments to qualify you as a faculty member. The graduate courses aren't qualifying work-related education. Certification in a new state. Once you have met the minimum educational requirements for teachers for your state, you are considered to have met the minimum edu- cational requirements in all states. This is true even if you must get additional education to be certified in another state. Any additional education you need is qualifying work-related education. You have already met the mini- mum requirements for teaching. Teaching in another state isn't a new trade or business.

Page 68 Chapter 12 Business Deduction for Work-Related Education

Page 69 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Example. You hold a permanent teaching certificate in State A and are employed as a teacher in that state for several years. You move to State B and are promptly hired as a teacher. You are required, however, to com- plete certain prescribed courses to get a permanent teaching certificate in State B. These additional courses are qualifying work-related education because the teach- ing position in State B involves the same general kind of work for which you were qualified in State A.

Education That Qualifies You for a New Trade or Business Education that is part of a program of study that will qualify you for a new trade or business isn't qualifying work-rela- ted education. This is true even if you don't plan to enter that trade or business.

If you are an employee, a change of duties that in- volves the same general kind of work isn't a new trade or business.

Example 1. You are an accountant. Your employer re- quires you to get a law degree at your own expense. You register at a law school for the regular curriculum that leads to a law degree. Even if you don't intend to become a lawyer, the education isn't qualifying because the law degree will qualify you for a new trade or business.

Example 2. You are a general practitioner of medi- cine. You take a 2-week course to review developments in several specialized fields of medicine. The course doesn't qualify you for a new profession. It is qualifying work-rela- ted education because it maintains or improves skills re- quired in your present profession.

Example 3. While working in the private practice of psychiatry, you enter a program to study and train at an accredited psychoanalytic institute. The program will lead to qualifying you to practice psychoanalysis. The psycho- analytic training doesn't qualify you for a new profession. It is qualifying work-related education because it maintains or improves skills required in your present profession.

Bar or CPA Review Course Review courses to prepare for the bar examination or the certified public accountant (CPA) examination aren't quali- fying work-related education. They are part of a program of study that can qualify you for a new profession.

Teaching and Related Duties All teaching and related duties are considered the same general kind of work. A change in duties in any of the fol- lowing ways isn't considered a change to a new business.

• Elementary school teacher to secondary school teacher.

• Teacher of one subject, such as biology, to teacher of another subject, such as art.

• Classroom teacher to guidance counselor.

• Classroom teacher to school administrator.

What Expenses Can Be Deducted? If your education meets the requirements described ear- lier under Qualifying Work-Related Education, you may be able to deduct your education expenses as business ex- penses. If you aren't self-employed, you can deduct busi- ness expenses only if you are a qualified performing artist, fee-based state or local government official, or, for impair- ment-related expenses, a disabled individual.

You can't deduct expenses related to tax-exempt and excluded income. Deductible expenses. The following education expen- ses can be deducted.

• Tuition, books, supplies, lab fees, and similar items. • Certain transportation and travel costs. • Other education expenses, such as costs of research

and typing when writing a paper as part of an educa- tional program.

Nondeductible expenses. You can't deduct personal or capital expenses. For example, you can't deduct the dollar value of vacation time or annual leave you take to attend classes. This amount is a personal expense.

Unclaimed reimbursement. If you don't claim reim- bursement that you are entitled to receive from your em- ployer, you can't deduct the expenses that apply to that unclaimed reimbursement.

Example. Your employer agrees to pay your educa- tion expenses if you file a voucher showing your expen- ses. You don't file a voucher and you don't get reim- bursed. Because you didn't file a voucher, you can't deduct the expenses on your tax return.

Transportation Expenses If your education qualifies, you can deduct local transpor- tation costs of going directly from work to school. If you are regularly employed and go to school on a temporary basis, you can also deduct the costs of returning from school to home. Temporary basis. You go to school on a temporary ba- sis if either of the following situations applies to you.

1. Your attendance at school is realistically expected to last 1 year or less and does indeed last for 1 year or less.

2. Initially, your attendance at school is realistically ex- pected to last 1 year or less, but at a later date your attendance is reasonably expected to last more than

Chapter 12 Business Deduction for Work-Related Education Page 69

Page 70 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

1 year. Your attendance is temporary up to the date you determine it will last more than 1 year.

If you are in either situation (1) or (2), your attendance isn't temporary if facts and circumstances indicate otherwise.

Attendance not on a temporary basis. You don't go to school on a temporary basis if either of the following sit- uations applies to you.

1. Your attendance at school is realistically expected to last more than 1 year. It doesn't matter how long you actually attend.

2. Initially, your attendance at school is realistically ex- pected to last 1 year or less, but at a later date your attendance is reasonably expected to last more than 1 year. Your attendance isn't temporary after the date you determine it will last more than 1 year.

Deductible Transportation Expenses If you are regularly employed and go directly from home to school on a temporary basis, you can deduct the round-trip costs of transportation between your home and school. This is true regardless of the location of the school, the distance traveled, or whether you attend school on nonwork days.

Transportation expenses include the actual costs of bus, subway, cab, or other fares, as well as the costs of using your car. Transportation expenses don't include amounts spent for travel, meals, or lodging while you are away from home overnight.

Example 1. You regularly work in a nearby town, and go directly from work to home. You also attend school ev- ery work night for 3 months to take a course that improves your job skills. Since you are attending school on a tempo- rary basis, you can deduct your daily round-trip transpor- tation expenses in going between home and school. This is true regardless of the distance traveled.

Example 2. Assume the same facts as in Example 1, except that on certain nights you go directly from work to school and then home. You can deduct your transporta- tion expenses from your regular work site to school and then home.

Example 3. Assume the same facts as in Example 1, except that you attend the school for 9 months on Satur- days, nonwork days. Since you are attending school on a temporary basis, you can deduct your round-trip transpor- tation expenses in going between home and school.

Example 4. Assume the same facts as in Example 1, except that you attend classes twice a week for 15 months. Since your attendance in school isn't considered temporary, you can't deduct your transportation expenses in going between home and school. If you go directly from work to school, you can deduct the one-way transporta- tion expenses of going from work to school. If you go from

work to home to school and return home, your transporta- tion expenses can't be more than if you had gone directly from work to school. Using your car. If you use your car (whether you own or lease it) for transportation to school, you can deduct your actual expenses or use the standard mileage rate to figure the amount you can deduct. The standard mileage rate for miles driven from January 1, 2019, through December 31, 2019, is 58 cents a mile. Whichever method you use, you can also deduct parking fees and tolls. See Pub. 463, chapter 4, for information on deducting your actual expen- ses of using a car.

Travel Expenses You can deduct expenses for travel, meals (see 50% limit on meals, later), and lodging if you travel overnight mainly to obtain qualifying work-related education.

Travel expenses for qualifying work-related education are treated the same as travel expenses for other em- ployee business purposes. For more information, see chapter 1 of Pub. 463.

You can't deduct expenses for personal activities such as sightseeing, visiting, or entertaining.

Mainly personal travel. If your travel away from home is mainly personal, you can't deduct all of your expenses for travel, meals, and lodging. You can deduct only your ex- penses for lodging and 50% of your expenses for meals during the time you attend the qualified educational activi- ties.

Whether a trip's purpose is mainly personal or educa- tional depends upon the facts and circumstances. An im- portant factor is the comparison of time spent on personal activities with time spent on educational activities. If you spend more time on personal activities, the trip is consid- ered mainly educational only if you can show a substantial nonpersonal reason for traveling to a particular location.

Example 1. John works in Newark, New Jersey. He traveled to Chicago to take a deductible 1-week course at the request of his employer. His main reason for going to Chicago was to take the course.

While there, he took a sightseeing trip, entertained some friends, and took a side trip to Pleasantville for a day.

Since the trip was mainly for business, John can de- duct his round-trip airfare to Chicago. He can't deduct his transportation expenses of going to Pleasantville. He can deduct only the meals (subject to the 50% limit) and lodg- ing connected with his educational activities.

Example 2. Sue works in Boston. She went to a uni- versity in Michigan to take a course for work. The course is qualifying work-related education.

She took one course, which is one-fourth of a full course load of study. She spent the rest of the time on personal activities. Her reasons for taking the course in Michigan were all personal.

CAUTION !

Page 70 Chapter 12 Business Deduction for Work-Related Education

Page 71 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Sue's trip is mainly personal because three-fourths of her time is considered personal time. She can't deduct the cost of her round-trip train ticket to Michigan. She can de- duct one-fourth of the meals (subject to the 50% limit) and lodging costs for the time she attended the university.

Example 3. Dave works in Nashville and recently trav- eled to California to take a 2-week seminar. The seminar is qualifying work-related education.

While there, he spent an extra 8 weeks on personal ac- tivities. The facts, including the extra 8-week stay, show that his main purpose was to take a vacation.

Dave can't deduct his round-trip airfare or his meals and lodging for the 8 weeks. He can deduct only his ex- penses for meals (subject to the 50% limit) and lodging for the 2 weeks he attended the seminar. Cruises and conventions. Certain cruises and conven- tions offer seminars or courses as part of their itinerary. Even if the seminars or courses are work related, your de- duction for travel may be limited. This applies to:

• Travel by ocean liner, cruise ship, or other form of luxury water transportation; and

• Conventions outside the North American area. For a discussion of the limits on travel expense deduc-

tions that apply to cruises and conventions, see Luxury Water Travel and Conventions in chapter 1 of Pub. 463. 50% limit on meals. You can deduct only 50% of the cost of your meals while traveling away from home to ob- tain qualifying work-related education. If you were reim- bursed for the meals, see How To Treat Reimbursements, later.

Qualified performing artists and fee-based state or local government officials must use Form 2106 to apply the 50% limit.

Travel as Education You can't deduct the cost of travel as a form of education even if it is directly related to your duties in your work or business.

Example. You are a French language teacher. While on sabbatical leave granted for travel, you traveled through France to improve your knowledge of the French language. You chose your itinerary and most of your activ- ities to improve your French language skills. You can't de- duct your travel expenses as education expenses. This is true even if you spent most of your time learning French by visiting French schools and families, attending movies or plays, and engaging in similar activities.

No Double Benefit Allowed You can't do either of the following.

• Deduct work-related education expenses as business expenses if you benefit from these expenses under any other provision of the law.

• Deduct work-related education expenses paid with tax-free scholarship, grant, or employer-provided educational assistance.

Adjustments to Qualifying Work-Related Education Expenses If you pay qualifying work-related education expenses with certain tax-free funds, you can't claim a deduction for those amounts. You must reduce the qualifying expenses by the amount of such expenses allocable to the tax-free educational assistance. Tax-free educational assistance. This includes:

• The tax-free part of scholarships and fellowship grants (see Tax-Free Scholarships and Fellowship Grants in chapter 1);

• The tax-free part of Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chap- ter 1);

• Employer-provided educational assistance (see chap- ter 11);

• Veterans' educational assistance (see Veterans' Ben- efits in chapter 1); and

• Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assis- tance.

