Department of the Treasury
Internal Revenue Service
Publication 970
Cat. No. 25221V
Tax Benefits
for Education
For use in preparing
2016 Returns
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Contents
Future Developments . . . . . . . . . . . . . . . . . . . . . . . 2
What's New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Reminders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Chapter 1. Scholarships, Fellowship Grants,
Grants, and Tuition Reductions . . . . . . . . . . . . 4
Scholarships and Fellowship Grants . . . . . . . . . . 5
Other Types of Educational Assistance . . . . . . . . 7
Chapter 2. American Opportunity Credit . . . . . . . 8
Can You Claim the Credit? . . . . . . . . . . . . . . . . 10
What Expenses Qualify? . . . . . . . . . . . . . . . . . . 12
Who Is an Eligible Student? . . . . . . . . . . . . . . . . 16
Who Can Claim a Dependent's Expenses? . . . . . 18
Figuring the Credit . . . . . . . . . . . . . . . . . . . . . . 19
Claiming the Credit . . . . . . . . . . . . . . . . . . . . . . 21
Chapter 3. Lifetime Learning Credit . . . . . . . . . . 21
Can You Claim the Credit? . . . . . . . . . . . . . . . . 21
What Expenses Qualify? . . . . . . . . . . . . . . . . . 22
Who Is an Eligible Student? . . . . . . . . . . . . . . . 27
Who Can Claim a Dependent's Expenses? . . . . 27
Figuring the Credit . . . . . . . . . . . . . . . . . . . . . . 28
Claiming the Credit . . . . . . . . . . . . . . . . . . . . . . 29
Chapter 4. Student Loan Interest Deduction . . . 29
Student Loan Interest Defined . . . . . . . . . . . . . . 30
Can You Claim the Deduction? . . . . . . . . . . . . . 32
Figuring the Deduction . . . . . . . . . . . . . . . . . . . 33
Claiming the Deduction . . . . . . . . . . . . . . . . . . . 34
Chapter 5. Student Loan Cancellations and
Repayment Assistance . . . . . . . . . . . . . . . . . 36
Student Loan Cancellation . . . . . . . . . . . . . . . . 36
Student Loan Repayment Assistance . . . . . . . . . 37
Chapter 6. Tuition and Fees Deduction . . . . . . . 37
Can You Claim the Deduction? . . . . . . . . . . . . . 37
What Expenses Qualify? . . . . . . . . . . . . . . . . . . 38
Who Is an Eligible Student? . . . . . . . . . . . . . . . . 41
Who Can Claim a Dependent's Expenses? . . . . . 41
Figuring the Deduction . . . . . . . . . . . . . . . . . . . 42
Claiming the Deduction . . . . . . . . . . . . . . . . . . . 42
Illustrated Example . . . . . . . . . . . . . . . . . . . . . . 43
Chapter 7. Coverdell Education Savings
Account (ESA) . . . . . . . . . . . . . . . . . . . . . . . . 46
What Is a Coverdell ESA? . . . . . . . . . . . . . . . . . 46
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Rollovers and Other Transfers . . . . . . . . . . . . . . 51
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Chapter 8. Qualified Tuition Program (QTP) . . . . 56
What Is a Qualified Tuition Program? . . . . . . . . . 56
How Much Can You Contribute? . . . . . . . . . . . . 58
Jan 18, 2017
Recontribution of Refunded Amounts . . . . . . . . . 58
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 . . . . . . . . . . . . . . . 62
Chapter 10. Education Savings Bond
Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Who Can Cash in Bonds Tax Free? . . . . . . . . . . 63
Figuring the Tax-Free Amount . . . . . . . . . . . . . . 64
Claiming the Exclusion . . . . . . . . . . . . . . . . . . . 64
Chapter 11. Employer-Provided Educational
Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Chapter 12. Business Deduction for
Work-Related Education . . . . . . . . . . . . . . . . 65
Qualifying Work-Related Education . . . . . . . . . . 66
What Expenses Can Be Deducted? . . . . . . . . . . 69
How To Treat Reimbursements . . . . . . . . . . . . . 71
Deducting Business Expenses . . . . . . . . . . . . . 72
Recordkeeping . . . . . . . . . . . . . . . . . . . . . . . . . 73
Illustrated Example . . . . . . . . . . . . . . . . . . . . . . 73
Chapter 13. How To Get Tax Help . . . . . . . . . . . . 76
Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Future Developments
For the latest information about developments related to
Pub. 970, such as legislation enacted after it was
published, go to www.irs.gov/pub970.
What's New
Form 1098-T requirement. For tax years beginning after
June 29, 2015, generally tax year 2016 returns for most
taxpayers, the law requires a taxpayer (or a dependent) to
have received a Form 1098-T from an eligible educational
institution in order to claim the tuition and fees deduction,
American opportunity credit, or the lifetime learning credit.
However, for tax year 2016, a taxpayer may claim one of
these education benefits if the student does not receive a
Form 1098-T because the student’s educational institution
is not required to send a Form 1098-T to the student un-
der existing rules (for example, if the student is a nonresi-
dent alien, has qualified education expenses paid entirely
with scholarships, or has qualified education expenses
paid under a formal billing arrangement). If a student’s ed-
ucational institution is not required to provide a Form
1098-T to the student, a taxpayer may claim one of these
education benefits without a Form 1098-T if the taxpayer
otherwise qualifies, can demonstrate that the taxpayer (or
a dependent) was enrolled at an eligible educational insti-
tution, and can substantiate the payment of qualified tui-
tion and related 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 up to 10 years. See the Caution statement under
Introduction in chapter 2.
Taxpayer identification number needed by due date
of return. If you don’t have a taxpayer identification num-
ber (TIN) by the due date of your 2016 return (including
extensions), you can’t claim the American opportunity
credit on either your original or an amended 2016 return,
even if you later get a TIN. Also, the American opportunity
credit isn’t allowed on either your original or an amended
2016 return for a student who doesn’t have a TIN by the
due date of your return (including extensions), even if that
student later gets a TIN.
Lifetime learning credit. For 2016, the amount of your
lifetime learning credit is gradually reduced (phased out) if
your modified adjusted gross income (MAGI) is between
$55,000 and $65,000 ($111,000 and $131,000 if you file a
joint return). You can't claim a credit if your MAGI is
$65,000 or more ($131,000 or more if you file a joint re-
turn). For more information, see chapter 3. The American
opportunity credit MAGI limits are unchanged (see chap-
ter 2).
Student loan interest deduction. For 2016, the
amount of your student loan interest deduction is gradu-
ally reduced (phased out) if your MAGI is between
$65,000 and $80,000 ($130,000 and $160,000 if you file a
joint return). You can't claim the deduction if your MAGI is
$80,000 or more ($160,000 or more if you file a joint re-
turn). See chapter 4 for more information.
Education savings bond program. For 2016, the
amount of your education savings bond interest exclusion
is gradually reduced (phased out) if your MAGI is between
$77,550 and $92,550 ($116,300 and $146,300 if you file a
joint return). You can't exclude any of the interest if your
MAGI is $92,550 or more ($146,300 or more if you file a
joint return). See chapter 10 for more information.
Business deduction for work-related education. For
2016, if you drive your car to and from school and qualify
to deduct transportation expenses, the amount you can
deduct for miles driven from January 1, 2016, through De-
cember 31, 2016, is 54 cents a mile. See chapter 12 for
more information.
Reminders
Form 1098-T, Tuition Statement. When figuring an ed-
ucation credit or tuition and fees deduction, use only the
amounts you paid and are deemed to have paid during
the tax year for qualified education expenses. In most ca-
ses, the student should receive Form 1098-T from the
Page 2 Publication 970 (2016)
eligible educational institution by January 31, 2017. An in-
stitution may choose to report either payments received
during calendar year 2016 (box 1), or amounts billed dur-
ing the calendar year 2016 (box 2), for qualified education
expenses. However, the amounts on Form 1098-T, boxes
1 and 2, might be different than the amount you actually
paid and are deemed to have paid. In addition, the 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.
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 Coordi
nation with Pell grants and other scholarships or fellow
ship grants throughout this publication.
Hope scholarship credit. For 2016, the Hope scholar-
ship credit isn't available. However, you may be able to
claim an American opportunity or lifetime learning credit.
See chapter 2 and chapter 3 for more information.
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.
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
(1-800-843-5678) 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;
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 educational 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.TIP
Publication 970 (2016) Page 3
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.
You can send us comments from irs.gov/formspubs.
Click on “More Information” and then on “Give us feed-
back.”
Or you can write to:
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We respond to many letters by telephone. Therefore, it
would be helpful if you would include your daytime phone
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Although we cannot respond individually to each com-
ment received, we do appreciate your feedback and will
consider your comments as we revise our tax products.
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 at the end of this publication.
Useful Items
You may want to see:
Publication
Travel, Entertainment, Gift, and Car Expenses
Taxable and Nontaxable Income
Investment Income and Expenses
Contributions to Individual Retirement
Arrangements (IRAs)
590-A
Distributions from Individual Retirement
Arrangements (IRAs)
Form (and Instructions)
U.S. Individual Income Tax Return
U.S. Individual Income Tax Return
Income Tax Return for Single and Joint
Filers With No Dependents
U.S. Nonresident Alien Income Tax Return
U.S. Income Tax Return for Certain
Nonresident Aliens With No Dependents
Employee Business Expenses
Unreimbursed Employee Business
Expenses
Additional Taxes on Qualified Plans and Other
Tax-Favored Accounts
Exclusion of Interest From Series EE and I
U.S. Savings Bonds Issued After 1989
Education Credits
Tuition and Fees Deduction
Itemized Deductions
See chapter 13 for information about getting these publi-
cations and forms.
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
590-B
1040
1040A
1040EZ
1040NR
1040NR-EZ
2106
2106-EZ
5329
8815
8863
8917
Schedule A (Form 1040)
Page 4 Chapter 1 Scholarships, Fellowship Grants, Grants, and Tuition Reductions
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.TIP
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.
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
Chapter 1 Scholarships, Fellowship Grants, Grants, and Tuition Reductions Page 5
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. (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, $1,500 of your scholarship is tax
free. The $1,000 you received for teaching is taxable.
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.
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 2016. 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, in this chapter.
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.
Page 6 Chapter 1 Scholarships, Fellowship Grants, Grants, and Tuition Reductions
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, Exemptions, 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 1040EZ. If you file Form 1040EZ, include the taxa-
ble amount in the total on line 1. If the taxable amount was
not reported on Form W-2, also enter “SCH” and the taxa-
ble amount in the space to the left of line 1.
Form 1040A. If you file Form 1040A, include the taxable
amount in the total on line 7. If the taxable amount was not
reported on Form W-2, also enter “SCH” and the taxable
amount in the space to the left of line 7.
Form 1040. If you file Form 1040, include the taxable
amount in the total on line 7. 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 7.
Form 1040NR. If you file Form 1040NR, report the taxa-
ble 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 1040NR for more information.
Form 1040NR-EZ. If you file Form 1040NR-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 1040NR-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 United States military academy isn't a
scholarship 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 on
Form W-2, box 1. Include this pay in your income in the
year you receive it unless one of the exceptions, dis-
cussed earlier under Payment for services, applies.
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
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
Chapter 1 Scholarships, Fellowship Grants, Grants, and Tuition Reductions Page 7
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. (See below for exceptions.)
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 on your Form W-2, box 1. Report the amount from
Form W-2, box 1, on line 7 (Form 1040 or Form 1040A) or
line 1 (Form 1040EZ).
2.
American Opportunity
Credit
Introduction
For 2016, 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).
Page 8 Chapter 2 American Opportunity Credit
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 2016, 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
2016. 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 child on your 2016 tax
return, you can't use that same child's qualified education
expenses to figure the lifetime learning credit for 2016.
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.
If you claim this credit even though you're not eli
gible and it's determined that your error is due to
reckless or intentional disregard of the rules, but
not fraud, you won't be allowed to claim the credit for 2
years. If it's determined that your error is due to fraud, you
won't be allowed to claim the credit for 10 years.
Overview of the American
Opportunity Credit for 2016
Table 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 2016
(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)
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 2016 (or the
first 3 months of 2017 if the qualified
expenses were paid in 2016)
Felony drug
conviction
As of the end of 2016, 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 2016 for academic
periods beginning in 2016 or beginning
in the first 3 months of 2017TIPCAUTION
!
Chapter 2 American Opportunity Credit Page 9
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 for whom you claim an exemption on
your tax return.
Note. Qualified education expenses paid by a depend-
ent for whom you claim an exemption, 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 2016, 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 2016. If the American opportunity credit (and
Hope scholarship credit) has been claimed for this
student for any 3 or fewer tax years before 2016, this
requirement is met.
3. For at least one academic period beginning (or
treated as beginning) in 2016, 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.
The standard for what is half of the normal
full-time work load 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 2016, treat an academic period beginning
in the first 3 months of 2017 as if it began in 2016
if qualified education expenses for the student
were paid in 2016 for that academic period. See
Prepaid expenses, later.
4. As of the end of 2016, 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 2010, 2011, 2013,
and 2015. Her parents claimed the American opportunity
credit for Sharon on their 2010, 2011, and 2013 tax re-
turns. Sharon claimed the American opportunity credit on
her 2015 tax return. The American opportunity credit and
Hope scholarship credit have been claimed for Sharon for
4 tax years before 2016. Therefore, the American oppor-
tunity credit can't be claimed for Sharon for 2016. If
Sharon were to file Form 8863 for 2016, 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 2012, 2013, 2014, and 2016. His pa-
rents claimed the American opportunity credit for Wilbert
on their tax returns for 2012, 2013, and 2014. 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 2016.
Therefore, Wilbert meets the second requirement to be el-
igible for the American opportunity credit. If Wilbert were
to file Form 8863 for 2016, 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 2017 spring semester, which begins
in January 2017. Glenda pays her tuition for the 2017
spring semester in December 2016. Because the tuition
Glenda paid in 2016 relates to an academic period that
begins in the first 3 months of 2017, her eligibility to claim
an American opportunity credit in 2016 is determined as if
the 2017 spring semester began in 2016. 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
for whom you claim an exemption 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.TIP
Page 10 Chapter 2 American Opportunity Credit
Who Can't Claim the Credit?
You can't claim the American opportunity credit for 2016 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 2016 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.Figure 2-1. Can You Claim the American Opportunity Credit for 2016?
Yes
No
No
Yes
Yes
No
No
Yes
No
No
No
No
Yes
Yes
Yes
No
Yes
Yes
Yes
Did you pay qualified education expenses in 2016 for an eligible student?*
Did the academic period for which you paid qualified education
expenses begin in 2016 or the first 3 months of 2017?
No
Is the eligible student you, your spouse (if married filing jointly), or your
dependent for whom you claim an exemption on your tax return?
Are you listed as a dependent on another person’s tax return?
Is your filing status married filing separately?
For any part of 2016, were you (or your spouse) a nonresident alien
who didn’t elect to be treated as a resident alien for tax purposes?
Is your modified adjusted gross income (MAGI) less than $90,000
($180,000 if married filing 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 2016.**
*Qualified education expenses paid by a dependent for whom you claim an exemption, 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 2016.
Chapter 2 American Opportunity Credit Page 11
You didn't have an SSN (or ITIN) by the due date of
your 2016 return (including extensions), you can't
claim the American opportunity credit on either your
original or an amended 2016 return, even if you later
get an SSN (or ITIN). Also, you can't claim this credit
on your original or an amended 2016 return for a stu-
dent who didn't have an SSN, ATIN, or ITIN by the
due date of your return (including extensions), even if
the student later gets one of those numbers.
What Expenses Qualify?
The American opportunity credit is based on adjusted
qualified education expenses you pay for yourself, your
spouse, or a dependent for whom you claim an exemption
on your tax return. Generally, the credit is allowed for ad-
justed qualified education expenses paid in 2016 for an
academic period beginning in 2016 or beginning in the
first 3 months of 2017.
For example, if you paid $1,500 in December 2016 for
qualified tuition for the spring 2017 semester beginning
January 2017, you can use that $1,500 in figuring your
2016 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 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 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 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 2016 for an academic period that begins in the first 3
months of 2017 can be used in figuring an education
credit for 2016 only. See Academic period, earlier. For ex-
ample, if you pay $2,000 in December 2016 for qualified
tuition for the 2017 winter quarter that begins in January
2017, you can use that $2,000 in figuring an education
credit for 2016 only (if you meet all the other require-
ments).
You can't use any amount you paid in 2015 or
2017 to figure the qualified education expenses
you use to figure your 2016 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 theTIPCAUTION
!
Page 12 Chapter 2 American Opportunity Credit
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 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 2016, 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
2016 may be treated as a refund of qualified education ex-
penses paid in 2016. This tax-free educational assistance
is any tax-free educational assistance received by you or
anyone else after 2016 for qualified education expenses
paid on behalf of a student in 2016 (or attributable to en-
rollment at an eligible educational institution during 2016).
If this tax-free educational assistance is received after
2016 but before you file your 2016 income tax return, see
Refunds received after 2016 but before your income tax
return is filed, later. If this tax-free educational assistance
is received after 2016 and after you file your 2016 income
tax return, see Refunds received after 2016 and after your
income tax return is filed, later.
Tax-free educational assistance includes:
The tax-free parts of scholarships and fellowship
grants (see TaxFree Scholarships and Fellowship
Grants in chapter 1);
The tax-free part of Pell grants (see Pell Grants and
Other Title IV NeedBased 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 section 5.02(2)(b)(ii) of Revenue Procedure
201435, available at www.irs.gov/irb/201426_IRB/
ar10.html.
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 examples, see Coordination 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 2016 may be treated as a refund. See
Taxfree educational assistance , earlier.
Refunds received in 2016. For each student, figure
the adjusted qualified education expenses for 2016 by
adding all the qualified education expenses for 2016 and
subtracting any refunds of those expenses received from
the eligible educational institution during 2016.CAUTION
!TIP
Chapter 2 American Opportunity Credit Page 13
Refunds received after 2016 but before your in
come tax return is filed. If anyone receives a refund af-
ter 2016 of qualified education expenses paid on behalf of
a student in 2016 and the refund is paid before you file an
income tax return for 2016, the amount of qualified educa-
tion expenses for 2016 is reduced by the amount of the
refund.
Refunds received after 2016 and after your income
tax return is filed. If anyone receives a refund after 2016
of qualified education expenses paid on behalf of a stu-
dent in 2016 and the refund is paid after you file an in-
come tax return for 2016, 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 2016, or any
refund of your qualified education expenses paid in 2016,
is received after you file your 2016 income tax return, you
must recapture (repay) any excess credit. You do this by
refiguring the amount of your adjusted qualified education
expenses for 2016 by reducing the expenses by the
amount of the refund or tax-free educational assistance.
You then refigure your education credit(s) for 2016 and
figure the amount by which your 2016 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
2016, and your child began college in September 2016.
You filed your 2016 tax return on February 17, 2017, 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 2016 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 2017 tax return. See the instructions for your
2017 income tax return to determine where to include this
tax.
If you pay qualified education expenses in both
2016 and 2017 for an academic period that be
gins in the first 3 months of 2017 and you receive
taxfree educational assistance, or a refund, as described
above, you may choose to reduce your qualified educa
tion expenses for 2017 instead of reducing your expenses
for 2016.
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
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
Page 14 Chapter 2 American Opportunity Credit
opportunity credit may increase the credit by enough to in-
crease 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 2016 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
2016, he paid $5,600 for his qualified education expenses
and $4,400 for his room and board for the fall 2016 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 $30,400. Bill claims the standard deduction of
$6,300 and personal exemption of $4,050, resulting in tax-
able income of $20,050 and an income tax liability before
credits of $2,548. Bill claims no credits other than the
American opportunity credit. He figures his American op-
portunity credit based on qualified education expenses of
$4,000, which results in a credit of $2,500 and a tax liabil-
ity after credits of $48 ($2,548 - $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 expen-
ses would be zero and he wouldn't have an education
credit. Therefore, Bill's tax liability after credits would be
$2,548.
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 $34,400, his taxa-
ble income would increase to $24,050, and his tax liability
before credits would increase to $3,148. 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 $648.
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 $648.
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 2016, 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
2016.
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 $261. Her qualified education expenses would
be reduced to $500. She would be able to receive a $461
American opportunity credit ($200 refundable and $261
nonrefundable), a $1,000 additional child tax credit, and a
$3,080 earned income credit. In total, she would be able
to receive a tax refund of $4,280.
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
Chapter 2 American Opportunity Credit Page 15
$25,500. Her tax liability before any credits would be
$813. She would be able to receive a $1,813 American
opportunity credit ($1,000 refundable and $813 nonre-
fundable), a $1,000 additional child tax credit, and a
$2,201 earned income credit. In total, she would be able
to receive a tax refund of $4,201.
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
$613. She would be able to receive a $1,613 American
opportunity credit ($1,000 refundable and $613 nonre-
fundable), a $1,000 additional child tax credit, and a
$2,520 earned income credit. In total, she would be able
to receive a tax refund of $4,520.
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
$413. She would be able to receive a $1,213 American
opportunity credit ($800 refundable and $413 nonrefunda-
ble), a $1,000 additional child tax credit, and a $2,840
earned income credit. In total, she would be able to re-
ceive a tax refund of $4,640. 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 earned income credit, choos-
ing to apply a scholarship or fellowship grant to nonquali-
fied expenses by including the amount in your income
may benefit you if the increase to your American opportu-
nity credit is more than the decrease to your earned in-
come credit. Many students who have no children and
who are eligible to claim the earned income credit will
maximize the benefit of claiming both the American oppor-
tunity credit and the earned income credit if they have
$4,000 in qualified tuition and related expenses, even if
this means income from the scholarship or fellowship
grant reduces the amount of the earned income credit
they are eligible to claim. In the case of students who have
a qualifying child and who claim the earned income credit
with respect to that child, many can maximize the benefit
of claiming both the American opportunity credit and the
earned income credit if they have at least $2,000 in quali-
fied tuition and related expenses, even if this means in-
come from the scholarship or fellowship grant reduces the
amount of the earned income credit they are eligible to
claim.
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,
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
(or were billed) for qualified education expenses on Form
1098-T, Tuition Statement. See Figuring the Credit, later,
for more information about Form 1098-T.
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 2016.
For at least one academic period beginning in 2016
(or the first 3 months of 2017 if the qualified expenses
were paid in 2016), the student was enrolled at least
half-time in a program leading to a degree, certificate,
or other recognized educational credential.
Page 16 Chapter 2 American Opportunity Credit
The student hasn't been convicted of any federal or
state felony for possessing or distributing a controlled
substance as of the end of 2016.
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 2016. 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 work load for his or her course of study.
The standard for what is half of the normal full-time
work load 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.Figure 2-2. Who Is an Eligible Student for the American Opportunity Credit?
No
YesDid the student complete the first 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, certificate, or other
recognized educational credential for at least one
academic period beginning during 2016 (or the first
3 months of 2017 if the qualified expenses were paid
in 2016)?
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?
The student is
an eligible student.
The student isn’t
an eligible student.
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?
Chapter 2 American Opportunity Credit Page 17
Example 1. Mack graduated from high school in June
2015. In September, he enrolled in an undergraduate de-
gree program at College U, and attended full-time for both
the 2015 fall and 2016 spring semesters. For the 2016 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 2015 and at least one
academic period that began during 2016, he is an eligible
student for tax years 2015 and 2016 (including the 2016
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 2016 spring semester. College V classified
Shelly as a second-semester senior (fourth year) for the
2016 spring semester and as a first-semester graduate
student (fifth year) for the 2016 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 2016, Shelly is an eligible student for tax year
2016. Therefore, the qualified education expenses paid
for the 2016 spring semester and the 2016 fall semester
are taken into account in figuring the American opportu-
nity credit for 2016.
Example 3. During the 2016 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 2016, Larry wasn't an
eligible student for tax year 2016.
Example 4. The facts are the same as in Example 3.
During the 2016 spring semester, Larry again attended
College X but not as part of a degree program. Larry grad-
uated from high school in June 2016. For the 2016 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 2016 fall term on at least a half-time basis, Larry is an
eligible student for all of tax year 2016. Therefore, the
qualified education expenses paid for classes taken at
College X during both the 2016 spring semester (during
which Larry wasn't enrolled in a degree program) and the
2016 fall semester are taken into account in figuring any
American opportunity credit.
Example 5. Dee graduated from high school in June
2015. In January 2016, 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 2016, and was awarded a certificate. In Jan-
uary 2017, 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 2016 and 2017 because she meets the de-
gree requirement, the work load 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 an exemption
for your dependent. You do this by listing your depend-
ent's name and other required information on Form 1040
(or Form 1040A), line 6c.
IF you... THEN only...
claim an exemption on
your tax return for 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 an exemption
on your tax return for a
dependent who is an
eligible student (even if
entitled to the exemption)
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 an exemp-
tion on your tax return for 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 ex-
penses when figuring the amount of your American oppor-
tunity credit.
Qualified education expenses paid directly to an
eligible educational institution for your dependent
under a courtapproved divorce decree are
treated as paid by your dependent.
Expenses paid by you. If you claim an exemption for a
dependent who is an eligible student, only you can include
any expenses you paid when figuring the amount of the
American opportunity credit. If neither you nor anyone
else claims an exemption for the dependent, only the de-
pendent 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
treated as receiving the payment from the other personTIP
Page 18 Chapter 2 American Opportunity Credit
and, in turn, paying the institution. If you claim an exemp-
tion on your tax return for the student, you are considered
to have paid the expenses.
Example. In 2016, 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 an exemption for Todd is claimed on someone
else's 2016 tax return, only Todd can use the payment to
claim an American opportunity credit.
If anyone, such as Todd's parents, claims an exemp-
tion for Todd on his or her 2016 tax return, whoever claims
the exemption may be able to use the expenses to claim
an American opportunity credit. If anyone else claims an
exemption for Todd, Todd can't claim an American oppor-
tunity 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 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 2016 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 2016, they claim an exemption for their
dependent daughter on their tax return. Their MAGI is
$70,000. Their daughter is in her junior (third) year of stud-
ies at the local university. Jack and Kay paid qualified ed-
ucation expenses of $4,300 in 2016.
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 2016. 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, 2017. An institution may choose to report either
payments received (box 1), or amounts billed (box 2), for
qualified education expenses. However, the amounts on
Form 1098-T, boxes 1 and 2, might be different than what
you paid. When figuring the credit, use only the amounts
you paid or are deemed to have paid in 2016 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, Request for Student's or Borrower's
Taxpayer Identification Number and Certification, or simi-
lar statement to obtain the student's name, address, and
taxpayer identification number.
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 1040A. If you file Form
1040A, your MAGI is the AGI on line 22 of that form.
MAGI when using Form 1040. If you file Form 1040,
your MAGI is the AGI on line 38 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.
Chapter 2 American Opportunity Credit Page 19
MAGI for the American
Opportunity Credit
Worksheet 2-1.
1. Enter your adjusted gross income
(Form 1040, line 38) . . . . . . . . . . . . . . . . . 1.
2. Enter your foreign earned income
exclusion and/or housing
exclusion (Form 2555, line 45, or
Form 2555-EZ, line 18) . . . . . . . . 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.
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 2016, 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 2016 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 2016, or
b. Age 18 at the end of 2016 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 2016
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
2016.
3. You are filing a return as single, head of household,
qualifying widow(er), or married filing separately for
2016.
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
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 2016 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.
Page 20 Chapter 2 American Opportunity Credit
Claiming the Credit
You claim the American opportunity credit by completing
Form 8863 and submitting it with your Form 1040 or
1040A. Enter the nonrefundable part of the credit on Form
1040, line 50, or on Form 1040A, line 33. Enter the refund-
able part of the credit on Form 1040, line 68, or on Form
1040A, line 44. 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
Introduction
For 2016, 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 2016 tax return,
you can't, for that same child, also claim the American op-
portunity credit for 2016.
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 op-
portunity 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 2016. 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 for whom you claim an exemption on
your tax return.TIP
Chapter 3 Lifetime Learning Credit Page 21
Overview of the Lifetime
Learning Credit for 2016
Maximum credit Up to $2,000 credit per return
Limit on modified adjusted
gross income (MAGI)
$131,000 if married filling jointly;
$65,000 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 2016 for academic
periods beginning in 2016 or
beginning in the first 3 months of 2017
Note. Qualified education expenses paid by a depend-
ent for whom you claim an exemption, 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
for whom you claim an exemption 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 2016 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
$65,000 or more ($131,000 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 2016 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 2016.