Amounts that don't reduce qualifying work-related education expenses. Don't reduce the qualifying work-related 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.

Also, don't reduce the qualifying work-related educa- tion expenses by any scholarship or fellowship grant re- ported as income on the student's return or any scholar- ship which, by its terms, can't be applied to qualifying work-related education expenses.

How To Treat Reimbursements How you treat reimbursements depends on the arrange- ment you have with your employer.

There are two basic types of reimbursement arrange- ments—accountable plans and nonaccountable plans. You can tell the type of plan you are reimbursed under by the way the reimbursement is reported on your Form W-2.

Note. The following rules about reimbursement ar- rangements also apply to expense allowances received from your employer.

Chapter 12 Business Deduction for Work-Related Education Page 71

Page 72 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Accountable Plans To be an accountable plan, your employer's reimburse- ment arrangement must require you to meet all three of the following rules.

• Your expenses must have a business connection. This means your expenses must be allowed under the rules for qualifying work-related education explained earlier.

• You must adequately account to your employer for your expenses within a reasonable period of time.

• You must return any reimbursement or allowance in excess of the expenses accounted for within a rea- sonable period of time.

If you are reimbursed under an accountable plan, your employer shouldn't include any reimbursement of income on your Form W-2, box 1.

If your employer included reimbursements on your Form W-2, box 1, and you meet all three rules for accountable plans, ask your employer for

a corrected Form W-2.

Accountable plan rules not met. Even though you are reimbursed under an accountable plan, some of your ex- penses may not meet all three rules for accountable plans. Those expenses that fail to meet the three rules are treated as having been reimbursed under a Nonaccounta- ble Plan (discussed later). Expenses equal reimbursement. Under an accounta- ble plan, if your expenses equal your reimbursement, you don't complete Form 2106. Because your expenses and reimbursements are equal, you don't have unreimbursed work-related education expenses. Excess expenses. If your expenses are more than your reimbursement, you generally cannot deduct your excess expenses. See Deducting Business Expenses, later.

Allocating your reimbursements for meals. Be- cause your excess meal expenses are subject to the 50% limit, you must figure them separately from your other ex- penses. If your employer paid you a single amount to cover both meals and other expenses, you must allocate the reimbursement so that you can figure your excess meal expenses separately. Make the allocation as follows.

1. Divide your meal expenses by your total expenses. 2. Multiply your total reimbursement by the result from

(1). This is the allocated reimbursement for your meal expenses.

3. Subtract the amount figured in (2) from your total re- imbursement. The difference is the allocated reim- bursement for your other expenses of qualifying work-related education.

Example. Your employer paid you an expense allow- ance of $2,000 under an accountable plan. The allowance was to cover all of your expenses of traveling away from home to take a 2-week training course for work. There

TIP

was no indication of how much of the reimbursement was for each type of expense. Your actual expenses equal $2,500 ($425 for meals + $700 lodging + $150 transporta- tion expenses + $1,225 for books and tuition).

Using the steps listed above, allocate the reimburse- ment between the $425 meal expenses and the $2,075 other expenses.

.

1. $425 meal expenses = 0.17$2,500 total

expenses . .

2. $2,000 (reimbursement) × 0.17 = $340 (allocated reimbursement for meal expenses)

. . .

3. $2,000 (reimbursement) − $340 (meals) = $1,660 (allocated reimbursement for other qualifying

work-related education expenses)

Your excess meal expenses are $85 ($425 − $340) and your excess other expenses are $415 ($2,075 − $1,660). After you apply the 50% limit to your meals, you generally cannot deduct your excess work-related education expen- ses of $458 (($85 × 50%) + $415). See Deducting Busi- ness Expenses, later.

Nonaccountable Plans Your employer will combine the amount of any reimburse- ment or other expense allowance paid to you under a non- accountable plan with your wages, salary, or other pay and report the total on your Form W-2, box 1.

You generally cannot deduct your expenses regardless of whether they are more than, less than, or equal to your reimbursement. See Deducting Business Expenses, later. Reimbursements for nondeductible expenses. Reim- bursements you received for nondeductible expenses are treated as paid under a nonaccountable plan. You must include them in your income. For example, you must in- clude in your income reimbursements your employer gave you for expenses of education that:

• You need to meet the minimum educational require- ments for your job, or

• Is part of a program of study that can qualify you for a new trade or business.

For more information on accountable and nonaccount- able plans, see chapter 6 of Pub. 463.

Deducting Business Expenses Self-employed persons and employees report their busi- ness expenses differently.

The following information explains what forms you must use to deduct the cost of your qualifying work-related edu- cation as a business expense.

Page 72 Chapter 12 Business Deduction for Work-Related Education

Page 73 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Self-Employed Persons If you are self-employed, you must report the cost of your qualifying work-related education on the appropriate form used to report your business income and expenses (gen- erally, Schedule C (Form 1040 or 1040-SR), or Sched- ule F (Form 1040 or 1040-SR)). If your education expen- ses include expenses for a car or truck, travel, or meals, report those expenses the same way you report other business expenses for those items. See the instructions for the form you file for information on how to complete it.

Performing Artists and Fee-Basis Officials If you are a qualified performing artist, or a state (or local) government official who is paid in whole or in part on a fee basis, you can deduct the cost of your qualifying work-re- lated education as an adjustment to gross income.

Include the cost of your qualifying work-related educa- tion with any other employee business expenses on Schedule 1 (Form 1040 or 1040-SR), line 11, or Form 1040-NR, line 34 (on the dotted line next to line 34, enter the amount of your deduction and “QPA”). You must com- plete Form 2106 to figure your deduction.

For more information on qualified performing artists, see chapter 6 of Pub. 463.

Impairment-Related Work Expenses If you are disabled and have impairment-related work ex- penses that are necessary for you to be able to get quali- fying work-related education, you can deduct these ex- penses on Schedule A (Form 1040 or 1040-SR), line 16, or Form 1040-NR, Schedule A, line 7. To deduct these ex- penses, you must complete Form 2106.

For more information on impairment-related work ex- penses, see chapter 6 of Pub. 463.

Recordkeeping You must keep records as proof of any deduction claimed on your tax return. Generally, you should keep your records for 3 years from the date of fil-

ing the tax return and claiming the deduction.

If you are an employee who is reimbursed for expenses and you give your records and documentation to your em- ployer, you don't have to keep duplicate copies of this in- formation. However, you should keep your records for a 3-year period if:

• You claim deductions for expenses that are more than your reimbursement,

• Your employer doesn't use adequate accounting pro- cedures to verify expense accounts,

• You are related to your employer, or

RECORDS

• Your expenses are reimbursed under a nonaccounta- ble plan.

Examples of records to keep. If any of the above cases apply to you, you must be able to prove that your expen- ses are deductible. You should keep adequate records or have sufficient evidence that will support your expenses. Estimates or approximations don't qualify as proof of an expense. Some examples of what can be used to help prove your expenses are the following.

1. Documents, such as transcripts, course descriptions, catalogs, etc., showing periods of enrollment in edu- cational institutions, principal subjects studied, and descriptions of educational activity.

2. Canceled checks and receipts to verify amounts you spent for: a. Tuition and books, b. Meals and lodging while away from home over-

night for educational purposes, c. Travel and transportation, and d. Other education expenses.

3. Statements from your employer explaining whether the education was necessary for you to keep your job, salary, or status; how the education helped maintain or improve skills needed in your job; how much reim- bursement you received; and, if you are a teacher, the type of certificate and subjects taught.

4. Complete information about any scholarship or fellow- ship grants, including amounts you received during the year.

13.

How To Get Tax Help If you have questions about a tax issue, need help prepar- ing your tax return, or want to download free publications, forms, or instructions, go to IRS.gov and find resources that can help you right away. Preparing and filing your tax. After receiving your wage and earning statements (Form W-2, W-2G, 1099-R, 1099-MISC) from all employers and interest and dividend statements from banks (Forms 1099), you can find free options to prepare and file your return on IRS.gov or in your local community if you qualify.

The Volunteer Income Tax Assistance (VITA) program offers free tax help to people with low-to-moderate in- comes, persons with disabilities, and limited-Eng- lish-speaking taxpayers who need help preparing their own tax returns. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers

Chapter 13 How To Get Tax Help Page 73

Page 74 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

specialize in answering questions about pensions and re- tirement-related issues unique to seniors.

You can go to IRS.gov to see your options for preparing and filing your return which include the following.

• Free File. Go to IRS.gov/FreeFile to see if you qualify to use brand-name software to prepare and e-file your federal tax return for free.

• VITA. Go to IRS.gov/VITA, download the free IRS2Go app, or call 800-906-9887 to find the nearest VITA lo- cation for free tax return preparation.

• TCE. Go to IRS.gov/TCE, download the free IRS2Go app, or call 888-227-7669 to find the nearest TCE lo- cation for free tax return preparation.

Employers can register to use Business Services On- line. The SSA offers online service for fast, free, and se- cure online W-2 filing options to CPAs, accountants, en- rolled agents, and individuals who process Forms W-2, Wage and Tax Statement, and Forms W-2c, Corrected Wage and Tax Statement. Employers can go to SSA.gov/ employer for more information.

Getting answers to your tax questions. On IRS.gov, get answers to your tax questions any- time, anywhere.

• Go to IRS.gov/Help for a variety of tools that will help you get answers to some of the most common tax questions.

• Go to IRS.gov/ITA for the Interactive Tax Assistant, a tool that will ask you questions on a number of tax law topics and provide answers. You can print the entire interview and the final response for your records.

• Go to IRS.gov/Forms to search for our forms, instruc- tions, and publications. You will find details on 2019 tax changes and hundreds of interactive links to help you find answers to your questions.

• You may also be able to access tax law information in your electronic filing software.

Tax reform. Tax reform legislation affects individuals, businesses, tax-exempt and government entities. Go to IRS.gov/TaxReform for information and updates on how this legislation affects your taxes. IRS social media. Go to IRS.gov/SocialMedia to see the various social media tools the IRS uses to share the latest information on tax changes, scam alerts, initiatives, prod- ucts, and services. At the IRS, privacy and security are paramount. We use these tools to share public informa- tion with you. Don’t post your social security number or other confidential information on social media sites. Al- ways protect your identity when using any social network- ing site.

The following IRS YouTube channels provide short, in- formative videos on various tax-related topics in English, Spanish, and ASL.

• Youtube.com/irsvideos. • Youtube.com/irsvideosmultilingua.

• Youtube.com/irsvideosASL. Watching IRS videos. The IRS Video portal (IRSVideos.gov) contains video and audio presentations for individuals, small businesses, and tax professionals. Getting tax information in other languages. For tax- payers whose native language isn’t English, we have the following resources available. Taxpayers can find informa- tion on IRS.gov in the following languages.

• Spanish (IRS.gov/Spanish). • Chinese (IRS.gov/Chinese). • Korean (IRS.gov/Korean). • Russian (IRS.gov/Russian). • Vietnamese (IRS.gov/Vietnamese).

The IRS Taxpayer Assistance Centers (TACs) provide over-the-phone interpreter service in over 170 languages, and the service is available free to taxpayers. Getting tax forms and publications. Go to IRS.gov/ Forms to view, download, or print all of the forms and pub- lications you may need. You can also download and view popular tax publications and instructions (including the 1040 and 1040-SR instructions) on mobile devices as an eBook at no charge at IRS.gov/eBooks. Or you can go to IRS.gov/OrderForms to place an order and have forms mailed to you within 10 business days. Access your online account (individual taxpayers only). Go to IRS.gov/Account to securely access infor- mation about your federal tax account.

• View the amount you owe, pay online, or set up an on- line payment agreement.

• Access your tax records online. • Review the past 24 months of your payment history. • Go to IRS.gov/SecureAccess to review the required

identity authentication process. Using direct deposit. The fastest way to receive a tax refund is to combine direct deposit and IRS e-file. Direct deposit securely and electronically transfers your refund directly into your financial account. Eight in 10 taxpayers use direct deposit to receive their refund. The IRS issues more than 90% of refunds in less than 21 days. Getting a transcript or copy of a return. The quickest way to get a copy of your tax transcript is to go to IRS.gov/ Transcripts. Click on either “Get Transcript Online” or “Get Transcript by Mail” to order a copy of your transcript. If you prefer, you can order your transcript by calling 800-908-9946. Using online tools to help prepare your return. Go to IRS.gov/Tools for the following.

• The Earned Income Tax Credit Assistant (IRS.gov/ EITCAssistant) determines if you’re eligible for the EIC.

Page 74 Chapter 13 How To Get Tax Help

Page 75 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

• The Online EIN Application (IRS.gov/EIN) helps you get an employer identification number.

• The Tax Withholding Estimator (IRS.gov/W4app) makes it easier for everyone to pay the correct amount of tax during the year. The Estimator replaces the Withholding Calculator. The redesigned tool is a con- venient, online way to check and tailor your withhold- ing. It’s more user-friendly for taxpayers, including re- tirees and self-employed individuals. The new and improved features include the following. – Easy to understand language; – The ability to switch between screens, correct pre-

vious entries, and skip screens that don’t apply; – Tips and links to help you determine if you qualify

for tax credits and deductions; – A progress tracker; – A self-employment tax feature; and – Automatic calculation of taxable social security ben-

efits. • The First Time Homebuyer Credit Account Look-up

(IRS.gov/HomeBuyer) tool provides information on your repayments and account balance.

• The Sales Tax Deduction Calculator (IRS.gov/ SalesTax) figures the amount you can claim if you itemize deductions on Schedule A (Form 1040 or 1040-SR), choose not to claim state and local income taxes, and you didn’t save your receipts showing the sales tax you paid.

Resolving tax-related identity theft issues. • The IRS doesn’t initiate contact with taxpayers by

email or telephone to request personal or financial in- formation. This includes any type of electronic com- munication, such as text messages and social media channels.

• Go to IRS.gov/IDProtection for information. • If your SSN has been lost or stolen or you suspect

you’re a victim of tax-related identity theft, visit IRS.gov/IdentityTheft to learn what steps you should take.

Checking on the status of your refund. • Go to IRS.gov/Refunds. • The IRS can’t issue refunds before mid-February 2020

for returns that claimed the EIC or the ACTC. This ap- plies to the entire refund, not just the portion associ- ated with these credits.

• Download the official IRS2Go app to your mobile de- vice to check your refund status.

• Call the automated refund hotline at 800-829-1954. Making a tax payment. The IRS uses the latest encryp- tion technology to ensure your electronic payments are safe and secure. You can make electronic payments on- line, by phone, and from a mobile device using the

IRS2Go app. Paying electronically is quick, easy, and faster than mailing in a check or money order. Go to IRS.gov/Payments to make a payment using any of the following options.

• IRS Direct Pay: Pay your individual tax bill or estima- ted tax payment directly from your checking or sav- ings account at no cost to you.

• Debit or Credit Card: Choose an approved payment processor to pay online, by phone, and by mobile de- vice.

• Electronic Funds Withdrawal: Offered only when filing your federal taxes using tax return preparation soft- ware or through a tax professional.

• Electronic Federal Tax Payment System: Best option for businesses. Enrollment is required.

• Check or Money Order: Mail your payment to the ad- dress listed on the notice or instructions.

• Cash: You may be able to pay your taxes with cash at a participating retail store.

• Same-Day Wire: You may be able to do same-day wire from your financial institution. Contact your finan- cial institution for availability, cost, and cut-off times.

What if I can’t pay now? Go to IRS.gov/Payments for more information about your options.

• Apply for an online payment agreement (IRS.gov/ OPA) to meet your tax obligation in monthly install- ments if you can’t pay your taxes in full today. Once you complete the online process, you will receive im- mediate notification of whether your agreement has been approved.

• Use the Offer in Compromise Pre-Qualifier (IRS.gov/ OIC) to see if you can settle your tax debt for less than the full amount you owe.

Checking the status of an amended return. Go to IRS.gov/WMAR to track the status of Form 1040-X amen- ded returns. Please note that it can take up to 3 weeks from the date you mailed your amended return for it to show up in our system and processing it can take up to 16 weeks. Understanding an IRS notice or letter. Go to IRS.gov/ Notices to find additional information about responding to an IRS notice or letter. Contacting your local IRS office. Keep in mind, many questions can be answered on IRS.gov without visiting an IRS Taxpayer Assistance Center (TAC). Go to IRS.gov/ LetUsHelp for the topics people ask about most. If you still need help, IRS TACs provide tax help when a tax issue can’t be handled online or by phone. All TACs now pro- vide service by appointment so you’ll know in advance that you can get the service you need without long wait times. Before you visit, go to IRS.gov/TACLocator to find the nearest TAC, check hours, available services, and ap- pointment options. Or, on the IRS2Go app, under the Stay

Chapter 13 How To Get Tax Help Page 75

Page 76 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Connected tab, choose the Contact Us option and click on “Local Offices.”

The Taxpayer Advocate Service (TAS) Is Here To Help You What Is TAS? TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Their job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights.

How Can You Learn About Your Taxpayer Rights? The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Go to TaxpayerAdvocate.IRS.gov to help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.

What Can TAS Do For You? TAS can help you resolve problems that you can’t resolve with the IRS. And their service is free. If you qualify for their assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:

• Your problem is causing financial difficulty for you, your family, or your business;

• You face (or your business is facing) an immediate threat of adverse action; or

• You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised.

How Can You Reach TAS? TAS has offices in every state, the District of Columbia, and Puerto Rico. Your local advocate’s number is in your local directory and at TaxpayerAdvocate.IRS.gov/ Contact-Us. You can also call them at 877-777-4778.

How Else Does TAS Help Taxpayers? TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, please report it to them at IRS.gov/SAMS.

TAS also has a website, Tax Reform Changes, which shows you how the new tax law may change your future tax filings and helps you plan for these changes. The in- formation is categorized by tax topic in the order of the IRS Form 1040 or 1040-SR. Go to TaxChanges.us for more information.

TAS for Tax Professionals TAS can provide a variety of information for tax professio- nals, including tax law updates and guidance, TAS pro- grams, and ways to let TAS know about systemic prob- lems you’ve seen in your practice.

Low Income Taxpayer Clinics (LITCs) LITCs are independent from the IRS. LITCs represent in- dividuals whose income is below a certain level and need to resolve tax problems with the IRS, such as audits, ap- peals, and tax collection disputes. In addition, clinics can provide information about taxpayer rights and responsibili- ties in different languages for individuals who speak Eng- lish as a second language. Services are offered for free or a small fee. To find a clinic near you, visit IRS.gov/LITC or see IRS Pub. 4134, Low Income Taxpayer Clinic List.

Page 76 Chapter 13 How To Get Tax Help

Page 77 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Appendices The following appendices are provided to help you claim the education bene- fits that will give you the lowest tax.

1. Appendix A—An illustrated exam- ple of education credits, including a filled-in Form 8863 showing how to claim both the American oppor- tunity credit and the lifetime learn- ing credit for 2019.

2. Appendix B—A chart summariz- ing some of the major 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 on their 2019 joint tax return, they claim their two dependent children, Sean (age 22, social security number: 000-00-0001) and Carey (age 18, so- cial security number: 000-00-0002). Their modified adjusted gross income (MAGI) on Form 1040, line 8b, is $126,000. Because Dave and Valerie have unusually high itemized deduc- tions, their taxable income is $10,000 and their tax before credits is $1,003.

Sean enrolled as a full-time gradu- ate student in August 2019 at Califor- nia State College. He graduated with his bachelor's degree in 2018 and didn't attend school from January 2019 through July 2019. His parents claimed the American opportunity credit for Sean for 2015, 2016, 2017, and 2018.

Carey enrolled full-time as a fresh- man at the same college in January 2019 to begin working on her bache- lor's degree.

In 2019, Dave and Valerie paid $7,000 in tuition for Sean and $8,000 in tuition and $500 for mandatory course materials, not purchased from the col- lege, for Carey. Carey received a $2,000 scholarship.

California State College issued two Forms 1098-T, one for Sean and one for Carey, and sent them to the Jone- ses’ residence. The $2,000 scholar- ship that Carey received is reported in box 5 of her Form 1098-T. In complet- ing Form 8863, the Joneses should in- clude actual adjusted qualified educa- tion expenses paid, or deemed to have been paid, which may be different from what is reported on Form 1098-T. Therefore, the Joneses use the amounts they paid for tuition and man- datory course materials. Because the scholarship Carey received was ap- plied to tuition (a qualified expense), they don't include that in the amount they paid for qualified tuition expenses. Neither Sean nor Carey has been con- victed of a felony for possession or dis- tribution of a controlled substance be- fore the end of 2019.

Dave and Valerie figure their educa- tion credits by completing Form 8863. They begin Form 8863 on page 2 be- fore completing Part I on page 1. Be- cause the Joneses have two eligible students, they will complete page 2 twice, once for their son, Sean, and once for their daughter, Carey.

The Joneses decide to complete Part III for Carey first, as shown later.

They carry over the amount of $2,500 entered on Part III, line 30, to Part I, line 1.

The Joneses complete a separate Part III for Sean. They check the “Yes” box on line 23, determine that Sean isn't eligible for the American opportu- nity credit, and go to line 31 as instruc- ted. They figure their line 31 adjusted qualified education expenses for Sean to be $7,000.

Once they have completed Part III for each student, they figure their cred- its. The Joneses figure their refundable American opportunity credit of $1,000 by completing Form 8863, Part I, lines 1 through 8. They enter the amount from line 8, $1,000, on line 18c of their Form 1040.