What Expenses Qualify?
The lifetime learning credit is based on qualified education
expenses you pay for yourself, your spouse, or a depend-
ent for whom you claim an exemption on your tax return.
Generally, the credit is allowed for qualified education ex-
penses paid in 2016 for an academic period beginning in
2016 or in the first 3 months of 2017.
For example, if you paid $1,500 in December 2016 for
qualified tuition for the spring 2017 semester beginning in
January 2017, you may be able to use that $1,500 in figur-
ing your 2016 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 22 Chapter 3 Lifetime Learning Credit
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 2016 for an academic period that begins in the first 3
months of 2017 can be used in figuring an education
credit for 2016 only. See Academic period, earlier. For ex-
ample, if you pay $2,000 in December 2016 for qualified
tuition for the 2017 winter quarter that begins in January
2017, you can use that $2,000 in figuring an education
credit for 2016 only (if you meet all the other require-
ments).
You can't use any amount you paid in 2015 or
2017 to figure the qualified education expenses
you use to figure your 2016 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 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 below.
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 2016, 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
2016 may be treated as a refund of qualified education ex-
penses paid in 2016. This tax-free educational assistance
is any tax-free educational assistance received by you or
anyone else after 2016 for qualified education expenses
paid on behalf of a student in 2016 (or attributable to en-
rollment at an eligible educational institution during 2016).
If this tax-free educational assistance is received after
2016 but before you file your 2016 income tax return, see
Refunds received after 2016 but before your income tax
return is filed, later. If this tax-free educational assistance
is received after 2016 and after you file your 2016 income
tax return, see Refunds received after 2016 and after your
income tax return is filed, later.
Tax-free educational assistance includes:
The tax-free part of scholarships and fellowship grants
(see TaxFree Scholarships and Fellowship Grants in
chapter 1);
Chapter 3 Lifetime Learning Credit Page 23
Figure 3-1. Can You Claim the Lifetime Learning Credit for 2016?
Did you pay qualified education expenses in 2016 for an eligible student?*
Did the academic period for which you paid qualified education
expenses begin in 2016 or the first 3 months of 2017?
Is the eligible student you, your spouse (if married filing jointly), or your
dependent for whom you claim an exemption on your tax return?
Are you listed as a dependent on another person’s tax return?
Is your filing status married filing separately?
For any part of 2016, were you (or your spouse) a nonresident alien who
didn’t elect to be treated as a resident alien for tax purposes?
Is your modified adjusted gross income (MAGI) less than $65,000
($131,000 if married filing jointly)?
Are you claiming an American opportunity credit or a tuition and fees
deduction 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: line 47 minus lines 48, 49, and the
amount from Schedule R entered on line 22) (Form 1040A: line 30 minus
lines 31 and 32)?
You can’t
claim the lifetime
learning credit for
2016.
No
No
No
Yes
Yes
Yes
No
No
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
No
No
Yes
Yes
No
No
No
No
*Qualified education expenses paid by a dependent for whom you claim an exemption, 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 claim
the lifetime
learning credit
for 2016.**Page 24 Chapter 3 Lifetime Learning Credit
The tax-free part of Pell grants (see Pell Grants and
Other Title IV NeedBased 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 section 5.02(2)(b)(ii) of Revenue Procedure
201435, available at www.irs.gov/irb/201426_IRB/
ar10.html.
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 examples, see Coordination 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 2016 may be treated as a refund. See
Taxfree educational assistance , earlier.
Refunds received in 2016. For each student, figure
the adjusted qualified education expenses for 2016 by
adding all the qualified education expenses for 2016 and
subtracting any refunds of those expenses received from
the eligible educational institution during 2016.
Refunds received after 2016 but before your in
come tax return is filed. If anyone receives a refund af-
ter 2016 of qualified education expenses paid on behalf of
a student in 2016 and the refund is paid before you file anCAUTION
!TIP
income tax return for 2016, the amount of qualified educa-
tion expenses for 2016 is reduced by the amount of the
refund.
Refunds received after 2016 and after your income
tax return is filed. If anyone receives a refund after 2016
of qualified education expenses paid on behalf of a stu-
dent in 2016 and the refund is paid after you file an in-
come tax return for 2016, 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 2016 or any
refund of your qualified education expenses paid in 2016
is received after you file your 2016 income tax return, you
must recapture (repay) any excess credit. You do this by
refiguring the amount of your adjusted qualified education
expenses for 2016 by reducing the expenses by the
amount of the refund or tax-free educational assistance.
You then refigure your education credit(s) for 2016 and
figure the amount by which your 2016 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 2016, and your child began college in January
2017. You filed your 2016 tax return on February 14,
2017, 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 2016 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 2017 income tax return to determine where to in-
clude this tax.
If you pay qualified education expenses in both
2016 and 2017 for an academic period that be
gins in the first 3 months of 2017 and you receive
taxfree educational assistance, or a refund, as described
above, you may choose to reduce your qualified educa
tion expenses for 2017 instead of reducing your expenses
for 2016.
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 qualifiedTIP
Chapter 3 Lifetime Learning Credit Page 25
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
$6,300 and personal exemption of $4,050, resulting in tax-
able income of $17,050 and a tax liability before credits of
$2,098. Judy claims no credits other than the lifetime
learning credit. In July 2016, she paid $700 for the sum-
mer 2016 semester; in August 2016, she paid $1,900 for
the fall 2016 semester; and in December 2016, she paid
another $1,900 for the spring semester beginning in Janu-
ary 2017. Judy and the college meet all requirements for
the lifetime learning credit. She can use all of the $4,500
tuition she paid in 2016 when figuring her 2016 lifetime
learning credit. She claims a $900 lifetime learning credit
and her tax liability after credits is $1,198.
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 2016 could be used when figuring her
2016 lifetime learning credit. Her lifetime learning credit
would be reduced to $600 and her tax liability after credits
would be $1,498.
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 $18,550, and her tax liability before
credits would be $2,323. 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 $1,423.
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
$1,423.
Note. Whether you will benefit from applying a schol-
arship or fellowship grant to nonqualified expenses will
Page 26 Chapter 3 Lifetime Learning Credit
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 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
(or were billed) for qualified education expenses on Form
1098-T. See Figuring the Credit, later, for more informa-
tion 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
Qualified 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 an exemption
for your dependent. You do this by listing your depend-
ent's name and other required information on Form 1040
(or Form 1040A), line 6c.
IF you... THEN only...
claim an exemption on your
tax return for 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 an exemption
on your tax return for a
dependent who is an
eligible student (even if
entitled to the exemption)
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 an exemp-
tion on your tax return for 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 ex-
penses when figuring the amount of your lifetime learning
credit.
Qualified education expenses paid directly to an
eligible educational institution for your dependent
under a courtapproved divorce decree are
treated as paid by your dependent.
Expenses paid by you. If you claim an exemption for 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 an exemption for the dependent, only the depend-
ent 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
treated as receiving the payment from the other person
and, in turn, paying the institution. If you claim an exemp-
tion on your tax return for the student, you are considered
to have paid the expenses.
Example. In 2016, Ms. Allen makes a payment directly
to an eligible educational institution for her grandsonTIP
Chapter 3 Lifetime Learning Credit Page 27
Todd's qualified education expenses. For purposes of
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 an exemption for Todd is claimed on someone
else's 2016 tax return, only Todd can use the payment to
claim a lifetime learning credit.
If anyone, such as Todd's parents, claims an exemp-
tion for Todd on his or her 2016 tax return, whoever claims
the exemption may be able to use the expenses to claim a
lifetime learning credit. If anyone else claims an exemp-
tion for 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 2016 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 2016, 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 2016, Toni paid $5,000 of
qualified education expenses for her fall 2016 semester.
Bruce and Toni can claim a $1,000 (20% × $5,000) life-
time learning credit on their 2016 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, 2017. An institu-
tion may choose to report either payments received
(box 1), or amounts billed (box 2), for qualified education
expenses. However, the amounts on Form 1098-T, boxes
1 and 2, might be different from what you paid. When fig-
uring the credit, use only the amounts you paid or are
deemed to have paid in 2016 for qualified education ex-
penses.
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 $55,000 and
$65,000 ($111,000 and $131,000 if you file a joint return).
You can't claim a lifetime learning credit if your MAGI is
$65,000 or more ($131,000 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 1040A. If you file Form
1040A, your MAGI is the AGI on line 22 of that form.
MAGI when using Form 1040. If you file Form 1040,
your MAGI is the AGI on line 38 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.
Page 28 Chapter 3 Lifetime Learning Credit
MAGI for the Lifetime
Learning Credit
1. Enter your adjusted gross income
(Form 1040, line 38) . . . . . . . . . . . . . . . . . 1.
2. Enter your foreign earned
income exclusion and/or
housing exclusion (Form
2555, line 45, or Form
2555-EZ, line 18) . . . . . . 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 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.
Example. You are filing a joint return with a MAGI of
$112,000. In 2016, 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 $131,000 (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 ($111,000 to $131,000). The result is the
amount of your phased out (reduced) lifetime learning
credit ($1,254).
$1,320 ×
$131,000 − $112,000
= $1,254
$20,000
Worksheet 3-1.
Claiming the Credit
You claim the lifetime learning credit by completing Form
8863 and submitting it with your Form 1040 or 1040A. En-
ter the credit on Form 1040, line 50, or Form 1040A,
line 33.
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
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 $80,000 ($160,000 if filing a joint return), there
is a special deduction allowed for paying interest on a stu-
dent 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).
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.
Chapter 4 Student Loan Interest Deduction Page 29
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; 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)
$160,000 if married filing a joint
return;
$80,000 if single, head of household,
or qualifying widow(er).
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 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.
Table 4-1. 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.
Exceptions. For purposes of the student loan interest
deduction, the following are exceptions to the general
rules for dependents.
An individual can be your dependent even if you are
the dependent of another taxpayer.
An individual can be your dependent even if the indi-
vidual files a joint return with a spouse.
An individual can be your dependent even if the indi-
vidual had gross income for the year that was equal to
or more than the exemption amount for the year
($4,050 for 2016).
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 usually is 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. This is a student who was enrolled at
least half-time in a program leading to a degree, certifi-
cate, or other recognized educational credential.
Enrolled at least halftime. A student was enrolled at
least half-time if the student was taking at least half the
normal full-time work load for his or her course of study.
The standard for what is half of the normal full-time
work load 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.
Page 30 Chapter 4 Student Loan Interest Deduction
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, including graduate school. They in-
clude amounts paid for the following 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
that 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 ar-
rangement of the student; or
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 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.
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.
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 TaxFree 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 TaxFree 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.
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 ofTIP
Chapter 4 Student Loan Interest Deduction Page 31
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 student loans. This includes in-
terest on both:
Consolidated loans—loans used to refinance more
than one student loan of the same borrower, and
Collapsed loans—two or more loans of the same bor-
rower that are treated by both the lender and the bor-
rower as one loan.
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.
Example. In August 2015, 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 2015 through October
2016) 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 2016.
Peg didn't receive a Form 1098-E for 2016 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 2016 payments on her outstanding
loan of $10,625 ($10,000 principal + $625 accrued but un-
paid interest).CAUTION
!
Payment Date Payment Stated Interest Principal
November 2016 $200.51 $44.27 $156.24
December 2016 $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 2016, 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 2017, 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 also will 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.
Page 32 Chapter 4 Student Loan Interest Deduction
No one else is claiming an exemption for you 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 an exemption for you. Another taxpayer is
claiming an exemption for you if he or she lists your name
and other required information on his or her Form 1040 (or
Form 1040A), line 6c, or Form 1040NR, line 7c.
Example 1. During 2016, Josh paid $600 interest on
his qualified student loan. Only he is legally obligated to
make the payments. No one claimed an exemption for
Josh for 2016. Assuming all other requirements are met,
Josh can deduct the $600 of interest he paid on his 2016
Form 1040 or 1040A.
Example 2. During 2016, Jo paid $1,100 interest on
her qualified student loan. Only she is legally obligated to
make the payments. Jo's parents claimed an exemption
for her on their 2016 tax return. In this case, neither Jo nor
her parents may deduct the student loan interest Jo paid
in 2016.
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
treated 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
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 a dependency exemption for Ethan on his or her
tax return. Assuming all other qualifications are met, Ethan
can deduct 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).
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. Gener-
ally, an institution (such as a bank or governmental
agency) that received interest payments of $600 or more
during 2016 on one or more qualified student loans must
send Form 1098-E (or acceptable substitute) to each bor-
rower by January 31, 2017.
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
similar 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
$65,000 and $80,000 ($130,000 and $160,000 if you file a
joint return). You can't claim a student loan interest deduc-
tion if your MAGI is $80,000 or more ($160,000 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.
Chapter 4 Student Loan Interest Deduction Page 33
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
$65,000
not affected by the
phaseout.
more than $65,000
but less than
$80,000
reduced because of
the phaseout.
$80,000 or more eliminated by the
phaseout.
married
filing joint
return
not more than
$130,000
not affected by the
phaseout.
more than $130,000
but less than
$160,000
reduced because of
the phaseout.
$160,000 or more eliminated by the
phaseout.
MAGI when using Form 1040A. If you file Form
1040A, your MAGI is the AGI on line 22 of that form fig-
ured without taking into account any amount on line 18
(student loan interest deduction) and line 19 (tuition and
fees deduction).
MAGI when using Form 1040. If you file Form 1040,
your MAGI is the AGI on line 38 of that form figured with-
out taking into account any amount on line 33 (student
loan interest deduction), line 34 (tuition and fees deduc-
tion), or line 35 (domestic production activities 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.
MAGI when using Form 1040NR. If you file Form
1040NR, your MAGI is the AGI on line 36 of that form fig-
ured without taking into account any amount on line 33
(student loan interest deduction) and line 34 (domestic
production activities deduction).
MAGI when using Form 1040NREZ. If you file Form
1040NR-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).
Table 4-2. Phaseout. If your MAGI is within the range of incomes
where the credit must be reduced, you must figure your
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 $65,000 ($130,000 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 2016, you paid $800 interest on a
qualified student loan. Your 2016 MAGI is $145,000 and
you are filing a joint return. You must reduce your deduc-
tion by $400, figured as follows.
$800 × $145,000 − $130,000
$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 2016 is $2,500. You must reduce your maxi-
mum deduction by $1,250, figured as follows.
$2,500 × $145,000 − $130,000
$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,
Form 1040A, or Form 1040NR instructions. However, if
you are filing Form 2555, Foreign Earned Income; Form
2555-EZ, Foreign Earned Income Exclusion; Form 4563,
Exclusion of Income for Bona Fide Residents of American
Samoa; or you are excluding income from sources within
Puerto Rico, you must complete 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 line 33 (Form 1040), line 18 (Form 1040A), line 33
(Form 1040NR), or line 9 (Form 1040NR-EZ).
Page 34 Chapter 4 Student Loan Interest Deduction
Student Loan Interest Deduction Worksheet Keep for Your Records
Use this worksheet instead of the worksheet in the Form 1040 instructions if you are filing Form
2555, 2555EZ , or 4563, or you are excluding income from sources within Puerto Rico. Before
using this worksheet, you must complete Form 1040,lines 7 through 32, plus any amount to be
entered on the dotted line next to line 36.
1. Enter the total interest you paid in 2016 on qualified student loans. Don't enter
more than $2,500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.
2. Enter the amount from Form 1040, line 22 . . . . . . . . . . . . . . . . . . . . . . . . . 2.
3. Enter the total of the amounts from Form 1040,
lines 23 through 32 . . . . . . . . . . . . . . . . . . . . . . . . . 3.
4. Enter the total of any amounts entered on the
dotted line next to Form 1040, line 36 . . . . . . . . . 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; or Form 2555-EZ, line 18) . . . . . . . . . . . . 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)—$65,000
• Married filing jointly—$130,000
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 Form 1040, line 33. 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 35
5.
Student Loan
Cancellations and
Repayment Assistance
Introduction
Generally, if you are responsible for making loan pay-
ments, and the loan is canceled (forgiven), you must in-
clude the amount that was forgiven in your gross income
for tax purposes. However, if you fulfill certain require-
ments, two types of student loan assistance may be tax
free. The types of assistance discussed in this chapter
are:
Student loan cancellation, and
Student loan repayment assistance.
Student Loan Cancellation
If your student loan is canceled, you may not have to in-
clude any amount in income. This section describes the
requirements for tax-free treatment of canceled student
loans.
Qualifying Loans
To qualify for tax-free treatment, for the cancellation of
your loan, your loan must have been made by a qualified
lender to assist you in attending an eligible educational in-
stitution and contain a provision 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
taxfree 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 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.
Occupations with unmet needs include medicine, nurs-
ing, teaching, and law.
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. The cancellation of your loan doesn't qualify
as tax-free student loan cancellation if your student loan
was made by an educational institution and is canceled
because of services you performed for the educational in-
stitution or other organization that provided the funds.
Refinanced Loan
If you refinanced a student loan with another loan from an
eligible educational institution or a tax-exempt organiza-
tion, that loan may also be considered as made by a quali-
fied lender. The refinanced loan is considered made by a
qualified lender if it is made under a program of the refi-
nancing organization that is designed to encourage stu-
dents 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 governmen-
tal unit or a tax-exempt section 501(c)(3) organization.
Page 36 Chapter 5 Student Loan Cancellations and Repayment Assistance
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 (NHSC) Loan Re-
payment Program (NHSC 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 under served 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
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 an exemption for you as a dependent on his or her
tax return. The qualified expenses must be for higher edu-
cation, as explained later under Qualified Education Ex
penses.
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.
This means you can claim this deduction even if you don't
itemize deductions on Schedule A (Form 1040). This de-
duction may be beneficial to you if you don't qualify for the
American opportunity or lifetime learning credits.
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.CAUTION
!TIP
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 for whom you claim an exemption 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
Form 1040 or Form 1040A.
For whom must the
expenses be paid?
A student enrolled in an eligible educational
institution who is either:
• you,
• your spouse, or
• your dependent for whom you claim an
exemption.
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.
Table 6-1.
Chapter 6 Tuition and Fees Deduction Page 37
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 an exemption for 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 that exemption.
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 2016 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 for whom you claim an exemption on your tax
return. Generally, the deduction is allowed for qualified
education expenses paid in 2016 in connection with en-
rollment at an institution of higher education during 2016
or for an academic period beginning in 2016 or in the first
3 months of 2017.
For example, if you paid $1,500 in December 2016 for
qualified tuition for the spring 2017 semester beginning in
January 2017, you may be able to use that $1,500 in figur-
ing your 2016 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 2016 for an academic period that begins in the first 3
months of 2017 can be used in figuring an education
credit for 2016 only. See Academic period, earlier. For ex-
ample, if you pay $2,000 in December 2016 for qualified
tuition for the 2017 winter quarter that begins in January
2017, you can use that $2,000 in figuring an education
credit for 2016 only (if you meet all the other require-
ments).
You can't use any amount you paid in 2015 or
2017 to figure the qualified education expenses
you use to figure your 2016 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.TIPCAUTION
!
Page 38 Chapter 6 Tuition and Fees Deduction
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 TaxFree 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 2016, 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
2016 may be treated as a refund of qualified education ex-
penses paid in 2016. This tax-free educational assistance
is any tax-free educational assistance received by you or
anyone else after 2016 for qualified education expenses
paid on behalf of a student in 2016 (or attributable to en-
rollment at an eligible educational institution during 2016).
If this tax-free educational assistance is received after
2016 but before you file your 2016 income tax return, see
Refunds received after 2016 but before your income tax
return is filed, later. If this tax-free educational assistance
is received after 2016 and after you file your 2016 income
tax return, see Refunds received after 2016 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 TaxFree Scholarships and Fellowship Grants in
chapter 1);
The tax-free part of Pell grants (see Pell Grants and
Other Title IV NeedBased 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 2016 may be treated as a refund. See
Taxfree educational assistance , earlier.
Refunds received in 2016. For each student, figure
the adjusted qualified education expenses for 2016 by
adding all the qualified education expenses for 2016 andTIP
Chapter 6 Tuition and Fees Deduction Page 39
subtracting any refunds of those expenses received from
the eligible educational institution during 2016.
Refunds received after 2016 but before your in
come tax return is filed. If anyone receives a refund af-
ter 2016 of qualified education expenses paid on behalf of
a student in 2016 and the refund is paid before you file an
income tax return for 2016, the amount of qualified educa-
tion expenses for 2016 is reduced by the amount of the
refund.
Refunds received after 2016 and after your income
tax return is filed. If anyone receives a refund after 2016
of qualified education expenses paid on behalf of a stu-
dent in 2016 and the refund is paid after you file an in-
come tax return for 2016, 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 2016 or any
refund of your qualified education expenses paid in 2016
is received after you file your 2016 income tax return, you
must recapture (repay) any excess credit. You do this by
refiguring the amount of your adjusted qualified education
expenses for 2016 by reducing that amount by the amount
of the refund or tax-free educational assistance. You then
refigure your education credit(s) for 2016 and figure the
amount by which your 2016 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 2016, and your child began college
in January 2017. You claimed $3,500 as the tuition and
fees deduction on your 2016 income tax return. The re-
duction reduced your taxable income by $3,500. Also, you
claimed no tax credits in 2016. Your child withdrew from
two classes and you received a refund of $2,000 in 2017
after you filed your 2016 tax return. Refigure your 2016 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 2016
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 2016 tax) on the “Other
income” line of your 2017 Form 1040. You can't file Form
1040A for 2017.
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 2016, 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 2016.
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
treated as having paid $3,000 in qualified education ex-
penses.
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 40 Chapter 6 Tuition and Fees Deduction
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,
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
(or were billed) for qualified education expenses on Form
1098-T. See Figuring the Deduction, later, for more infor-
mation 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 an exemption for the student as a dependent.
For you to be able to deduct qualified education expen-
ses for your dependent, you must claim an exemption for
that individual. You do this by listing your dependent's
name and other required information on Form 1040 (or
Form 1040A), line 6c.
IF your
dependent is an
eligible student
and you... AND... THEN...
claim an exemption
for your dependent
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 an exemption
for your dependent
your dependent
paid all qualified
education
expenses
no one is allowed to
take a deduction.
don't claim an
exemption for your
dependent
you paid all
qualified
education
expenses
no one is allowed to
take a deduction.
don't claim an
exemption for your
dependent
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 for
whom you or anyone other than the dependent can claim
an exemption. This rule applies even if you don't claim an
exemption for your dependent on your tax return.
Expenses paid by you. If you claim an exemption for a
dependent who is an eligible student, 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 an
exemption for the student.
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
treated as receiving the payment from the other person
and, in turn, paying the institution. If you claim, or can
claim, an exemption on your tax return for the student, you
aren't considered to have paid the expenses and you can't
deduct them. If the student isn't a dependent, only the stu-
dent 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 41
Example. In 2016, 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 an exemption can't be claimed for Dan 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 an exemption for 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 2016 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, 2017. An
institution may choose to report either payments received
(box 1), or amounts billed (box 2), for qualified education
expenses. However, the amount on Form 1098-T, boxes
1 and 2, might be different than what you paid. When fig-
uring the deduction, use only the amounts you paid in
2016 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 1040A. If you file Form
1040A, your MAGI is the AGI on line 22 of that form, fig-
ured without taking into account any amount on line 19
(tuition and fees deduction).
MAGI when using Form 1040. If you file Form 1040,
your MAGI is the AGI on line 38 of that form, figured with-
out taking into account any amount on line 34 (tuition and
fees deduction), or line 35 (domestic production activities
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.
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.
Claiming the Deduction
You claim a tuition and fees deduction by completing
Form 8917 and submitting it with your Form 1040 or Form
1040A. Enter the deduction on Form 1040, line 34, or
Table 6-2.
Page 42 Chapter 6 Tuition and Fees Deduction
Form 1040A, line 19. A filled-in Form 8917 is shown at the
end of this chapter.
Illustrated Example
Tim Pfister, a single taxpayer, enrolled full-time at a local
college to earn a degree in engineering. This is the first
year of his postsecondary education. During 2016, he
paid $3,600 for his qualified 2016 tuition expense. Both he
and the college meet all of the requirements for the tuition
and fees deduction. Tim's total income (Form 1040,
line 22) and MAGI are $26,000. He figures his deduction
of $3,600 as shown on Form 8917, later.
Chapter 6 Tuition and Fees Deduction Page 43
MAGI for the Tuition and Fees Deduction Keep for Your Records
Use this worksheet if you are filing Form 2555, 2555EZ , or 4563, or you are excluding income
from sources within Puerto Rico. Before using this worksheet, you must complete Form 1040,
lines 7 through 33, and figure any amount to be entered on the dotted line next to line 36.
1. Enter the amount from Form 1040, line 22 . . . . . . . . . . . . . . . . . . . . . . . . 1.
2. Enter the total from Form 1040, lines 23
through 33 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.
3. Enter the total of any amounts entered on the
dotted line next to Form 1040, line 36 . . . . . . . 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, or Form 2555-EZ, line 18) . . . . . . . . . . . 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.
Page 44 Chapter 6 Tuition and Fees Deduction
Form 8917
Department of the Treasury
Internal Revenue Service
Tuition and Fees Deduction
▶ Attach to Form 1040 or Form 1040A.
▶ Information about Form 8917 and its instructions is at www.irs.gov/form8917.
OMB No. 1545-0074
2016Attachment
Sequence No. 60
Name(s) shown on return Your social security number
▲!CAUTION
You cannot take both an education credit from Form 8863 and the tuition and fees deduction from this form for the
same student for the same tax year.
Before you begin: ✔ To see if you qualify for this deduction, see Who Can Take the Deduction in the instructions below.
✔ If you file Form 1040, figure any write-in adjustments to be entered on the dotted line next to Form
1040, line 36. See the 2016 Form 1040 instructions for line 36.
1 (a) Student’s name (as shown on page 1 of your tax return)
First name Last name
(b) Student’s social security
number (as shown on page
1 of your tax return)
(c) Adjusted qualified
expenses (see
instructions)
2 Add the amounts on line 1, column (c), and enter the total . . . . . . . . . . . . . 2
3 Enter the amount from Form 1040, line 22, or Form 1040A, line 15 3
4 Enter the total from either:
• Form 1040, lines 23 through 33, plus any write-in adjustments
entered on the dotted line next to Form 1040, line 36, or
• Form 1040A, lines 16 through 18. . . . . . . . . . . 4
5 Subtract line 4 from line 3.* If the result is more than $80,000 ($160,000 if married filing jointly),
stop; you cannot take the deduction for tuition and fees . . . . . . . . . . . . . 5
*If you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from Puerto Rico,
see Effect of the Amount of Your Income on the Amount of Your Deduction in Pub. 970, chapter
6, to figure the amount to enter on line 5.
6 Tuition and fees deduction. Is the amount on line 5 more than $65,000 ($130,000 if married
filing jointly)?
Yes. Enter the smaller of line 2, or $2,000.
No. Enter the smaller of line 2, or $4,000.
Also enter this amount on Form 1040, line 34, or Form 1040A, line 19.
} . . . . . . . . . . . . . . 6
For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No. 37728P Form 8917 (2016)
Tim 000-00-5432
Tim Pfister 000-00-5432
3,600
3,600
3,600
26,000
26,000
Pfister
√Chapter 6 Tuition and Fees Deduction Page 45
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.
There is no limit on the number of separate Coverdell
ESAs that can be established for a designated benefi-
ciary. However, total contributions for the beneficiary in
any year can't be more than $2,000, no matter how many
accounts have been established. See Contributions, later.
This benefit applies not only to higher education
expenses, but also to elementary and secondary
education expenses.
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 TaxFree Distribu
tions, later.
Table 7-1 summarizes the main features of the Cover-
dell ESA.TIP
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.
Page 46 Chapter 7 Coverdell Education Savings Account (ESA)
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. For purposes of Coverdell ESAs,
the expenses can be either qualified higher education ex-
penses 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
For purposes of Coverdell ESAs, an eligible educational
institution can be either an eligible postsecondary school
or an eligible elementary or secondary school.
Eligible postsecondary school. This is any college,
university, vocational school, or other postsecondary edu-
cational institution eligible to participate in a student aid
program administered by the U.S. Department of Educa-
tion. It includes virtually all accredited public, nonprofit,
and proprietary (privately owned profit-making) postse-
condary institutions. The educational institution should be
able to tell you if it is an eligible 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.
Eligible elementary or secondary school. This is any
public, private, or religious school that provides elemen-
tary or secondary education (kindergarten through grade
12), as determined under state law.