The Joneses enter $7,000 on Part II, line 10, of Form 8863 and figure their tentative lifetime learning credit for 2019 to be $1,400 (line 12). They can't claim the full amount because their MAGI of $126,000 is greater than $116,000. They enter the reduced amount of $700 (figured on Part II, line 18) on the Credit Limit Worksheet, line 1. The $700 is added to their non- refundable American opportunity credit ($1,500 on line 2 of the Credit Limit Worksheet) for a total nonrefundable credit of $2,200. The Joneses enter $1,003 on line 7 of the Credit Limit Worksheet, which is the smaller of their tax from line 12b of their Form 1040 (which is $1,003) or the $2,200 on line 3 of the Credit Limit Worksheet. They enter $1,003 on Form 8863, Part II, line 19, and on Schedule 3 (Form 1040 or 1040-SR), line 3.

Publication 970 (2019) Page 77

Page 78 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Form 1098-T

2019 Tuition Statement

Copy B For Student

Department of the Treasury - Internal Revenue Service

This is important tax information

and is being furnished to the

IRS. This form must be used to

complete Form 8863 to claim education

credits. Give it to the tax preparer or use it to prepare the tax return.

OMB No. 1545-1574

CORRECTED FILER'S name, street address, city or town, state or province, country, ZIP or foreign postal code, and telephone number

FILER'S employer identi�cation no. STUDENT'S TIN

STUDENT'S name

Street address (including apt. no.)

City or town, state or province, country, and ZIP or foreign postal code

Service Provider/Acct. No. (see instr.) 8 Check if at least

half-time student

1 Payments received for quali�ed tuition and related expenses

$ 2

3

4 Adjustments made for a prior year

$

5 Scholarships or grants

$ 6 Adjustments to

scholarships or grants for a prior year

$

7 Checked if the amount in box 1 includes amounts for an academic period beginning January— March 2020

9 Checked if a graduate

student

10 Ins. contract reimb./refund

$ Form 1098-T (keep for your records) www.irs.gov/Form1098T

California State College 1 Education Way Modesto, CA 23232 732-111-1111

12-1234545 000-00-0002

Carey Jones

12 South Street

Napa Valley, CA 24556

X

10,000

2,000

Page 78 Publication 970 (2019)

Page 79 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Adjusted Qualified Education Expenses Worksheet (Form 8863 Instructions) for Carey Jones Adjusted Qualified Education Expenses Worksheet (Form 8863 Instructions)

1. Total qualified education expenses paid for or on behalf of the student in 2019 for the academic period . . . . . . . . . . 10,500 2. Less adjustments:

a. Tax-free educational assistance received in 2019 allocable to the academic period . . . 2,000 b. Tax-free educational assistance received in 2020 (and before you file your 2019 tax

return) allocable to the academic period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0- c. Refunds of qualified education expenses paid in 2019 if the refund is received in 2019

or in 2020 before you file your 2019 tax return . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0- 3. Total adjustments (add lines 2a, 2b, and 2c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 4. Adjusted qualified education expenses. Subtract line 3 from line 1. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . 8,500

Publication 970 (2019) Page 79

Page 80 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Form 1098-T

2019 Tuition Statement

Copy B For Student

Department of the Treasury - Internal Revenue Service

This is important tax information

and is being furnished to the

IRS. This form must be used to

complete Form 8863 to claim education

credits. Give it to the tax preparer or use it to prepare the tax return.

OMB No. 1545-1574

CORRECTED FILER'S name, street address, city or town, state or province, country, ZIP or foreign postal code, and telephone number

FILER'S employer identi�cation no. STUDENT'S TIN

STUDENT'S name

Street address (including apt. no.)

City or town, state or province, country, and ZIP or foreign postal code

Service Provider/Acct. No. (see instr.) 8 Check if at least

half-time student

1 Payments received for quali�ed tuition and related expenses

$ 2

3

4 Adjustments made for a prior year

$

5 Scholarships or grants

$ 6 Adjustments to

scholarships or grants for a prior year

$

7 Checked if the amount in box 1 includes amounts for an academic period beginning January— March 2020

9 Checked if a graduate

student

10 Ins. contract reimb./refund

$ Form 1098-T (keep for your records) www.irs.gov/Form1098T

California State College 1 Education Way Modesto, CA 23232 732-111-1111

12-1234545 000-00-0001

Sean Jones

12 South Street

Napa Valley, CA 24556

X

7,000

X

Page 80 Publication 970 (2019)

Page 81 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Adjusted Qualified Education Expenses Worksheet (Form 8863 Instructions) for Sean Jones Adjusted Qualified Education Expenses Worksheet (Form 8863 Instructions)

1. Total qualified education expenses paid for or on behalf of the student in 2019 for the academic period . . . . . . . . . . 7,000 2. Less adjustments:

a. Tax-free educational assistance received in 2019 allocable to the academic period . . . -0- b. Tax-free educational assistance received in 2020 (and before you file your 2019 tax

return) allocable to the academic period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0- c. Refunds of qualified education expenses paid in 2019 if the refund is received in 2019

or in 2020 before you file your 2019 tax return . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0- 3. Total adjustments (add lines 2a, 2b, and 2c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0- 4. Adjusted qualified education expenses. Subtract line 3 from line 1. If zero or less, enter -0- . . . . . . . . . . . . . . . . . . 7,000

Credit Limit Worksheet (Form 8863 Instructions) Complete this worksheet to figure the amount to enter on line 19.

1. Enter the amount from Form 8863, line 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 700 2. Enter the amount from Form 8863, line 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. 1,500 3. Add lines 1 and 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. 2,200 4. Enter the amount from:

Form 1040 or 1040-SR, line 12b . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. 1,003 5. Enter the total of your credits from:

Schedule 3 (Form 1040 or 1040-SR), lines 1and 2, and Schedule R, line 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. -0-

6. Subtract line 5 from line 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. 1,003 7. Enter the smaller of line 3 or line 6 here and on Form 8863, line 19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. 1,003

Publication 970 (2019) Page 81

Page 82 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Form 8863 Department of the Treasury Internal Revenue Service

Education Credits (American Opportunity and Lifetime Learning Credits)

Attach to Form 1040 or 1040-SR. Go to www.irs.gov/Form8863 for instructions and the latest information.

OMB No. 1545-0074

2019 Attachment Sequence No. 50

Name(s) shown on return Your social security number

! CAUTION

Complete a separate Part III on page 2 for each student for whom you’re claiming either credit before you complete Parts I and II.

Part I Refundable American Opportunity Credit 1 After completing Part III for each student, enter the total of all amounts from all Parts III, line 30 . . 1 2 Enter: $180,000 if married �ling jointly; $90,000 if single, head of household,

or qualifying widow(er) . . . . . . . . . . . . . . . . . . 2

3 Enter the amount from Form 1040 or 1040-SR, line 8b. If you’re �ling Form 2555 or 4563, or you’re excluding income from Puerto Rico, see Pub. 970 for the amount to enter . . . . . . . . . . . . . . . . . . . 3

4 Subtract line 3 from line 2. If zero or less, stop; you can’t take any education credit . . . . . . . . . . . . . . . . . . . . . . . . 4

5 Enter: $20,000 if married �ling jointly; $10,000 if single, head of household, or qualifying widow(er) . . . . . . . . . . . . . . . . . . . 5

6 If line 4 is: • Equal to or more than line 5, enter 1.000 on line 6 . . . . . . . . . . . . . • Less than line 5, divide line 4 by line 5. Enter the result as a decimal (rounded to

at least three places) . . . . . . . . . . . . . . . . . . . . . . } . . . 6 .

7 Multiply line 1 by line 6. Caution: If you were under age 24 at the end of the year and meet the conditions described in the instructions, you can’t take the refundable American opportunity credit; skip line 8, enter the amount from line 7 on line 9, and check this box . . . . . . . . 7

8 Refundable American opportunity credit. Multiply line 7 by 40% (0.40). Enter the amount here and on Form 1040 or 1040-SR, line 18c. Then go to line 9 below . . . . . . . . . . . . . . 8

Part II Nonrefundable Education Credits 9 Subtract line 8 from line 7. Enter here and on line 2 of the Credit Limit Worksheet (see instructions) . 9

10 After completing Part III for each student, enter the total of all amounts from all Parts III, line 31. If zero, skip lines 11 through 17, enter -0- on line 18, and go to line 19 . . . . . . . . . . . 10

11 Enter the smaller of line 10 or $10,000 . . . . . . . . . . . . . . . . . . . . . 11 12 Multiply line 11 by 20% (0.20) . . . . . . . . . . . . . . . . . . . . . . . . 12 13 Enter: $136,000 if married �ling jointly; $68,000 if single, head of household, or

qualifying widow(er) . . . . . . . . . . . . . . . . . . . 13

14 Enter the amount from Form 1040 or 1040-SR, line 8b. If you're �ling Form 2555 or 4563, or you’re excluding income from Puerto Rico, see Pub. 970 for the amount to enter . . . . . . . . . . . . . . . . . . . 14

15 Subtract line 14 from line 13. If zero or less, skip lines 16 and 17, enter -0- on line 18, and go to line 19 . . . . . . . . . . . . . . . . . 15

16 Enter: $20,000 if married �ling jointly; $10,000 if single, head of household, or qualifying widow(er) . . . . . . . . . . . . . . . . . . . 16

17 If line 15 is: • Equal to or more than line 16, enter 1.000 on line 17 and go to line 18 • Less than line 16, divide line 15 by line 16. Enter the result as a decimal (rounded to at least three

places) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 . 18 Multiply line 12 by line 17. Enter here and on line 1 of the Credit Limit Worksheet (see instructions) 18 19 Nonrefundable education credits. Enter the amount from line 7 of the Credit Limit Worksheet (see

instructions) here and on Schedule 3 (Form 1040 or 1040-SR), line 3 . . . . . . . . . . . 19 For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No. 25379M Form 8863 (2019)

Dave and Valerie Jones 001 00 0000

2,500

180,000

126,000

54,000

20,000

2,500

1,000

1,500

7,000 7,000 1,400

136,000

1 000

126,000

10,000

20,000

500 700

1,003

Page 82 Publication 970 (2019)

Page 83 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Form 8863 (2019) Page 2 Name(s) shown on return Your social security number

! CAUTION

Complete Part III for each student for whom you’re claiming either the American opportunity credit or lifetime learning credit. Use additional copies of page 2 as needed for each student.

Part III Student and Educational Institution Information. See instructions. 20 Student name (as shown on page 1 of your tax return) 21 Student social security number (as shown on page 1 of

your tax return)

22 Educational institution information (see instructions) a. Name of �rst educational institution

(1) Address. Number and street (or P.O. box). City, town or post of�ce, state, and ZIP code. If a foreign address, see instructions.

(2) Did the student receive Form 1098-T from this institution for 2019?

Yes No

(3) Did the student receive Form 1098-T from this institution for 2018 with box 7 checked?

Yes No

(4) Enter the institution’s employer identi�cation number (EIN) if you’re claiming the American opportunity credit or if you checked “Yes” in (2) or (3). You can get the EIN from Form 1098-T or from the institution.

–

b. Name of second educational institution (if any)

(1) Address. Number and street (or P.O. box). City, town or post of�ce, state, and ZIP code. If a foreign address, see instructions.

(2) Did the student receive Form 1098-T from this institution for 2019?

Yes No

(3) Did the student receive Form 1098-T from this institution for 2018 with box 7 checked?

Yes No

(4) Enter the institution’s employer identi�cation number (EIN) if you’re claiming the American opportunity credit or if you checked “Yes” in (2) or (3). You can get the EIN from Form 1098-T or from the institution.

–

23 Has the Hope Scholarship Credit or American opportunity credit been claimed for this student for any 4 tax years before 2019?

Yes — Stop! Go to line 31 for this student. No — Go to line 24.

24 Was the student enrolled at least half-time for at least one academic period that began or is treated as having begun in 2019 at an eligible educational institution in a program leading towards a postsecondary degree, certi�cate, or other recognized postsecondary educational credential? See instructions.

Yes — Go to line 25. No — Stop! Go to line 31 for this student.

25 Did the student complete the �rst 4 years of postsecondary education before 2019? See instructions.

Yes — Stop! Go to line 31 for this student.

No — Go to line 26.

26 Was the student convicted, before the end of 2019, of a felony for possession or distribution of a controlled substance?

Yes — Stop! Go to line 31 for this student.

No — Complete lines 27 through 30 for this student.

! CAUTION

You can't take the American opportunity credit and the lifetime learning credit for the same student in the same year. If you complete lines 27 through 30 for this student, don’t complete line 31.

American Opportunity Credit 27 Adjusted quali�ed education expenses (see instructions). Don’t enter more than $4,000 . . . . . 27 28 Subtract $2,000 from line 27. If zero or less, enter -0- . . . . . . . . . . . . . . . . . 28 29 Multiply line 28 by 25% (0.25) . . . . . . . . . . . . . . . . . . . . . . . . 29

30 If line 28 is zero, enter the amount from line 27. Otherwise, add $2,000 to the amount on line 29 and enter the result. Skip line 31. Include the total of all amounts from all Parts III, line 30, on Part I, line 1 . 30 Lifetime Learning Credit

31 Adjusted quali�ed education expenses (see instructions). Include the total of all amounts from all Parts III, line 31, on Part II, line 10 . . . . . . . . . . . . . . . . . . . . . . . . . 31

Form 8863 (2019)

Dave and Valerie Jones 001 00 0000

Carey Jones

California State College

1Education Way, Modesto, CA 23232

√

√

1 2 1 2 3 4 5 4 5

√

2,500

√

√

4,000 2,000

500

000 00 0002

√

Publication 970 (2019) Page 83

Page 84 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Form 8863 (2019) Page 2 Name(s) shown on return Your social security number

! CAUTION

Complete Part III for each student for whom you’re claiming either the American opportunity credit or lifetime learning credit. Use additional copies of page 2 as needed for each student.

Part III Student and Educational Institution Information. See instructions. 20 Student name (as shown on page 1 of your tax return) 21 Student social security number (as shown on page 1 of

your tax return)

22 Educational institution information (see instructions) a. Name of �rst educational institution

(1) Address. Number and street (or P.O. box). City, town or post of�ce, state, and ZIP code. If a foreign address, see instructions.

(2) Did the student receive Form 1098-T from this institution for 2019?

Yes No

(3) Did the student receive Form 1098-T from this institution for 2018 with box 7 checked?

Yes No

(4) Enter the institution’s employer identi�cation number (EIN) if you’re claiming the American opportunity credit or if you checked “Yes” in (2) or (3). You can get the EIN from Form 1098-T or from the institution.

–

b. Name of second educational institution (if any)

(1) Address. Number and street (or P.O. box). City, town or post of�ce, state, and ZIP code. If a foreign address, see instructions.

(2) Did the student receive Form 1098-T from this institution for 2019?

Yes No

(3) Did the student receive Form 1098-T from this institution for 2018 with box 7 checked?

Yes No

(4) Enter the institution’s employer identi�cation number (EIN) if you’re claiming the American opportunity credit or if you checked “Yes” in (2) or (3). You can get the EIN from Form 1098-T or from the institution.

–

23 Has the Hope Scholarship Credit or American opportunity credit been claimed for this student for any 4 tax years before 2019?

Yes — Stop! Go to line 31 for this student. No — Go to line 24.

24 Was the student enrolled at least half-time for at least one academic period that began or is treated as having begun in 2019 at an eligible educational institution in a program leading towards a postsecondary degree, certi�cate, or other recognized postsecondary educational credential? See instructions.

Yes — Go to line 25. No — Stop! Go to line 31 for this student.

25 Did the student complete the �rst 4 years of postsecondary education before 2019? See instructions.

Yes — Stop! Go to line 31 for this student.

No — Go to line 26.

26 Was the student convicted, before the end of 2019, of a felony for possession or distribution of a controlled substance?

Yes — Stop! Go to line 31 for this student.

No — Complete lines 27 through 30 for this student.

! CAUTION

You can't take the American opportunity credit and the lifetime learning credit for the same student in the same year. If you complete lines 27 through 30 for this student, don’t complete line 31.

American Opportunity Credit 27 Adjusted quali�ed education expenses (see instructions). Don’t enter more than $4,000 . . . . . 27 28 Subtract $2,000 from line 27. If zero or less, enter -0- . . . . . . . . . . . . . . . . . 28 29 Multiply line 28 by 25% (0.25) . . . . . . . . . . . . . . . . . . . . . . . . 29

30 If line 28 is zero, enter the amount from line 27. Otherwise, add $2,000 to the amount on line 29 and enter the result. Skip line 31. Include the total of all amounts from all Parts III, line 30, on Part I, line 1 . 30 Lifetime Learning Credit

31 Adjusted quali�ed education expenses (see instructions). Include the total of all amounts from all Parts III, line 31, on Part II, line 10 . . . . . . . . . . . . . . . . . . . . . . . . . 31

Form 8863 (2019)

Dave and Valerie Jones 001 00 0000

Sean Jones 000 00 0001

California State College

1Education Way, Modesto, CA 23232

√

√

1 2 1 2 3 4 5 4 5

7,000

√

Page 84 Publication 970 (2019)

Page 85 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Hi gh

lig ht

s of

E du

ca tio

n Ta

x Be

ne fit

s fo

r T ax

Y ea

r 2 01

9 Th

is ch

ar t h

igh lig

ht s s

om e d

iffe re

nc es

am on

g th

e b en

ef its

d isc

us se

d in

th is

pu bli

ca tio

n. S

ee th

e t ex

t fo r d

ef ini

tio ns

an d

de ta

ils . D

on 't

re ly

on

th is

c ha

rt al

on e.

Ca ut

io n:

Y ou

g en

er all

y c an

't c lai

m m

or e t

ha n o

ne b

en ef

it f or

th e s

am e e

du ca

tio n e

xp en

se .

Ap pe

nd ix

B .

Sc ho

la rs

hi ps

, Fe

llo ws

hi p

Gr an

ts ,

Gr an

ts , a

nd

Tu iti

on

Re du

ct io

ns

Am er

ic an

Op

po rtu

ni ty

Cr

ed it

Li fe

tim e

Le ar

ni ng

Cr

ed it

St ud

en t L

oa n

In te

re st

De

du ct

io n

Tu iti

on a

nd

Fe es

D ed

uc tio

n Co

ve rd

el l E

SA †

Qu al

ifi ed

Tu

iti on

Pr

og ra

m (Q

TP )†

Ed uc

at io

n Ex

ce pt

io n

to

Ad di

tio na

l T ax

on

E ar

ly IR

A Di

st rib

ut io

ns †

Ed uc

at io

n Sa

vi ng

s Bo

nd

Pr og

ra m

†

Em pl

oy er

- Pr

ov id

ed

Ed uc

at io

na l

As si

st an

ce †

Bu si

ne ss

De

du ct

io n

fo r

W or

k- Re

la t

ed

Ed uc

at io

n W

ha t i

s yo

ur

be ne

fit ?

Am ou

nt s

re ce

ive d

m ay

no

t b e t

ax ab

le

Cr ed

its ca

n re

du ce

th e

am ou

nt o

f ta x

yo u m

us t p

ay .

40

% o

f th e

cr ed

it m ay

b e

re fu

nd ab

le (lim

ite d

to

$1 ,0

00 p

er

stu de

nt ).

Cr ed

its ca

n re

du ce

th e

am ou

nt o

f ta x

yo u m

us t p

ay

Ca n d

ed uc

t int

er es

t p aid

Ca n d

ed uc

t ex

pe ns

es Ea

rn ing

s n ot

ta

xe d

Ea rn

ing s n

ot

ta xe

d No

1 0%

ad

dit ion

al ta

x on

ea rly

dis

tri bu

tio n

In te

re st

no t ta

xe d

Em plo

ye r

be ne

fits no

t ta

xe d

In div

idu als

wh

o ar

e se

lf-

em plo

ye d,

qu

ali fie

d pe

rfo rm

ing

ar tis

ts, fe

e-

ba se

d of

fic ial

s, or

dis

ab led

ca

n d ed

uc t

ce rta

in ex

pe ns

es W

ha t i

s th

e an

nu al

li m

it? No

ne $2

,5 00

cr ed

it pe

r s tu

de nt

$2 ,0

00 cr

ed it

pe r t

ax re

tu rn

$2 ,5

00

de du

cti on

$4 ,0

00 d

ed uc

tio n

$2 ,0

00

co nt

rib ut

ion p

er

be ne

fic iar

y

No ne

Am ou

nt o

f qu

ali fie

d ed

uc at

ion

ex pe

ns es

Am ou

nt o

f qu

ali fie

d ed

uc at

ion

ex pe

ns es

$5 ,2

50

ex clu

sio n

Am ou

nt o

f qu

ali fyi

ng

wo rk

-re lat

e d

ed uc

at ion

ex

pe ns

es W

ha t

ex pe

ns es

qu

al ify

be

si de

s tu

iti on

a nd

re

qu ire

d en

ro llm

en t

fe es

?