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
students 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 does not 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 at-
tendance at an eligible elementary or secondary
school.
a. Tuition and fees.
b. Books, supplies, and equipment.
Chapter 7 Coverdell Education Savings Account (ESA) Page 47
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 technology, equipment, or
Internet access and related services is a qualified ele-
mentary and secondary education expense if it is to
be used by the beneficiary and the beneficiary's fam-
ily during any of the years the beneficiary is in ele-
mentary or secondary school. (This doesn't include
expenses for computer software designed for sports,
games, or hobbies unless the software is predomi-
nantly 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.
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.
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 2017, and you designate it as a contribu-
tion for 2016, you are considered to have made that con-
tribution on December 31, 2016.
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.
Limit for each designated beneficiary. For 2016, 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 2015, three
separate Coverdell ESAs were set up for her, one by her
parents, one by her grandfather, and one by her aunt. In
2016, 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 2016.
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 2016, 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.
Page 48 Chapter 7 Coverdell Education Savings Account (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.
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 1040A. If you file Form
1040A, your MAGI is the AGI on line 22 of that form.
MAGI when using Form 1040. If you file Form 1040,
your MAGI is the AGI on line 38 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 1040NR. If you file Form
1040NR, your MAGI is the AGI on line 36 of that form.
MAGI when using Form 1040NREZ. If you file Form
1040NR-EZ, your MAGI is the AGI on line 10 of that form.
If you have any of these adjustments, you can use
Worksheet 7-1 to figure your MAGI for Form 1040.
Table 7-2. Worksheet 7-1. MAGI for a Coverdell ESA
1. Enter your adjusted gross income
(Form 1040, line 38) . . . . . . . . . . . . . . . . . 1.
2. Enter your foreign earned
income exclusion and/or
housing exclusion (Form
2555, line 45, or Form
2555-EZ, line 18) . . . . . . . 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.
Chapter 7 Coverdell Education Savings Account (ESA) Page 49
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 2016.
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 2016. Paul can contribute up to $1,800 in 2016 for
each beneficiary, as shown in the illustrated Worksheet
7-2.
Worksheet 7-2. 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 2016.
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 must pay 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 2016 (and any earnings on them)
are distributed before the first day of the sixth month of the
following tax year (June 1, 2017, 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.
Page 50 Chapter 7 Coverdell Education Savings Account (ESA)
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 Form 1040 (or Form 1040NR), line 21, for the ap-
plicable tax year. For more information, see Taxable Dis
tributions, 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 2015, 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, 2016, she had to pay
an additional tax of $18 (6% × $300) when she filed her
2015 tax return.
In 2016, 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 2016 as follows.
(1) $500 excess contributions
made in 2016
+ (2) $300 excess contributions in
ESA at end of 2015
− (2a) $250 distribution during 2016
$550 excess at end of 2016 × 6% = $33
If Greta limits 2017 contributions to $1,450 ($2,000 maxi-
mum allowed − $550 excess contributions from 2016),
she won't owe any additional tax in 2017 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 Form 1040, line 59 (or Form 1040NR, 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
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 or 1040NR.
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 12month
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 12month 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 theCAUTION
!
Chapter 7 Coverdell Education Savings Account (ESA) Page 51
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 12month 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
!
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 TaxFree 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 NeedBased 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.
Page 52 Chapter 7 Coverdell Education Savings Account (ESA)
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 2016. The amount of your gross distribution will
be shown in box 1. For 2016, 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, 2016. 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 2016 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 2015 plus total
contributions for 2016 and the denominator (bottom
part) is the value (balance) of the account at the end
of 2016 plus the amount distributed during 2016.
2. Subtract the amount figured in (1) from the total
amount distributed during 2016. 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 2016 and
the denominator (bottom part) is the total amount dis-
tributed during 2016.
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 Form 1040 or
Form 1040NR, line 21.
Example. You received an $850 distribution from your
Coverdell ESA, to which $1,500 had been contributed be-
fore 2016. There were no contributions in 2016. This is
your first distribution from the account, so your basis in the
account on December 31, 2015, was $1,500. The value
(balance) of your account on December 31, 2016, was
$950. You had $700 of adjusted qualified education ex-
penses (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 Form 1040, line 21, 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 2016, 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.
Chapter 7 Coverdell Education Savings Account (ESA) Page 53
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,
2016. Prior to 2016, $2,100 had been contributed to this
account. Contributions for 2016 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 (Form 1040, line 21).
This is the amount of distributed earnings not used for ad-
justed qualified higher education 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 2016, 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. To pay these expenses, 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 edu-
cational assistance in 2016. Beatrice must allocate her to-
tal qualified education expenses between the two distribu-
tions.
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 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
If you have a loss on your investment in a Coverdell ESA,
you may be able to deduct the loss on your income tax re-
turn. You can deduct the loss only when all amounts fromTIP
Page 54 Chapter 7 Coverdell Education Savings Account (ESA)
that account have been distributed and the total distribu-
tions are less than your unrecovered basis. Your basis is
the total amount of contributions to that Coverdell ESA.
You claim the loss as a miscellaneous itemized deduction
on Schedule A (Form 1040), line 23 (Schedule A (Form
1040NR), line 9), subject to the 2%-of-adjusted-gross-in-
come limit.
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
TaxFree 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, 2017, of an excess 2016 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.
Figuring the additional tax. Use Part II of Form 5329, to
figure any additional tax. Report the amount on Form
1040, line 59, or Form 1040NR, 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 before reaching age
30. In this case, the remaining 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 2015 plus total contri-
butions for 2016, and the denominator (bottom part) is
the balance in the account at the end of 2016 plus the
amount distributed during 2016.
2. Subtract the amount figured in (1) from the total
amount distributed during 2016. 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 Form 1040 or Form
1040NR, line 21, listing the type and amount of income on
the dotted line.
Chapter 7 Coverdell Education Savings Account (ESA) Page 55
8.
Qualified Tuition Program
(QTP)
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 a postsecon-
dary institution. Eligible educational institutions may es-
tablish and maintain programs that allow you to prepay a
student's qualified education expenses. If you prepay tui-
tion, 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.
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.
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. These are expenses re-
lated to enrollment or attendance at an Eligible educa
tional institution (defined later). As shown in the following
list, to be qualified, some of the expenses must be re-
quired by the institution and some must be incurred byTIP
Coverdell ESA—Taxable Distributions and Basis
Line G. Enter the total distributions received from all Coverdell ESAs during 2016. 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, 2015, is the total of:
• All contributions to this Coverdell ESA before 2016
• Minus the tax-free portion of any distributions from this Coverdell ESA before 2016.
If your last distribution from this Coverdell ESA was before 2016, 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, 2015, 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 2016.
Line 4. Enter the total distributions received from this Coverdell ESA in 2016. 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, 2016, plus any outstanding rollovers contributed to the account
after 2015, but before the end of the 60-day rollover period. A statement should be sent to you by January 31, 2017, for this
Coverdell ESA showing the value on December 31, 2016.
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 2016 (November 2 through December 31) that was rolled
over after December 31, 2016, but within the 60-day rollover period.
Worksheet 7-3 Instructions.
Page 56 Chapter 8 Qualified Tuition Program (QTP)
students who are enrolled at least half-time. See Halftime
student, later.
1. The following expenses must be required for enroll-
ment or attendance of a Designated beneficiary (de-
fined later) at an eligible educational institution.
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 edu-
cational institution.
3. Expenses for room and board must be incurred by
students who are enrolled at least half-time.
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.
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 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 or
C-EZ (Form 1040), Schedule F (Form 1040), or as a miscellaneous itemized
deduction on Schedule A (Form 1040 or 1040NR) . . . . . . . . . . . . . . . . . . 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 2016 . . . . . . . . . . . . . . . . F.
G. Enter your total distributions from all Coverdell ESAs during 2016. 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 2016, including contributions made for 2016 from
January 1, 2017, through April 18, 2017. Don't include rollovers or the return of excess contributions . . . . . 1.
2. Enter your basis in this Coverdell ESA as of December 31, 2015 (see instructions) . . . . . . . . . . . . . . . . . . 2.
3. Add lines 1 and 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.
4. Enter the total distributions from this Coverdell ESA during 2016. 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, 2016,
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 2016 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, 2016 . . . . . . . 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 Form 1040, line 21; or Form 1040NR, line 21, listing the type and amount of income on
the dotted line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.
Chapter 8 Qualified Tuition Program (QTP) Page 57
a. The allowance for room and board, as determined
by the eligible educational institution, that was in-
cluded in the cost of attendance (for federal finan-
cial 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 eligible
educational institution.
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 educational institution. (This does not in-
clude expenses for computer software for sports,
games, or hobbies unless the software is predomi-
nantly educational in nature.)
Designated beneficiary. The designated beneficiary
is generally the student (or future student) for whom the
QTP is intended to provide benefits. The designated ben-
eficiary 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.
Halftime student. A student is enrolled “at least
half-time” if he or she is enrolled for at least half the
full-time academic workload for the course of study the
student is pursuing, as determined under the standards of
the school where the student is enrolled.
Eligible educational institution. For purposes of a
QTP, this 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.
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.
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 a 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 2016. The amount of your
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, 2017.
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 TaxFree 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 NeedBased 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.
Page 58 Chapter 8 Qualified Tuition Program (QTP)
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 Form 1040
or Form 1040NR, line 21.
Example 1. In 2009, 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 2016, 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 (Form 1040, line 21) 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 (Form 1040, line 21).
This represents distributed earnings not used for adjusted
qualified education expenses.
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.
For purposes of this allocation, disregard any qualified el-
ementary and secondary education expenses.
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
Chapter 8 Qualified Tuition Program (QTP) Page 59
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 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
If you have a loss on your investment in a QTP account,
you may be able to claim the loss on your income tax re-
turn. You can claim the loss only when all amounts from
that account have been distributed and the total distribu-
tions are less than your unrecovered basis. Your basis is
the total amount of contributions to that QTP account. You
claim the loss as a miscellaneous itemized deduction on
Schedule A (Form 1040), line 23 (Schedule A (Form
1040NR), line 9), subject to the 2%-of-adjusted-gross-in-
come limit.
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 201613 available
at www.irs.gov/irb/201607_IRB/ar06.html .
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
TaxFree Scholarships and Fellowship Grants in
chapter 1);
b. Veterans' educational assistance (see Veterans'
Benefits in chapter 1);CAUTION
!
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 Form
1040, line 59, or Form 1040NR, line 57.
Rollovers and Other Transfers
Assets can be rolled over or transferred from one QTP to
another. In addition, the designated beneficiary can be
changed without transferring accounts.
Rollovers
Any amount distributed from a QTP isn't taxable if it is rol-
led over to another QTP 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). An amount is
rolled over if it is paid to another QTP within 60 days after
the date of the distribution.
Don't report qualifying rollovers (those that meet the
above criteria) anywhere on Form 1040 or 1040NR.
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.
Page 60 Chapter 8 Qualified Tuition Program (QTP)
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.
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.CAUTION
!
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 tax
if, for the year of the distribution, you pay qualified educa-
tion expenses for:
yourself;
your spouse; or
your or your spouse's child, foster child, adopted
child, or descendant of any of them.
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 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.
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.
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
Chapter 9 Education Exception to Additional Tax on Early IRA Distributions Page 61
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. You do this by reducing
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 TaxFree Scholarships and Fellowship Grants in
chapter 1);
The tax-free part of Pell grants (see Pell Grants and
Other Title IV NeedBased 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 adjus-
ted qualified education expenses, you aren't subject to the
10% additional tax.
Example 1. In 2016, 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.
Total qualified education expenses $5,800
Minus: Tax-free educational assistance −5,000
Equals: Adjusted qualified
education expenses (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 qualified education
expenses ($800). She doesn't have to pay the 10% addi-
tional tax on the remaining $800 of her taxable distribu-
tion.
Reporting Early Distributions
By January 31, 2017, 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, line 15b, or Form 1040NR, line 16b. Then, if you
qualify for an exception for qualified higher education ex-
penses, you must file Form 5329 to show how much, if
any, of your early distribution is subject to the 10% addi-
tional tax. See the instructions for Form 5329, Part I, for
help in completing the form and entering the results on
Form 1040 or 1040NR.
There are many other situations in which Form 5329 is
required. If, during 2016, 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 line 59 (Form 1040) or line 57 (Form
1040NR) to determine if you must file Form 5329.
Page 62 Chapter 9 Education Exception to Additional Tax on Early IRA Distributions
10.
Education Savings Bond
Program
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 for whom you claim an
exemption on your return.
Your modified adjusted gross income (MAGI) is less
than $92,550 ($146,300 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).
Qualified education expenses. These include the fol-
lowing items you pay for either yourself, your spouse, or a
dependent for whom you claim an exemption.
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.CAUTION
!
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 TaxFree 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 for whom you claim an exemption. You
claim an exemption for a person if you list his or her name
and other required information on Form 1040 (or Form
1040A), line 6c.
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.
MAGI when using Form 1040A. If you file Form
1040A, your MAGI is the AGI on line 22 of that form fig-
ured without taking into account any savings bond interest
exclusion and modified by adding back any amount on
Chapter 10 Education Savings Bond Program Page 63
line 18 (student loan interest deduction) and line 19 (tui-
tion and fees deduction).
MAGI when using Form 1040. If you file Form 1040,
your MAGI is the AGI on line 38 of that form figured with-
out taking into account any savings bond interest exclu-
sion 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,
8. Deduction for tuition and fees, and
9. Deduction for domestic production activities.
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 and (8) tuition and fees, or (9) domestic produc-
tion activities because line 4 of the worksheet already in-
cludes 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), Supplemental Income and Loss, you must make a
special computation of your deductible interest without re
gard to this exclusion to figure the net royalty income in
cluded in your MAGI. See Royalties included in MAGI un
der 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 forCAUTION
!
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.
Example. In February 2016, 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 2016,
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
2016 was $80,000.
$3,000
interest ×
$7,650 AQEE
=
$2,550
tax-free
interest
$9,000 proceeds
They can exclude $2,550 of interest in 2016. They must
pay tax on the remaining $450 ($3,000 − $2,550) interest.
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 $77,550 and
$92,550 (between $116,300 and $146,300 if your filing
status is married filing jointly). You cannot 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 1040A or 1040), Interest and Ordinary Divi-
dends. Attach Form 8815 to your tax return.