Co ur

se -re

lat ed

ex

pe ns

es su

ch

as fe

es , b

oo ks

, su

pp lie

s, an

d eq

uip m

en t

Co ur

se -re

lat ed

bo

ok s,

su pp

lie s,

an d

eq uip

m en

t

Am ou

nt s p

aid

fo r r

eq uir

ed

bo ok

s, et

c.,

th at

m us

t b e

pa id

to th

e ed

uc at

ion al

ins titu

tio n a

re

re qu

ire d

fe es

Bo ok

s Su

pp lie

s Eq

uip m

en t

Ro om

& b

oa rd

Tr an

sp or

ta tio

n Ot

he r

ne ce

ss ar

y ex

pe ns

es

No ne

Bo ok

s Su

pp lie

s Eq

uip m

en t

Co m

pu te

r eq

uip m

en t,

co m

pu te

r so

ftw ar

e, o

r In

te rn

et ac

ce ss

an

d re

lat ed

se

rv ice

s Ex

pe ns

es fo

r sp

ec ial

ne ed

s se

rv ice

s Pa

ym en

ts to

Q TP

Hi gh

er ed

uc at

ion :

Ro om

& b

oa rd

if at

le as

t h alf

-ti m

e stu

de nt

El em

/se c (

K– 12

) ed

uc at

ion : S

ee

ch ap

te r 7

Hi gh

er

ed uc

at ion

: Bo

ok s

Su pp

lie s

Eq uip

m en

t Co

m pu

te r

eq uip

m en

t, co

m pu

te r

so ftw

ar e,

o r

In te

rn et

ac ce

ss

an d

re lat

ed

se rv

ice s

Ex pe

ns es

fo r

sp ec

ial ne

ed s

se rv

ice s

Ro om

& b

oa rd

if at

le as

t h alf

-ti m

e stu

de nt

El em

/se c (

K- 12

) ed

uc at

ion : S

ee

ch ap

te r 8

Bo ok

s Su

pp lie

s Eq

uip m

en t

Ro om

& b

oa rd

if a

t le as

t ha

lf- tim

e s tu

de nt

Ex pe

ns es

fo r

sp ec

ial ne

ed s

se rv

ice s

Pa ym

en ts

to

Co ve

rd ell

E SA

Pa ym

en ts

to Q

TP

Bo ok

s Su

pp lie

s Eq

uip m

en t

Tr an

sp or

ta ti

on Tr av

el Ot

he r

ne ce

ss ar

y ex

pe ns

es

Publication 970 (2019) Page 85

Page 86 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Sc ho

la rs

hi ps

, Fe

llo ws

hi p

Gr an

ts ,

Gr an

ts , a

nd

Tu iti

on

Re du

ct io

ns

Am er

ic an

Op

po rtu

ni ty

Cr

ed it

Li fe

tim e

Le ar

ni ng

Cr

ed it

St ud

en t L

oa n

In te

re st

De

du ct

io n

Tu iti

on a

nd

Fe es

De

du ct

io n

Co ve

rd el

l ES

A†

Qu al

ifi ed

Tu

iti on

Pr

og ra

m (Q

TP )†

Ed uc

at io

n Ex

ce pt

io n

to

Ad di

tio na

l Ta

x on

E ar

ly

IR A

Di st

rib ut

io ns

†

Ed uc

at io

n Sa

vi ng

s Bo

nd

Pr og

ra m

†

Em pl

oy er

- Pr

ov id

ed

Ed uc

at io

na l

As si

st an

ce †

Bu si

ne ss

De

du ct

io n

fo r

W or

k- Re

la te

d Ed

uc at

io n

W ha

t ed

uc at

io n

qu al

ifi es

?

Un de

rg ra

du at

e &

gr ad

ua te

K– 12

Un de

rg ra

du at

e &

gr ad

ua te

Un de

rg ra

du at

e &

g ra

du at

e Co

ur se

s t o

ac qu

ire o

r im

pr ov

e j ob

sk

ills

Un de

rg ra

du at

e &

gr ad

ua te

Un de

rg ra

du at

e &

gr ad

ua te

Un de

rg ra

du at

e &

gr ad

ua te

K– 12

Un de

rg ra

du at

e &

gr ad

ua te

K– 12

fo r n

o m

or e t

ha n

$1 0,

00 0

of tu

itio n

Un de

rg ra

du at

e &

gr ad

ua te

Un de

rg ra

du at

e &

g ra

du at

e Un

de rg

ra du

at e

& g

ra du

at e

Re qu

ire d

by

em plo

ye r o

r la w

to ke

ep p

re se

nt

job , s

ala ry

, sta

tu s

M ain

ta in

or

im pr

ov e j

ob

sk ills

W ha

t a re

so

m e

of th

e ot

he r

co nd

iti on

s th

at

ap pl

y?

M us

t b e i

n de

gr ee

o r

vo ca

tio na

l pr

og ra

m Pa

ym en

t o f

tu itio

n a nd

re

qu ire

d fe

es

m us

t b e a

llo we

d un

de r t

he g

ra nt

Ca n b

e cla

im ed

fo r

on ly

4 ta

x y ea

rs

M us

t b e

en ro

lle d

at

lea st

ha lf-

tim e

in de

gr ee

pr

og ra

m

No fe

lon y d

ru g

co nv

ict ion

(s )

M us

t n ot

ha ve

co

m ple

te d

fir st

4 ye

ar s o

f po

sts ec

on da

ry

ed uc

at ion

be

fo re

en d

of

pr ec

ed ing

ta x

ye ar

No o

th er

co

nd itio

ns M

us t h

av e

be en

at le

as t

ha lf-

tim e

stu de

nt in

de

gr ee

pr

og ra

m

Ca n’t

cl aim

bo

th d

ed uc

tio n

& ed

uc at

ion

cr ed

it f or

sa m

e stu

de nt

in

sa m

e y ea

r

As se

ts m

us t

be d

ist rib

ut ed

at

ag e 3

0 un

les s s

pe cia

l ne

ed s

be ne

fic iar

y

No o

th er

co

nd itio

ns No

o th

er

co nd

itio ns

Ap pli

es o

nly to

qu

ali fie

d se

rie s

EE b

on ds

iss

ue d

af te

r 19

89 o

r s er

ies

I b on

ds

No o

th er

co

nd itio

ns Ca

n't b

e t o

m ee

t m ini

m um

ed

uc at

ion al

re qu

ire m

en ts

of

pr es

en t tr

ad e/

bu sin

es s

Ca n't

q ua

lify

yo u f

or ne

w tra

de /b

us ine

ss

In w

ha t

in co

m e

ra ng

e do

be

ne fit

s ph

as e

ou t?

No p

ha se

ou t

$8 0,

00 0

– $9

0, 00

0 $1

60 ,0

00 –

$1 80

,0 00

fo r

joi nt

re tu

rn s

$5 8,

00 0

– $6

8, 00

0 $1

16 ,0

00 –

$1 36

,0 00

fo r

joi nt

re tu

rn s

$7 0,

00 0

– $8

5, 00

0 $1

40 ,0

00 –

$1 70

,0 00

fo r

joi nt

re tu

rn s

$6 0,

00 0

– $8

0, 00

0 $1

30 ,0

00 –

$1 60

,0 00

fo r

joi nt

re tu

rn s

$9 5,

00 0

– $1

10 ,0

00 $1

90 ,0

00 –

$2 20

,0 00

fo r

joi nt

re tu

rn s

No p

ha se

ou t

No p

ha se

ou t

$8 1,

10 0

– $9

6, 10

0 $1

21 ,6

00 –

$1 51

,6 00

fo r

jo int

re tu

rn s

No p

ha se

ou t

No p

ha se

ou t

† A ny

no nt

ax ab

le dis

tri bu

tio n i

s l im

ite d

to th

e a m

ou nt

th at

d oe

sn 't e

xc ee

d qu

ali fie

d ed

uc at

ion ex

pe ns

es .

Page 86 Publication 970 (2019)

Page 87 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

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 aren't taxable and something else when determining if a scholarship or fellowship grant isn't taxable.

For each term listed below that has more than one definition, the definition for each education benefit is listed. Academic period: A semester, tri- mester, quarter, or other period of study (such as a summer school ses- sion) as reasonably determined by an educational institution. If an educa- tional institution uses credit hours or clock hours and doesn't have aca- demic terms, each payment period can be treated as an academic period. Adjusted qualified education ex- penses (AQEE): Qualified education expenses (defined later) reduced by any tax-free educational assistance, such as a tax-free scholarship or em- ployer-provided educational assis- tance. They must also be reduced by any qualified education expenses de- ducted 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 re- quirements.

1. Attends a primary or secondary school or pursues a degree at a college or university.

2. Attends an accredited educational institution that is authorized to pro- vide: a. A program that is acceptable

for full credit toward a bache- lor's or higher degree, or

b. A program of training to pre- pare students for gainful em-

ployment in a recognized occu- pation.

Designated beneficiary: The indi- vidual named in the document creating the account/plan who is to receive the benefit of the funds in the account/ plan. Eligible educational institution:

1. American opportunity credit. Any college, university, vocational school, or other postsecondary ed- ucational institution eligible to par- ticipate in a student aid program administered by the U.S. Depart- ment of Education. It includes vir- tually all accredited public, non- profit, and proprietary (privately owned profit-making) postsecon- dary institutions.

2. Coverdell education savings account (ESA). Any college, uni- versity, vocational school, or other postsecondary educational institu- tion eligible to participate in a stu- dent 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. Also in- cluded is any public, private, or re- ligious school that provides ele- mentary or secondary education (kindergarten through grade 12), as determined under state law.

3. Education savings bond pro- gram. Same as American opportu- nity credit in this category.

4. IRA, early distributions from. Same as American opportunity credit in this category.

5. Lifetime learning credit. Same as American opportunity credit in this category.

6. Qualified tuition program (QTP). Generally, same as Cover- dell education savings account (ESA) in this category.

7. Scholarships and fellowship grants. An institution that main- tains a regular faculty and curricu-

lum and normally has a regularly enrolled body of students in at- tendance at the place where it car- ries on its educational activities.

8. Student loan, cancellation of. Same as Scholarships and fellow- ship grants in this category.

9. Student loan interest deduc- tion. Any college, university, voca- tional school, or other postsecon- dary educational institution eligible to participate in a student aid pro- gram administered by the U.S. De- partment of Education. It includes virtually all accredited public, non- profit, and proprietary (privately owned profit-making) postsecon- dary institutions. Also included is an institution that conducts an in- ternship or residency program leading to a degree or certificate from an institution of higher educa- tion, a hospital, or a health care fa- cility that offers postgraduate train- ing.

10. Tuition and fees deduction. Same as American opportunity credit in this category.

Eligible student: 1. American opportunity credit. A

student who meets all of the fol- lowing requirements for the tax year for which the credit is being determined.

• Didn't have expenses that were used to figure an Ameri- can opportunity credit in any 4 earlier tax years.

• Hadn't completed the first 4 years of postsecondary educa- tion (generally, the freshman through senior years) in an earlier tax year.

• For at least one academic pe- riod beginning in the tax year, was enrolled at least half-time in a program leading to a de- gree, certificate, or other rec- ognized educational credential at an eligible educational insti- tution.

Publication 970 (2019) Page 87

Page 88 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

• Was free of any federal or state felony conviction for pos- sessing or distributing a con- trolled substance as of the end of the tax year.

2. Lifetime learning credit. A stu- dent who is enrolled in one or more courses at an eligible educa- tional institution.

3. Student loan interest deduc- tion. A student who was enrolled at least half-time in a program leading to a postsecondary de- gree, certificate, or other recog- nized educational credential at an eligible educational institution.

4. Tuition and fees deduction. A student who is enrolled in one or more courses at an eligible educa- tional institution.

Half-time student: A student who is enrolled for at least half the full-time academic workload for the course of study the student is pursuing, as deter- mined under the standards of the school where the student is enrolled. Modified adjusted gross income (MAGI):

1. American opportunity credit. Adjusted gross income (AGI) as figured on the federal income tax return, modified by adding back any:

• Foreign earned income exclu- sion,

• Foreign housing exclusion, • Foreign housing deduction, • Exclusion of income by bona

fide residents of American Sa- moa, and

• Exclusion of income by bona fide residents of Puerto Rico.