Page 64 Chapter 10 Education Savings Bond Program
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 taxfree 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 themCAUTION
!
in your wages. A working condition fringe benefit is a ben-
efit that, had you paid for it, you could deduct as an em-
ployee business expense. For more information on work-
ing condition fringe benefits, see Working Condition
Benefits in chapter 2 of Pub. 15-B, Employer's Tax Guide
to Fringe Benefits.
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, 2016, through December
31, 2016, is 54 cents a mile. For more information, see
Transportation Expenses under What Expenses Can Be
Deducted.
Introduction
This chapter discusses work-related education expenses
you may be able to deduct as business expenses.
To claim such a deduction, you must:
Itemize your deductions on Schedule A (Form 1040 or
1040NR) if you are an employee;
File Schedule C (Form 1040), Profit or Loss From
Business, Schedule C-EZ (Form 1040), Net Profit
From Business, or Schedule F (Form 1040), Profit or
Loss From Farming, if you are self-employed; and
Have expenses for education that meet the require-
ments discussed under Qualifying WorkRelated Edu
cation, later.
What is the tax benefit of taking a business deduc-
tion for work-related education? If you are an em-
ployee and can itemize your deductions, you may be able
to claim a deduction for the expenses you pay for your
work-related education. Your deduction will be the amount
by which your qualifying work-related education expenses
plus other job and certain miscellaneous expenses (ex-
cept for impairment-related work expenses of disabled in-
dividuals) is greater than 2% of your adjusted gross in-
come (AGI). An itemized deduction reduces the amount of
your income subject to tax.
If you are self-employed, you deduct your expenses for
qualifying work-related education directly from your
self-employment income. This reduces the amount of your
Chapter 11 Employer-Provided Educational Assistance Page 65
income subject to both income tax and self-employment
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
You can deduct the costs of qualifying work-related edu-
cation as business expenses. 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.
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
qualifying work-related education only if it maintains or im-
proves 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
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.
Page 66 Chapter 12 Business Deduction for 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 yourCAUTION
!
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 generally will be considered a faculty member when
one or more of the following occurs.
You have tenure.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 fide 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
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.
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.
Page 68 Chapter 12 Business Deduction for Work-Related Education
Classroom teacher to school administrator.
What Expenses
Can Be Deducted?
If your education meets the requirements described ear-
lier under Qualifying WorkRelated Education , you can
generally deduct your education expenses as business
expenses. If you aren't self-employed, you can deduct
business expenses only if you itemize your deductions.
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
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.
Chapter 12 Business Deduction for Work-Related Education Page 69
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, 2016, through December 31,
2016, is 54 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.
Sue's trip is mainly personal because three-fourths of
her time is considered personal time. She can't deduct theCAUTION
!
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.
Employees must use Form 2106 or Form 2106-EZ 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.
Page 70 Chapter 12 Business Deduction for Work-Related Education
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 TaxFree Scholarships and Fellowship Grants in
chapter 1);
The tax-free part of Pell grants (see Pell Grants and
Other Title IV NeedBased 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.
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 deductible under
the rules for qualifying work-related education ex-
plained 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 W2, box 1, and you meet all three
rules for accountable plans, ask your employer for
a corrected Form W2.
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 or 2106-EZ. Because your ex-
penses and reimbursements are equal, you don't have a
deduction.
Excess expenses. If your expenses are more than your
reimbursement, you can deduct your excess expenses.
This is discussed later under Deducting Business Expen
ses.
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 fromTIP
Chapter 12 Business Deduction for Work-Related Education Page 71
home to take a 2-week training course for work. There
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 have a
deduction for work-related education expenses of $458
(($85 × 50%) + $415).
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 can deduct your expenses regardless of whether
they are more than, less than, or equal to your reimburse-
ment. This is discussed later under Deducting Business
Expenses. An illustrated example of a nonaccountable
plan, using Form 2106-EZ, is shown at the end of this
chapter.
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.
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), Schedule C-EZ (Form
1040), or Schedule F (Form 1040)). If your education ex-
penses 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 instruc-
tions for the form you file for information on how to com-
plete it.
Employees
If you are an employee, you can deduct the cost of qualify-
ing work-related education only if you:
1. Didn't receive (and weren't entitled to receive) any re-
imbursement from your employer;
2. Were reimbursed under a nonaccountable plan
(amount is included on Form W-2, box 1); or
3. Received reimbursement under an accountable plan,
but the amount received was less than your expenses
for which you claimed reimbursement.
If either (1) or (2) applies, you can deduct the total qualify-
ing cost. If (3) applies, you can deduct only the qualifying
costs that were more than your reimbursement.
In order to deduct the cost of your qualifying work-rela-
ted education as a business expense, include the amount
with your deduction for any other employee business ex-
penses on Schedule A (Form 1040), line 21, or Sched-
ule A (Form 1040NR), line 7. (Special rules for expenses
of certain performing artists and fee-basis officials and for
impairment-related work expenses are explained later.)
This deduction (except for impairment-related work ex-
penses of disabled individuals) is subject to the 2%-of-ad-
justed-gross-income limit that applies to most miscellane-
ous itemized deductions.
Form 2106 or 2106-EZ. To figure your deduction for em-
ployee business expenses, including qualifying work-rela-
ted education, you generally must complete Form 2106 or
2106-EZ.
Form not required. Don't complete either Form 2106
or 2106-EZ if:
All reimbursements, if any, are included on your Form
W-2, box 1; and
You aren't claiming travel, transportation, meal, or en-
tertainment expenses.
If you meet both of these requirements, enter the ex-
penses directly on Schedule A (Form 1040), line 21, or
Schedule A (Form 1040NR), line 7. (Special rules for
Page 72 Chapter 12 Business Deduction for Work-Related Education
expenses of certain Performing Artists and FeeBasis Offi
cials and for ImpairmentRelated Work Expenses are ex-
plained later.)
Using Form 2106EZ. This form is shorter and easier
to use than Form 2106. Generally, you can use this form
if:
All reimbursements, if any, are included on your Form
W-2, box 1; and
You are using the standard mileage rate if you are
claiming vehicle expenses.
If you don't meet both of these requirements, use Form
2106.
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 rather
than as an itemized deduction.
Include the cost of your qualifying work-related educa-
tion with any other employee business expenses on Form
1040, line 24, or Form 1040NR, line 35 (on the dotted line
next to line 35, enter the amount of your deduction and
“QPA”). You don't have to itemize your deductions on
Schedule A (Form 1040 or 1040NR), and, therefore, the
deduction isn't subject to the 2%-of-adjusted-gross-in-
come limit. You must complete Form 2106 or 2106-EZ to
figure your deduction even if you meet the requirements
described earlier under Form not required.
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), line 28, or
Schedule A (Form 1040NR), line 14. They aren't subject
to the 2%-of-adjusted-gross-income limit. To deduct these
expenses, you must complete Form 2106 or 2106-EZ
even if you meet the requirements described earlier under
Form not required.
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.RECORDS
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
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.
Illustrated Example
Victor Jones teaches math at a private high school in
North Carolina. He was selected to attend a 3-week math
seminar at a university in California. The seminar will im-
prove his skills in his current job and is qualifying work-re-
lated education. He was reimbursed for his expenses un-
der his employer's nonaccountable plan, so his
reimbursement of $2,100 is included in the wages shown
on his Form W-2, box 1. Victor will file Form 1040.
His actual expenses for the seminar are as follows.
Chapter 12 Business Deduction for Work-Related Education Page 73
Lodging . . . . . . . . . . . . . . . . . . . . . . . . . $1,050
Meals . . . . . . . . . . . . . . . . . . . . . . . . . . 526
Airfare . . . . . . . . . . . . . . . . . . . . . . . . . . 550
Taxi fares . . . . . . . . . . . . . . . . . . . . . . . . 50
Tuition and books . . . . . . . . . . . . . . . . . . . 400
Total Expenses $2,576
Victor files Form 2106-EZ with his tax return. He shows
his expenses for the seminar in Part I of the form. He en-
ters $1,650 ($1,050 + $550 + $50) on line 3 to account for
his lodging, airfare, and taxi fares. He enters $400 on
line 4 for his tuition and books. On the line provided for to-
tal meals and entertainment expenses, Victor enters $526
for meal expenses. He multiplies that amount by 50% and
enters the result, $263, on line 5. On line 6, Victor totals
the amounts from lines 3 through 5. He carries the total,
$2,313, to Schedule A (Form 1040), line 21.
Since he doesn't claim any vehicle expenses, Victor
leaves Part II blank. His filled-in form is shown on the next
page.
Page 74 Chapter 12 Business Deduction for Work-Related Education
Form 2106-EZ
Department of the Treasury
Internal Revenue Service (99)
Unreimbursed Employee Business Expenses
▶ Attach to Form 1040 or Form 1040NR.
▶ Information about Form 2106-EZ and its instructions is available at www.irs.gov/form2106ez.
OMB No. 1545-0074
2016Attachment
Sequence No. 129A
Your name Occupation in which you incurred expenses Social security number
You Can Use This Form Only if All of the Following Apply.
• You are an employee deducting ordinary and necessary expenses attributable to your job. An ordinary expense is one that is
common and accepted in your field of trade, business, or profession. A necessary expense is one that is helpful and appropriate for
your business. An expense doesn't have to be required to be considered necessary.
• You don't get reimbursed by your employer for any expenses (amounts your employer included in box 1 of your Form W-2 aren't
considered reimbursements for this purpose).
• If you are claiming vehicle expense, you are using the standard mileage rate for 2016.
Caution: You can use the standard mileage rate for 2016 only if: (a) you owned the vehicle and used the standard mileage rate for the first year
you placed the vehicle in service, or (b) you leased the vehicle and used the standard mileage rate for the portion of the lease period after 1997.
Part I Figure Your Expenses
1 Complete Part II. Multiply line 8a by 54¢ (0.54). Enter the result here . . . . . . . . . 1
2 Parking fees, tolls, and transportation, including train, bus, etc., that didn't involve overnight
travel or commuting to and from work . . . . . . . . . . . . . . . . . . . 2
3 Travel expense while away from home overnight, including lodging, airplane, car rental, etc.
Don't include meals and entertainment . . . . . . . . . . . . . . . . . . . 3
4 Business expenses not included on lines 1 through 3. Don't include meals and
entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5 Meals and entertainment expenses: $ × 50% (0.50). (Employees subject to
Department of Transportation (DOT) hours of service limits: Multiply meal expenses incurred
while away from home on business by 80% (0.80) instead of 50%. For details, see instructions.) 5
6 Total expenses. Add lines 1 through 5. Enter here and on Schedule A (Form 1040), line 21 (or
on Schedule A (Form 1040NR), line 7). (Armed Forces reservists, fee-basis state or local
government officials, qualified performing artists, and individuals with disabilities: See the
instructions for special rules on where to enter this amount.) . . . . . . . . . . . . 6
Part II Information on Your Vehicle. Complete this part only if you are claiming vehicle expense on line 1.
7 When did you place your vehicle in service for business use? (month, day, year) ▶ / /
8 Of the total number of miles you drove your vehicle during 2016, enter the number of miles you used your vehicle for:
a Business b Commuting (see instructions) c Other
9 Was your vehicle available for personal use during off-duty hours? . . . . . . . . . . . . . . Yes No
10 Do you (or your spouse) have another vehicle available for personal use? . . . . . . . . . . . . Yes No
11a Do you have evidence to support your deduction? . . . . . . . . . . . . . . . . . . . Yes No
b If “Yes,” is the evidence written? . . . . . . . . . . . . . . . . . . . . . . . . . Yes No
For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No. 20604Q Form 2106-EZ (2016)
Victor Jones 123 00 4321Teaching
1,650
2,313Chapter 12 Business Deduction for Work-Related Education Page 75
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 return. 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 who generally make $54,000
or less, persons with disabilities, the elderly, and limi-
ted-English-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, par-
ticularly those who are 60 years of age and older. TCE
volunteers specialize in answering questions about pen-
sions and retirement-related issues unique to seniors.
You can go to IRS.gov and click on the Filing tab to see
your options for preparing and filing your return which in-
clude the following.
Free File. Go to IRS.gov/freefile. See if you qualify to
use brand-name software to prepare and efile your
federal tax return for free.
VITA. Go to IRS.gov/vita, download the free IRS2Go
app, or call 1-800-906-9887 to find the nearest VITA
location for free tax preparation.
TCE. Go to IRS.gov/tce, download the free IRS2Go
app, or call 1-888-227-7669 to find the nearest TCE
location for free tax preparation.
Getting answers to your tax law questions.
On IRS.gov get answers to your tax questions
anytime, anywhere.
Go to IRS.gov/help or IRS.gov/letushelp pages 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/pub17 to get Pub. 17, Your Federal In-
come Tax for Individuals, which features details on
tax-saving opportunities, 2016 tax changes, and thou-
sands of interactive links to help you find answers to
your questions. View it online in HTML or as a PDF or,
better yet, download it to your mobile device to enjoy
eBook features.
You may also be able to access tax law information in
your electronic filing software.
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 instructions) on mobile devices as an eBook at no
charge. Or, you can go to IRS.gov/orderforms to place an
order and have forms mailed to you within 10 business
days.
Using direct deposit. The fastest way to receive a tax
refund is to combine direct deposit and IRS efile . Direct
deposit securely and electronically transfers your refund
directly into your financial account. Eight in 10 taxpayers
use direct deposit to receive their refund. IRS issues more
than 90% of refunds in less than 21 days.
Delayed refund for returns claiming certain credits.
Due to changes in the law, the IRS can’t issue refunds be-
fore February 15, 2017, for returns that claim the earned
income credit (EIC) or the additional child tax credit
(ACTC). This applies to the entire refund, not just the por-
tion associated with these credits.
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 1-800-908-9946.
Mail Form 4506-T or Form 4506T-EZ (both available
on IRS.gov).
Using online tools to help prepare your return. Go to
IRS.gov/tools for the following.
The Earned Income Tax Credit Assistant (IRS.gov/eic)
determines if you are eligible for the EIC.
The Online EIN Application (IRS.gov/ein) helps you
get an employer identification number.
The IRS Withholding Calculator (IRS.gov/w4app) esti-
mates the amount you should have withheld from your
paycheck for federal income tax purposes.
The First Time Homebuyer Credit Account Lookup
(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 item-
ize deductions on Schedule A (Form 1040), 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 and videos.
Page 76 Chapter 13 How To Get Tax Help
If your SSN has been lost or stolen or you suspect you
are a victim of tax-related identity theft, visit IRS.gov/id
to learn what steps you should take.
Checking on the status of your refund.
Go to IRS.gov/refunds.
Due to changes in the law, the IRS can’t issue refunds
before February 15, 2017, for returns that claim the
EIC or the ACTC. This applies to the entire refund, not
just the portion associated with these credits.
Download the official IRS2Go app to your mobile de-
vice to check your refund status.
Call the automated refund hotline at 1-800-829-1954.
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 fil-
ing your federal taxes using tax preparation software
or through a tax professional.
Electronic Federal Tax Payment System: Best op-
tion for businesses. Enrollment is required.
Check or money order: Mail your payment to the ad-
dress listed on the notice or instructions.
Cash: If cash is your only option, you may be able to
pay your taxes at a participating retail store.
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 installments if
you can’t pay your taxes in full today. Once you com-
plete the online process, you will receive immediate
notification of whether your agreement has been ap-
proved.
Use the Offer in Compromise PreQualifier (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 and click on Where’s My Amended Return?
(IRS.gov/wmar) under the “Tools” bar to track the status of
Form 1040X amended returns. Please note that it can
take up to 3 weeks from the date you mailed your amen-
ded 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 resolved on IRS.gov without visiting an
IRS Tax 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 waiting. Be-
fore you visit, go to IRS.gov/taclocator to find the nearest
TAC, check hours, available services, and appointment
options. Or, on the IRS2Go app, under the Stay Connec-
ted tab, choose the Contact Us option and click on “Local
Offices.”
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).
Vietnamese (IRS.gov/vietnamese).
Korean (IRS.gov/korean).
Russian (IRS.gov/russian).
The IRS TACs provide over-the-phone interpreter serv-
ice in over 170 languages, and the service is available
free to taxpayers.
The Taxpayer Advocate
Service Is Here To Help You
What is the Taxpayer Advocate Service? The Tax-
payer Advocate Service (TAS) is an independent organi-
zation within the IRS that helps taxpayers and protects
taxpayer rights. Our job is to ensure that every taxpayer is
treated fairly and that you know and understand your
rights under the Taxpayer Bill of Rights.
What Can the Taxpayer Advocate Service Do For
You? We can help you resolve problems that you can’t
resolve with the IRS. And our service is free. If you qualify
for our 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
Chapter 13 How To Get Tax Help Page 77
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 Us? We have 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. You can also call us at
1-877-777-4778.
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. Our Tax
Toolkit at taxpayeradvocate.irs.gov can help you under-
stand what these rights mean to you and how they apply.
These are your rights. Know them. Use them.
How Else Does the Taxpayer Advocate Service 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 us at IRS.gov/sams.
Low Income Taxpayer Clinics
Low Income Taxpayer Clinics (LITCs) serve individuals
whose income is below a certain level and need to resolve
tax problems such as audits, appeals, and tax collection
disputes. Some clinics can provide information about tax-
payer rights and responsibilities in different languages for
individuals who speak English as a second language. To
find a clinic near you, visit IRS.gov/litc or see IRS Publica-
tion 4134, Low Income Taxpayer Clinic List.
Page 78 Chapter 13 How To Get Tax Help
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 lifetime learning
credit for 2016.
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 2016 joint tax return they
claim exemptions for their two depend-
ent children, Sean (age 22, social se-
curity number: 000-00-0001) and
Carey (age 18, social security number:
000-00-0002). Their modified adjusted
gross income (MAGI) on Form 1040,
line 38, is $121,000. Because Dave
and Valerie have unusually high item-
ized deductions, 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 2016 at Califor-
nia State College. He graduated with
his bachelor's degree in 2015 and
didn't attend school from January 2016
through July 2016. His parents claimed
the American opportunity credit for
Sean for 2012, 2013, 2014, and 2015.
Carey enrolled full-time as a fresh-
man at the same college in January
2016 to begin working on her bache-
lor's degree.
In 2016, 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 scholarship
that Carey received is reported in
box 5 of her Form 1098-T. California
State College reports amounts billed in
2016 instead of amounts paid during
2016. In completing Form 8863, the
Joneses should include actual adjus-
ted qualified education expenses paid,
or deemed to have been paid, which
may be different from what is reported
on Form 1098-T. Therefore, the Jone-
ses use the amounts they paid for tui-
tion and mandatory course materials.
Because the scholarship Carey re-
ceived was applied to tuition (a quali-
fied expense), they don't include that in
the amount they paid for qualified tui-
tion expenses. Neither Sean nor Carey
has been convicted of a felony for pos-
session or distribution of a controlled
substance before the end of 2016.
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 their son Sean. They check
the “Yes” box on line 23, determine
that Sean isn't eligible for the American
opportunity credit, and go to line 31 as
instructed. They figure their line 31 ad-
justed 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 68 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
2016 to be $1,400 (line 12). They can't
claim the full amount because their
MAGI of $121,000 is greater than
$111,000. 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 47 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 Form 1040, line 50.
Publication 970 (2016) Page 79
Form 1098-T
2016 Tuition
Statement
Copy B
For Student
Department of the Treasury - Internal Revenue Service
This is important
tax information
and is being
furnished to the
Internal Revenue
Service. 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 federal identification no. STUDENT'S taxpayer identification no.
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.)
1 Payments received for
qualified tuition and related
expenses
$
2 Amounts billed for
qualified tuition and
related expenses
3 If this box is checked, your educational institution
has changed its reporting method for 2016
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 or 2 includes
amounts for an academic
period beginning January
— March 2017 ▶
8 Check if at least
half-time student
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
2,000Page 80 Publication 970 (2016)
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 2016 for the academic period . . . . . . . . . . 10,500
2. Less adjustments:
a. Tax-free educational assistance received in 2016 allocable to the academic period . . . 2,000
b. Tax-free educational assistance received in 2017 (and before you file your 2016 tax
return) allocable to the academic period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
c. Refunds of qualified education expenses paid in 2016 if the refund is received in 2016
or in 2017 before you file your 2016 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 (2016) Page 81
Form 1098-T
2016 Tuition
Statement
Copy B
For Student
Department of the Treasury - Internal Revenue Service
This is important
tax information
and is being
furnished to the
Internal Revenue
Service. 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 federal identification no. STUDENT'S taxpayer identification no.
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.)
1 Payments received for
qualified tuition and related
expenses
$
2 Amounts billed for
qualified tuition and
related expenses
3 If this box is checked, your educational institution
has changed its reporting method for 2016
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 or 2 includes
amounts for an academic
period beginning January
— March 2017 ▶
8 Check if at least
half-time student
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
9,000
XPage 82 Publication 970 (2016)
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 2016 for the academic period . . . . . . . . . . 7,000
2. Less adjustments:
a. Tax-free educational assistance received in 2016 allocable to the academic period . . . 0
b. Tax-free educational assistance received in 2017 (and before you file your 2016 tax
return) allocable to the academic period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
c. Refunds of qualified education expenses paid in 2016 if the refund is received in 2016
or in 2017 before you file your 2016 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, line 47; or
Form 1040A, line 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. 1,003
5. Enter the amount from either:
Form 1040, lines 48 and 49, and the amount from Schedule R, line 22; or
Form 1040A, lines 31 and 32 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 (2016) Page 83
Form 8863
Department of the Treasury
Internal Revenue Service (99)
Education Credits
(American Opportunity and Lifetime Learning Credits)
▶ Attach to Form 1040 or Form 1040A.
▶ Information about Form 8863 and its separate instructions is at www.irs.gov/form8863.
OMB No. 1545-0074
2016Attachment
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 filing jointly; $90,000 if single, head of
household, or qualifying widow(er) . . . . . . . . . . . . . 2
3 Enter the amount from Form 1040, line 38, or Form 1040A, line 22. If
you're filing Form 2555, 2555-EZ, 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 filing 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, line 68, or Form 1040A, line 44. 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: $131,000 if married filing jointly; $65,000 if single, head of
household, or qualifying widow(er) . . . . . . . . . . . . . 13
14 Enter the amount from Form 1040, line 38, or Form 1040A, line 22. If you're
filing Form 2555, 2555-EZ, 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 filing 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 Form 1040, line 50, or Form 1040A, line 33 . . . . . . . . . . 19
For Paperwork Reduction Act Notice, see your tax return instructions. Cat. No. 25379M Form 8863 (2016)
Dave and Valerie Jones 001 00 0000
2,500
180,000
121,000
59,000
20,000
2,500
1,000
1,500
7,000
7,000
1,400
131,000
1 000
121,000
10,000
20,000
1,003Page 84 Publication 970 (2016)
Form 8863 (2016) 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 first educational institution
(1) Address. Number and street (or P.O. box). City, town or
post office, state, and ZIP code. If a foreign address, see
instructions.
(2) Did the student receive Form 1098-T
from this institution for 2016? Yes No
(3) Did the student receive Form 1098-T
from this institution for 2015 with box
2 filled in and box 7 checked?
Yes No
If you checked “No” in both (2) and (3), skip (4).
(4) If you checked “Yes” in (2) or (3), enter the institution's
federal identification number (from Form 1098-T).
–
b. Name of second educational institution (if any)
(1) Address. Number and street (or P.O. box). City, town or
post office, state, and ZIP code. If a foreign address, see
instructions.
(2) Did the student receive Form 1098-T
from this institution for 2016? Yes No
(3) Did the student receive Form 1098-T
from this institution for 2015 with box
2 filled in and box 7 checked?
Yes No
If you checked “No” in both (2) and (3), skip (4).
(4) If you checked “Yes” in (2) or (3), enter the institution's
federal identification number (from Form 1098-T).
–
23 Has the Hope Scholarship Credit or American opportunity
credit been claimed for this student for any 4 tax years
before 2016?
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
2016 at an eligible educational institution in a program
leading towards a postsecondary degree, certificate, 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 first 4 years of postsecondary
education before 2016? 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 2016, 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 qualified 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 qualified education expenses (see instructions). Include the total of all amounts from all Parts
III, line 31, on Part II, line 10 . . . . . . . . . . . . . . . . . . . . . . . . . 31
Form 8863 (2016)
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
000 00 0002
√Publication 970 (2016) Page 85
Form 8863 (2016) 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 first educational institution
(1) Address. Number and street (or P.O. box). City, town or
post office, state, and ZIP code. If a foreign address, see
instructions.
(2) Did the student receive Form 1098-T
from this institution for 2016? Yes No
(3) Did the student receive Form 1098-T
from this institution for 2015 with box
2 filled in and box 7 checked?
Yes No
If you checked “No” in both (2) and (3), skip (4).
(4) If you checked “Yes” in (2) or (3), enter the institution's
federal identification number (from Form 1098-T).
–
b. Name of second educational institution (if any)
(1) Address. Number and street (or P.O. box). City, town or
post office, state, and ZIP code. If a foreign address, see
instructions.
(2) Did the student receive Form 1098-T
from this institution for 2016? Yes No
(3) Did the student receive Form 1098-T
from this institution for 2015 with box
2 filled in and box 7 checked?
Yes No
If you checked “No” in both (2) and (3), skip (4).
(4) If you checked “Yes” in (2) or (3), enter the institution's
federal identification number (from Form 1098-T).
–
23 Has the Hope Scholarship Credit or American opportunity
credit been claimed for this student for any 4 tax years
before 2016?
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
2016 at an eligible educational institution in a program
leading towards a postsecondary degree, certificate, 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 first 4 years of postsecondary
education before 2016? 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 2016, 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 qualified 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 qualified education expenses (see instructions). Include the total of all amounts from all Parts
III, line 31, on Part II, line 10 . . . . . . . . . . . . . . . . . . . . . . . . . 31
Form 8863 (2016)
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 86 Publication 970 (2016)
Highlights of Education Tax Benefits for Tax Year 2016
This chart highlights some differences among the benefits discussed in this publication. See the text for definitions and details. Don't rely
on this chart alone.
Caution: You generally can't claim more than one benefit for the same education expense.
Appendix B.
Scholarships,
Fellowship
Grants,
Grants, and
Tuition
Reductions
American
Opportunity
Credit
Lifetime
Learning
Credit
Student Loan
Interest
Deduction
Tuition and
Fees
Deduction
Coverdell
ESA†
Qualified
Tuition
Program
(QTP)†
Education
Exception to
Additional
Tax on Early
IRA
Distributions†
Education
Savings Bond
Program†
Employer-
Provided
Educational
Assistance†
Business
Deduction for
Work-Related
Education
What is your
benefit?
Amounts
received may
not be taxable
Credits can
reduce the
amount of tax
you must pay.
40% of the
credit may be
refundable
(limited to
$1,000 per
student).
Credits can
reduce the
amount of tax
you must pay
Can deduct
interest paid
Can deduct
expenses
Earnings not
taxed
Earnings not
taxed
No 10%
additional tax
on early
distribution
Interest not
taxed
Employer
benefits not
taxed
Can deduct
expenses
What is the
annual limit?
None $2,500 credit
per student
$2,000 credit
per tax return
$2,500
deduction
$4,000
deduction
$2,000
contribution
per beneficiary
None Amount of
qualified
education
expenses
Amount of
qualified
education
expenses
$5,250
exclusion
Amount of
qualifying
work-related
education
expenses
What
expenses
qualify
besides
tuition and
required
enrollment
fees?
Course-related
expenses such
as fees, books,
supplies, and
equipment
Course-related
books,
supplies, and
equipment
Amounts paid
for required
books, etc.,
that must be
paid to the
educational
institution, are
required fees
Books
Supplies
Equipment
Room & board
Transportation
Other
necessary
expenses
None Books
Supplies
Equipment
Expenses for
special needs
services
Payments to
QTP
Higher
education:
Room & board
if
at least
half-time
student
Elem/sec (K–
12) education:
Tutoring
Room & board
Uniforms
Transportation
Computer
access
Supplementary
expenses
Books
Supplies
Equipment
Room & board
if
at least
half-time
student
Computer or
peripheral
equipment,
computer
software, or
Internet access
and related
services
Expenses for
special needs
services
Books
Supplies
Equipment
Room & board
if
at least
half-time
student
Expenses for
special needs
services
Payments to
Coverdell ESA
Payments to
QTP
Books
Supplies
Equipment
Transportation
Travel
Other necessary
expenses
Publication 970 (2016) Page 87
Scholarships,
Fellowship
Grants,
Grants, and
Tuition
Reductions
American
Opportunity
Credit
Lifetime
Learning
Credit
Student Loan
Interest
Deduction
Tuition and
Fees
Deduction
Coverdell
ESA†
Qualified
Tuition
Program
(QTP)†
Education
Exception to
Additional
Tax on Early
IRA
Distributions†
Education
Savings Bond
Program†
Employer-
Provided
Educational
Assistance†
Business
Deduction for
Work-Related
Education
What
education
qualifies?