2. Coverdell education savings account (ESA). Same as Ameri- can opportunity credit in this cate- gory.

3. Education savings bond pro- gram. Adjusted gross income (AGI) as figured on the federal in- come tax return without taking into account any savings bond interest exclusion and modified by adding back any:

• Foreign earned income exclu- sion,

• Foreign housing exclusion, • Foreign housing deduction, • Exclusion of income by bona

fide residents of American Sa- moa,

• Exclusion of income by bona fide residents of Puerto Rico,

• Exclusion for adoption benefits received under an employer's adoption assistance program,

• Deduction for student loan in- terest,

• Deduction for tuition and fees, and

• Deduction for domestic pro- duction activities.

4. Lifetime learning credit. Same as American opportunity credit in this category.

5. Student loan interest deduc- tion. Adjusted gross income (AGI) as figured on the federal income tax return without taking into ac- count any student loan interest de- duction, tuition and fees deduction, or domestic production activities deduction, and modified by adding back any:

• Foreign earned income exclu- sion,

• Foreign housing exclusion, • Foreign housing deduction, • Exclusion of income by bona

fide residents of American Sa- moa, and

• Exclusion of income by bona fide residents of Puerto Rico.

6. Tuition and fees deduction. Ad- justed gross income (AGI) as fig- ured on the federal income tax re- turn without taking into account any tuition and fees deduction, and modified by adding back any:

• Foreign earned income exclusion, • Foreign housing exclusion, • Foreign housing deduction, • Exclusion of income by bona fide

residents of American Samoa, and • Exclusion of income by bona fide

residents of Puerto Rico.

Phaseout: The amount of credit or deduction allowed is reduced when modified adjusted gross income (MAGI) is greater than a specified amount of income. Qualified education expenses: See pertinent chapter for specific items.

1. American opportunity credit. Tuition and certain related expen- ses (including student activity fees) required for enrollment or at- tendance at an eligible educational institution. Books, supplies, and equipment needed for a course of study are included even if not pur- chased from the educational insti- tution. Doesn't include expenses for room and board. Doesn't in- clude expenses for courses involv- ing sports, games, or hobbies (in- cluding noncredit courses) that aren't part of the student's postse- condary degree program.

2. Coverdell education savings account (ESA). Expenses related to or required for enrollment or at- tendance of the designated benefi- ciary at an eligible elementary, secondary, or postsecondary school. Includes computer or pe- ripheral equipment, computer soft- ware, or Internet access and rela- ted services. Many specialized expenses included for K–12. Also includes expenses for special needs services and contributions to qualified tuition program (QTP).

3. Education savings bond pro- gram. Tuition and fees required to enroll at or attend an eligible edu- cational institution. Also includes contributions to a qualified tuition program (QTP) or Coverdell edu- cation savings account (ESA). Doesn't include expenses for room and board. Doesn't include expen- ses for courses involving sports, games, or hobbies that aren't part of a degree or certificate-granting program.

4. IRA, early distributions from. Tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educa- tional institution, plus certain limi- ted costs of room and board for students who are enrolled at least half-time. Also includes expenses

Page 88 Publication 970 (2019)

Page 89 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

for special needs services incurred by or for special needs students in connection with their enrollment or attendance.

5. Lifetime learning credit. Tuition and certain related expenses re- quired for enrollment or attend- ance at an eligible educational in- stitution. 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 insti- tution as a condition of enrollment or attendance. Doesn't include ex- penses for room and board. Doesn't include expenses for cour- ses involving sports, games, or hobbies (including noncredit cour- ses) that aren't part of the stu- dent's postsecondary degree pro- gram, unless taken by the student to acquire or improve job skills.

6. Qualified tuition program (QTP). Tuition, fees, books, sup- plies, and equipment required for enrollment or attendance at an eli- gible higher educational institution, plus certain limited costs of room

and board for students who are en- rolled at least half-time. Includes computer or peripheral equipment, computer software, or Internet ac- cess and related services. Also in- cludes expenses for special needs services and computer access. Also, for amounts paid from distri- butions made after 2017, includes no more than $10,000 of elemen- tary and secondary school (K–12) tuition incurred after 2017.

7. Scholarships and fellowship grants. 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.

8. Student loan interest deduc- tion. Total costs of attending an el- igible educational institution, in- cluding graduate school (however, limitations may apply to the cost of room and board allowed).

9. Tuition and fees deduction. Tui- tion and certain related expenses required for enrollment or attend- ance at an eligible educational in- stitution. 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 insti- tution as a condition of enrollment or attendance.

Recapture: To include as income on your current year's return an amount allowed as a deduction in a prior year. To include as tax on your current year's return an amount allowed as a credit 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 di- rectly to another, either at your request or at the trustee's request.

Publication 970 (2019) Page 89

Page 90 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

To help us develop a more useful index, please let us know if you have ideas for index entries. See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.Index

529 program (See Qualified tuition program (QTP))

A Academic period:

American opportunity credit 12 Lifetime learning credit 24 Student loan interest deduction 32 Tuition and fees deduction 40

Accountable plans 72 Additional tax:

Coverdell ESA: On excess contributions 50 On taxable distributions 54

IRA distributions, education exception 61

Qualified tuition program (QTP), on taxable distributions 60

Adjusted qualified education expenses (See Qualified education expenses)

American opportunity credit: Adjustments to qualified education

expenses 14 Claiming dependent's expenses 19, 20

Tuition reduction 20 Claiming the credit 11, 12, 22

Qualifying to claim (Figure 2-1) 13 Contrast to the lifetime learning

credits 85 Coordination with Coverdell ESA

distributions 53 Coordination with qualified tuition

program (QTP) distributions 59 Eligible educational institution 13 Eligible student 18

Requirements (Figure 2-2) 19 Expenses qualifying for 12, 16 Figuring the credit 20 Income level, effect on amount of

credit 21 Income limits 21 Modified adjusted gross income

(MAGI) 21 Worksheet 2-1 22

Overview of American opportunity credit (Table 2-1) 11

Phaseout 21 Qualified education expenses 13 Tax benefit of 9

Armed Forces Health Professions Scholarship and Financial Assistance Program 8

Assistance (See Tax help) Athletic scholarships 6

B Bar review course 69 Bonds, education

savings (See Education savings bond program)

Business deduction for work-related education 66 Accountable plans 72 Adjustments to qualifying work-related

education expenses 71 Allocating meal reimbursements 72 Deductible education expenses 69, 71 Deducting business expenses 72, 73 Double benefit not allowed 71

Education required by employer or by law 66

Education to maintain or improve skills 67

Education to meet minimum requirements 68, 69

Education to qualify for new trade or business 69

Excess expenses, accountable plan 72 Indefinite absence 67 Maintaining skills vs. qualifying for new

job 67 Nonaccountable plans 72 Nondeductible expenses 69 Qualified education expenses 69, 71 Recordkeeping requirements 73 Reimbursements, treatment of 71, 72 Tax benefit of 66 Tax-free educational assistance 71 Teachers 68, 69 Temporary absence to acquire

education 67 Transportation expenses 69, 70 Travel expenses 70

C Cancellation of student

loan (See Student loan cancellation) Candidate for a degree:

Scholarships and fellowship grants 5 Change of designated beneficiary:

Coverdell ESA 51 Qualified tuition program 61

Comprehensive or bundled fees: American opportunity credit 18 Lifetime learning credit 29 Tuition and fees deduction 43

Conventions outside U.S. 71 Coverdell education savings account

(ESA) 45–56 Additional tax:

On excess contributions 50 On taxable distributions 54

Assets to be distributed at age 30 or death of beneficiary 55

Contribution limits 48, 49 Figuring the limit (Worksheet 6-2) 49

Contributions to 47, 50 Table 7-2 48

Coordination with American opportunity and lifetime learning credits 53

Coordination with qualified tuition program (QTP) 53

Defined 46 Distributions 51, 55

Overview (Table 7-3) 52 Divorce, transfer due to 51 Eligible educational institution 46 Figuring taxable portion of

distribution 52 Worksheet 7-3 56

Figuring the taxable earnings in required distribution 55

Losses 54 Modified adjusted gross income

(MAGI) 48 Worksheet 6-1 49

Overview (Table 6-1) 46 Qualified education expenses 46, 47 Rollovers 50 Taxable distributions 52–55

Worksheet 7-3 to figure 56 Tax benefit of 45

Tax-free distributions 52 Transfers 50

CPA review course 69 Credits:

American opportunity (See American opportunity credit)

Lifetime learning (See Lifetime learning credit)

Cruises, educational 71

D Deductions (See Business deduction for

work-related education) Designated beneficiary:

Coverdell ESA 46, 51 Qualified tuition program (QTP) 57, 61

Disabilities, persons with: Impairment-related work expenses 73

Distributions (See specific benefit) Divorce:

Coverdell ESA transfer due to 51 Expenses paid under decree:

American opportunity credit 20 Lifetime learning credit 29 Tuition and fees deduction 43

Double benefit not allowed: American opportunity credit 14 Lifetime learning credit 25 Student loan interest deduction 35 Tuition and fees deduction 41 Work-related education 71

E Early distributions from IRAs 61–63

Eligible educational institution 62 Figuring amount not subject to 10%

tax 62 Qualified education expenses 62 Reporting 63

Educational assistance, employer-provided (See Employer-pr ovided educational assistance)

Education IRA (See Coverdell education savings account (ESA))

Education loans (See Student loan interest deduction)

Education savings account (See Coverdell education savings account (ESA))

Education savings bond program: Cashing in bonds tax free 63, 64 Claiming exclusion 65 Eligible educational institution 64 Figuring tax-free amount 64 Income level, effect on amount of

exclusion 65 Modified adjusted gross income

(MAGI) 64 Phaseout 65 Qualified education expenses 64

Eligible educational institution: American opportunity credit 13 Cancellation of student loan 38 Coverdell ESA 46 Early distributions from IRAs 62 Education savings bond program 64 Lifetime learning credit 24 Qualified tuition program (QTP) 57 Qualified tuition reduction 8 Scholarships and fellowship grants 6, 8 Student loan cancellation 38

Page 90 Publication 970 (2019)

Page 91 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Student loan interest deduction 33 Tuition and fees deduction 40

Eligible elementary or secondary school: Coverdell ESA 46

Eligible student: American opportunity credit 18 Lifetime learning credit 29 Student loan interest deduction 32 Tuition and fees deduction 43

Employer-provided educational assistance 65

ESAs (See Coverdell education savings account (ESA))

Estimated tax 3 Exception 38 Excess contributions:

Coverdell ESA 50 Excess expenses, accountable plan 72 Expenses (See specific benefit)

F Family members, beneficiary:

Coverdell ESA 51 Qualified tuition program (QTP) 61

Fee-basis officials, work-related education deduction 73

Fellowship grants (See Scholarships and fellowship grants)

Figures (See Tables and figures) Financial aid (See Scholarships and

fellowship grants) Form 1098-E:

Student loan interest deduction 33, 35 Form 1098-T:

American opportunity credit 20 Lifetime learning credit 30 Tuition and fees deduction 44

Form 1099-Q: Coverdell ESA 50, 52 Qualified tuition program (QTP) 58

Form 1099-R: Early distributions from IRAs 63

Form 2106 71 Form 5329:

Coverdell ESA 55 Early distributions from IRAs 63 Qualified tuition program (QTP) 60

Form 8815 64, 65 Form 8863:

Filled-in examples 82 Form W-9S 20, 30, 35, 44 Fulbright grants 7

G Glossary 4, 87–89 Graduate education tuition reduction 8 Grants:

Fulbright 7 Pell 7 Title IV need-based education 7

H Half-time student:

American opportunity credit 18 Coverdell ESA 47 Early distributions from IRAs 62 Student loan interest deduction 32

I Identity theft 75

Illustrated example of education credits (Appendix A) 77–82

Impairment-related work expenses: Work-related education deduction 73

Individual retirement arrangements (IRAs) 45 Early distributions (See Early

distributions from IRAs)

L Lifetime learning credit 23

Academic period 24 Adjustments to qualified education

expenses 25 Claiming dependent's expenses 29

Tuition reduction 30 Claiming the credit 23, 24, 31

Qualifying to claim (Figure 3-1) 26 Contrast to the American opportunity

credit 85 Coordination with Coverdell ESA

distributions 53 Coordination with qualified tuition

program (QTP) distributions 59 Eligible educational institution 24 Eligible student 29 Expenses qualifying for 24–28 Figuring the credit 30, 31 Income level, effect on amount of

credit 30, 31 Income limits 30 Modified adjusted gross income

(MAGI) 30 Worksheet 3-1 30

Overview (Table 3-1) 24 Phaseout 30 Qualified education expenses 24, 28 Qualifying to claim (Figure 3-1) 26 Tax benefit of 23

Loans: Cancellation (See Student loan

cancellation) Capitalized interest on student loan 33 Origination fees on student loan 33 Qualified education expenses paid with:

American opportunity credit 12 Lifetime learning credit 24

Student loan repayment assistance 39 Losses, deducting:

Coverdell ESA 54 Qualified tuition program (QTP) 60

Luxury water transportation 71

M Mileage deduction for work-related

education 66, 70 Military academy cadets 7 Missing children, photographs of 3 Modified adjusted gross income

(MAGI): American opportunity credit:

Worksheet 2-1 22 Coverdell ESA 48

Worksheet 6-1 49 Education savings bond program 64 Lifetime learning credit 30

Worksheet 3-1 30 Student loan interest deduction 35

Table 4-2 35 Tuition and fees deduction 44

Table 6-2 44 Worksheet 6-1 45

N National Health Service Corps

Scholarship Program 6, 8 Nonaccountable plans:

Work-related education 72

P Pell grants 7, 16, 28 Performing artists, work-related

education deduction 73 Phaseout:

American opportunity credit 21 Education savings bond program 65 Lifetime learning credit 30 Student loan interest deduction 35, 36

Publications (See Tax help)

Q Qualified education expenses:

Adjustments to: American opportunity credit 14–16 Coverdell ESA 52 Education savings bond program 64 Lifetime learning credit 25 Qualified tuition program (QTP) 59 Student loan interest deduction 33 Tuition and fees deduction 41 Work-related education 71

American opportunity credit 13–16 Coverdell ESA 46, 47 Early distributions from IRAs 62 Education savings bond program 64 Expenses not qualified:

American opportunity credit 17, 18 Lifetime learning credit 29 Tuition and fees deduction 42

Lifetime learning credit 24–28 Qualified tuition program (QTP) 57 Scholarships and fellowship grants 6 Student loan interest deduction 32 Tuition and fees deduction 40–42 Work-related education 69–71

Qualified elementary and secondary education expenses: Coverdell ESAs 47

Qualified employer plans: Student loan interest deduction not

allowed 32 Qualified student loans 32 Qualified tuition program (QTP) 57–61

Additional tax on taxable distributions 60

Change of designated beneficiary 61 Contributions to 58 Coordination with American opportunity

and lifetime learning credits 59 Coordination with Coverdell ESA

distributions 60 Defined 57 Eligible educational institution 57 Figuring taxable portion of

distribution 59 Losses 60 Recontribution 58 Rollovers 60, 61 Taxability of distributions 58, 60 Taxable earnings 59 Tax benefit of 57 Transfers 60, 61

Qualified tuition reduction 8 Qualified U.S. savings bonds 63

Publication 970 (2019) Page 91

Page 92 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Qualifying work-related education 66–69 Determining if qualified (Figure

11-1) 67

R Recapture:

American opportunity credit 15 Lifetime learning credit 27 Tuition and fees deduction 42

Recordkeeping requirements: Work-related education 73

Refinanced and consolidated student loans 33

Refinanced student loans 38 Reimbursements:

Nondeductible expenses 72 Work-related education 71, 72

Related persons: Coverdell ESA 51 Qualified tuition program (QTP) 61 Student loan interest deduction 32

Repayment programs (See Student loan repayment assistance)

Reporting: American opportunity credit 22 Coverdell ESA 50, 52, 55 Early distributions from IRAs 63 Education savings bond program 65 Lifetime learning credit 31 Qualified tuition program (QTP) 59–61 Scholarships and fellowship grants,

taxable 6 Student loan interest deduction 36 Tuition and fees deduction 44 Tuition reduction, taxable 8 Work-related education expenses 72,

73 Revolving lines of credit, interest on 33 Rollovers:

Coverdell ESA 50 Qualified tuition program (QTP) 60, 61

S Scholarships and fellowship

grants 5–7, 16, 28 Athletic scholarships 6 Eligible educational institution 6, 8 Figuring tax-free and taxable parts

(Worksheet 1-1) 6 Qualified education expenses 6 Reporting 6 Scholarship, defined 5 Taxable 6 Tax-free 5, 6 Tax treatment of (Table 1-1) 5

Section 501(c)(3) organizations (See Student loan cancellation)

Section 529 program (See Qualified tuition program (QTP))

Self-employed persons: Deducting work-related education

expenses 73 Service academy cadets 7 Sports, games, hobbies, and noncredit

courses: American opportunity credit 18 Education savings bond program 64 Lifetime learning credit 29 Tuition and fees deduction 43

Standard mileage rate: Work-related education 66, 70

State prepaid education accounts (See Qualified tuition program (QTP))

Student loan cancellation 38 Eligible educational institution 38 Section 501(c)(3) organizations 38

Student loan interest deduction: Academic period 32 Adjustments to qualified education

expenses 33 Allocation between interest and

principal 33, 34 Claiming the deduction 36 Eligible educational institution 33 Eligible student 32 Figuring the deduction 35, 36 Include as interest 33 Income level, effect on amount of

deduction 35 Loan repayment assistance 34 Modified adjusted gross income

(MAGI) 35, 36 Table 4-2 35

Not included as interest 34 Phaseout 35, 36 Qualified education expenses 32 Qualified employer plans 32 Qualified student loans 32 Reasonable period of time 32 Related persons 32 Student loan interest, defined 32, 34 Third party interest payments 34 When interest must be paid 34 Worksheet 4-1 37

Student loan repayment assistance 39 Surviving spouse:

Coverdell ESA transfer to 55

T Tables and figures:

American opportunity credit: Eligible student requirements (Figure

2-2) 19 Overview (Table 2-1) 11 Qualifying to claim (Figure 2-1) 13

Comparison of education tax benefits (Appendix B) 82

Coverdell ESAs: Contributions to (Table 7-2) 48 Distributions (Table 7-3) 52 Overview (Table 6-1) 46

Education credits: Overview of American opportunity

credit (Table 2-1) 11 Overview of lifetime learning credit

(Table 3-1) 24 Lifetime learning credit:

Overview (Table 3-1) 24 Qualifying to claim (Figure 3-1) 26

Scholarships and fellowship grants, taxability of (Table 1-1) 5

Student loan interest deduction: MAGI, effect of (Table 4-2) 35 Overview (Table 4-1) 31

Summary chart of differences between education tax benefits (Appendix B) 82

Tuition and fees deduction: MAGI, effect of (Table 6-2) 44 Overview (Table 6-1) 39

Work-related education, qualifying (Figure 112-1) 67

Taxable scholarships and fellowship grants 6

Tax-free educational assistance: American opportunity credit 14 Coverdell ESA 52

Early distributions from IRAs 62 Education savings bond program 64 Lifetime learning credit 25 Qualified tuition program (QTP) 59 Tuition and fees deduction 41 Work-related education 71

Tax help 73 Teachers 68, 69 Temporary-basis student,

transportation expenses of 69 Title IV need-based education grants 7 Transfers:

Coverdell ESA 50 Qualified tuition program (QTP) 60, 61

Transportation expenses: Work-related education 69, 70

Travel expenses: 50% limit on meals 71 Not deductible as form of education 71 Work-related education 70

Tuition and fees deduction 39 Academic period 40 Adjustments to qualified education

expenses 41, 42 Can you claim the deduction 39 Claiming dependent's expenses 43 Claiming the deduction 44 Double benefit not allowed 41 Eligible educational institution 40 Eligible student 43 Expenses not qualifying for 42 Expenses qualifying for 40–42 Figuring the deduction 44 Income level, effect on amount of

deduction 44 Loan used to pay tuition and fees 40 Modified adjusted gross income

(MAGI) 44 Table 6-2 44 Worksheet 6-1 45

Overview (Table 6-1) 39 Qualified education expenses 40, 42 Qualifying for deduction 39 Tax benefit of 39 Tax-free educational assistance 41

Tuition reduction: American opportunity credit 20 Lifetime learning credit 30 Qualified 8 Tuition and fees deduction 44

U U.S. savings bonds 63 Unclaimed reimbursement:

Work-related education 69

V Veterans' benefits 7

W Withholding 4 Working condition fringe benefit 65 Work-related education (See Business

deduction for work-related education) Worksheets:

American opportunity credit MAGI calculation (Worksheet 2-1) 21

Coverdell ESA: Contribution limit (Worksheet

6-2) 49 MAGI, calculation of (Worksheet

6-1) 49 Taxable distributions and basis

(Worksheet 6-3) 56

Page 92 Publication 970 (2019)

Page 93 of 93 Fileid: … tions/P970/2019/A/XML/Cycle03/source 14:37 - 17-Jan-2020 The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Taxable distributions and basis (Worksheet 7-3) 56

Lifetime learning credit MAGI calculation (Worksheet 3-1) 30

Scholarships and fellowship grants, taxable income (Worksheet 1-1) 6

Student loan interest deduction (Worksheet 4-1) 37

Tuition and fees deduction, MAGI calculation (Worksheet 6-1) 45

Publication 970 (2019) Page 93