Undergraduate
& graduate
K–12
Undergraduate
& graduate
Undergraduate
& graduate
Courses to
acquire or
improve job
skills
Undergraduate
& graduate
Undergraduate
& graduate
Undergraduate
& graduate
K–12
Undergraduate
& graduate
Undergraduate
& graduate
Undergraduate
& graduate
Undergraduate
& graduate
Required by
employer or law
to keep present
job, salary,
status
Maintain or
improve job skills
What are
some of the
other
conditions that
apply?
Must be in
degree or
vocational
program
Payment of
tuition and
required fees
must be allowed
under the grant
Can be
claimed for
only 4 tax years
(which includes
years Hope
scholarship
credit claimed)
Must be
enrolled at
least half-time
in degree
program
No felony drug
conviction(s)
Must not have
completed first
4 years of
postsecondary
education
before end of
preceding tax
year.
No other
conditions
Must have
been at least
half-time
student in
degree
program
Can't claim
both deduction
& education
credit for same
student in
same year
Assets must
be distributed
at age 30
unless special
needs
beneficiary
No other
conditions
No other
conditions
Applies only to
qualified series
EE bonds
issued after
1989 or series I
bonds
No other
conditions
Can't be to
meet minimum
educational
requirements of
present trade/
business
Can't qualify
you for new
trade/business
In what
income
range do
benefits
phase out?
No phaseout $80,000 –
$90,000
$160,000 –
$180,000 for
joint returns
$55,000 –
$65,000
$111,000 –
$131,000 for
joint returns
$65,000 –
$80,000
$130,000 –
$160,000 for
joint returns
$60,000 –
$80,000
$130,000 –
$160,000 for
joint returns
$95,000 –
$110,000
$190,000 –
$220,000 for
joint returns
No phaseout No phaseout $77,550 –
$92,550
$116,300 –
$146,300 for
joint returns
No phaseout No phaseout
†Any nontaxable distribution is limited to the amount that doesn't exceed qualified education expenses.
Page 88 Publication 970 (2016)
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, or
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). Same as American oppor
tunity credit 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 or Hope schol-
arship 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 (2016) Page 89
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 work load 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, or
domestic production activities de-
duction, 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.
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 contribution 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
Page 90 Publication 970 (2016)
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
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 educational institution, plus
certain limited costs of room and
board for students who are enrol-
led 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.
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 (2016) Page 91
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 22
Student loan interest deduction 30
Tuition and fees deduction 38
Accountable plans 71, 72
Additional tax:
Coverdell ESA:
On excess contributions 50, 51
On taxable distributions 55
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 13
Claiming dependent's expenses 18, 19
Tuition reduction 19
Claiming the credit 10, 12, 21
Qualifying to claim (Figure 2-1) 11
Contrast to the lifetime learning
credits 87
Coordination with Coverdell ESA
distributions 53
Coordination with qualified tuition
program (QTP) distributions 59
Eligible educational institution 12
Eligible student 16
Requirements (Figure 2-2) 17
Expenses qualifying for 12, 14
Figuring the credit 19
Income level, effect on amount of
credit 19, 20
Income limits 19, 20
Modified adjusted gross income
(MAGI) 19
Worksheet 2-1 21
Overview of American opportunity credit
(Table 2-1) 10
Phaseout 20
Qualified education expenses 12
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 68
Bonds, education
savings (See Education savings bond
program)
Business deduction for work-related
education 65–74
Accountable plans 71, 72
Adjustments to qualifying work-related
education expenses 71
Allocating meal reimbursements 71
Deductible education expenses 69, 71
Deducting business expenses 72, 73
Double benefit not allowed 70
Education required by employer or by
law 66
Education to maintain or improve
skills 66
Education to meet minimum
requirements 67, 68
Education to qualify for new trade or
business 68, 69
Excess expenses, accountable
plan 71, 72
Indefinite absence 66
Maintaining skills vs. qualifying for new
job 66
Nonaccountable plans 72
Nondeductible expenses 69
Qualified education expenses 69, 71
Recordkeeping requirements 73
Reimbursements, treatment of 71, 72
Tax benefit of 65
Tax-free educational assistance 71
Teachers 67, 68
Temporary absence to acquire
education 66
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 52
Qualified tuition program 61
Collapsed loans 32
Comprehensive or bundled fees:
American opportunity credit 16
Lifetime learning credit 27
Tuition and fees deduction 41
Consolidated loans used to refinance
student loans 32
Conventions outside U.S. 70
Coverdell education savings account
(ESA) 46–57
Additional tax:
On excess contributions 50, 51
On taxable distributions 55
Assets to be distributed at age 30 or
death of beneficiary 55
Contribution limits 48, 50
Figuring the limit (Worksheet 6-2) 49
Contributions to 48, 51
Table 7-2 48
Coordination with American opportunity
and lifetime learning credits 53
Coordination with qualified tuition
program (QTP) 54
Defined 46
Distributions 52, 55
Overview (Table 7-3) 52
Divorce, transfer due to 52
Eligible educational institution 47
Figuring taxable portion of
distribution 53
Worksheet 7-3 57
Figuring the taxable earnings in
required distribution 55
Losses 54
Modified adjusted gross income
(MAGI) 49
Worksheet 6-1 49
Overview (Table 6-1) 46
Qualified education expenses 47, 48
Rollovers 51
Taxable distributions 53–55
Worksheet 7-3 to figure 57
Tax benefit of 46
Tax-free distributions 52
Transfers 51
CPA review course 68
Credits:
American opportunity (See American
opportunity credit)
Lifetime learning (See Lifetime learning
credit)
Cruises, educational 70
D
Deductions (See Business deduction for
work-related education)
Designated beneficiary:
Coverdell ESA 46, 52
Qualified tuition program (QTP) 58, 61
Disabilities, persons with:
Impairment-related work expenses 73
Distributions (See specific benefit)
Divorce:
Coverdell ESA transfer due to 52
Expenses paid under decree:
American opportunity credit 18
Lifetime learning credit 27
Tuition and fees deduction 41
Double benefit not allowed:
American opportunity credit 13
Lifetime learning credit 23
Student loan interest deduction 33
Tuition and fees deduction 39
Work-related education 70
E
Early distributions from IRAs 61, 62
Eligible educational institution 61
Figuring amount not subject to 10%
tax 62
Qualified education expenses 61
Reporting 62
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 dependent's exemption 63
Claiming exclusion 64
Eligible educational institution 63
Figuring tax-free amount 64
Income level, effect on amount of
exclusion 64
Modified adjusted gross income
(MAGI) 63, 64
Phaseout 64
Qualified education expenses 63
Eligible educational institution:
American opportunity credit 12
Cancellation of student loan 36
Coverdell ESA 47
Early distributions from IRAs 61
Education savings bond program 63
Page 92 Publication 970 (2016)
Lifetime learning credit 22
Qualified tuition program (QTP) 58
Qualified tuition reduction 7
Scholarships and fellowship grants 5, 8
Student loan cancellation 36
Student loan interest deduction 31
Tuition and fees deduction 38
Eligible elementary or secondary
school:
Coverdell ESA 47
Eligible student:
American opportunity credit 16
Lifetime learning credit 27
Student loan interest deduction 30
Tuition and fees deduction 41
Employees:
Deducting work-related education
expenses 72
Employer-provided educational
assistance 65
ESAs (See Coverdell education savings
account (ESA))
Estimated tax 3
Excess contributions:
Coverdell ESA 50, 51
Excess expenses, accountable
plan 71, 72
Expenses (See specific benefit)
F
Family members, beneficiary:
Coverdell ESA 51
Qualified tuition program (QTP) 60
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 31, 33
Form 1098-T 2
American opportunity credit 19
Lifetime learning credit 28
Tuition and fees deduction 42
Form 1099-Q:
Coverdell ESA 50, 53
Qualified tuition program (QTP) 58
Form 1099-R:
Early distributions from IRAs 62
Form 2106 70, 72
Form 2106-EZ 70, 72, 73
Filled-in example 75
Form 5329:
Coverdell ESA 55
Early distributions from IRAs 62
Qualified tuition program (QTP) 60
Form 8815 64
Form 8863:
Filled-in examples 84
Form 8917:
Filled-in examples 45
Form W-9S 19, 28, 33, 42
Fulbright grants 7
G
Glossary 4, 89–91
Graduate education tuition reduction 8
Grants:
Fulbright 7
Pell 7
Title IV need-based education 7
H
Half-time student:
American opportunity credit 17
Coverdell ESA 47
Early distributions from IRAs 61
Student loan interest deduction 30
I
Identity theft 76
Illustrated example of education
credits (Appendix A) 79–84
Impairment-related work expenses:
Work-related education deduction 73
Individual retirement arrangements
(IRAs) 46
Early distributions (See Early
distributions from IRAs)
L
Lifetime learning credit 21
Academic period 22
Adjustments to qualified education
expenses 23
Claiming dependent's expenses 27
Tuition reduction 28
Claiming the credit 21, 22, 29
Qualifying to claim (Figure 3-1) 24
Contrast to the American opportunity
credit 87
Coordination with Coverdell ESA
distributions 53, 54
Coordination with qualified tuition
program (QTP) distributions 59
Eligible educational institution 22
Eligible student 27
Expenses qualifying for 22–26
Figuring the credit 28, 29
Income level, effect on amount of
credit 28, 29
Income limits 28
Modified adjusted gross income
(MAGI) 28
Worksheet 3-1 28
Overview (Table 3-1) 22
Phaseout 29
Qualified education expenses 22, 26
Qualifying to claim (Figure 3-1) 24
Tax benefit of 21
Loans:
Cancellation (See Student loan
cancellation)
Capitalized interest on student loan 31
Origination fees on student loan 31
Qualified education expenses paid with:
American opportunity credit 12
Lifetime learning credit 22
Student loan repayment assistance 37
Losses, deducting:
Coverdell ESA 54
Qualified tuition program (QTP) 60
Luxury water transportation 70
M
Mileage deduction for work-related
education 65, 70
Military academy cadets 7
Missing children, photographs of 3
Modified adjusted gross income
(MAGI):
American opportunity credit:
Worksheet 2-1 21
Coverdell ESA 49
Worksheet 6-1 49
Education savings bond program 63,
Lifetime learning credit 28
Worksheet 3-1 28
Student loan interest deduction 33
Table 4-2 34
Tuition and fees deduction 42
Table 6-2 42
Worksheet 6-1 44
N
National Health Service Corps
Scholarship Program 6, 8
Nonaccountable plans:
Work-related education 72
P
Pell grants 7, 14, 26
Performing artists, work-related
education deduction 73
Phaseout:
American opportunity credit 20
Education savings bond program 64
Lifetime learning credit 29
Student loan interest deduction 34
Publications (See Tax help)
Q
Qualified education expenses:
Adjustments to:
American opportunity credit 13, 14
Coverdell ESA 52
Education savings bond program 63
Lifetime learning credit 23
Qualified tuition program (QTP) 58
Student loan interest deduction 31
Tuition and fees deduction 39
Work-related education 71
American opportunity credit 12–14
Coverdell ESA 47, 48
Early distributions from IRAs 61
Education savings bond program 63
Expenses not qualified:
American opportunity credit 16
Lifetime learning credit 27
Tuition and fees deduction 40
Lifetime learning credit 22–26
Qualified tuition program (QTP) 56
Scholarships and fellowship grants 5
Student loan interest deduction 31
Tuition and fees deduction 38–40
Work-related education 69–71
Qualified elementary and secondary
education expenses:
Coverdell ESAs 47
Qualified employer plans:
Student loan interest deduction not
allowed 31
Qualified student loans 30, 31
Qualified tuition program (QTP) 56–61
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 59, 60
Defined 56
Eligible educational institution 58
Figuring taxable portion of
distribution 58
Losses 60
Publication 970 (2016) Page 93
Qualified education expenses 56
Recontribution 58
Rollovers 60, 61
Taxability of distributions 58, 60
Taxable earnings 59
Tax benefit of 56
Transfers 60, 61
Qualified tuition reduction 7, 8
Qualified U.S. savings bonds 63
Qualifying work-related
education 66–69
Determining if qualified (Figure
11-1) 67
R
Recapture:
American opportunity credit 14
Lifetime learning credit 25
Tuition and fees deduction 40
Recordkeeping requirements:
Work-related education 73
Refinanced student loans 32, 36
Reimbursements:
Nondeductible expenses 72
Work-related education 71, 72
Related persons:
Coverdell ESA 51
Qualified tuition program (QTP) 60
Student loan interest deduction 31
Repayment programs (See Student loan
repayment assistance)
Reporting:
American opportunity credit 21
Coverdell ESA 50, 51, 53, 55
Early distributions from IRAs 62
Education savings bond program 64
Lifetime learning credit 29
Qualified tuition program (QTP) 59, 60
Scholarships and fellowship grants,
taxable 7
Student loan interest deduction 34
Tuition and fees deduction 42
Tuition reduction, taxable 8
Work-related education expenses 72,
Revolving lines of credit, interest on 32
Rollovers:
Coverdell ESA 51
Qualified tuition program (QTP) 60, 61
S
Scholarships and fellowship
grants 5–7, 14, 26
Athletic scholarships 6
Eligible educational institution 5, 8
Figuring tax-free and taxable parts
(Worksheet 1-1) 6
Qualified education expenses 5
Reporting 7
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 72
Service academy cadets 7
Sports, games, hobbies, and noncredit
courses:
American opportunity credit 16
Education savings bond program 63
Lifetime learning credit 27
Tuition and fees deduction 41
Standard mileage rate:
Work-related education 65, 70
State prepaid education
accounts (See Qualified tuition
program (QTP))
Student loan cancellation 36
Eligible educational institution 36
Section 501(c)(3) organizations 36
Student loan interest deduction:
Academic period 30
Adjustments to qualified education
expenses 31
Allocation between interest and
principal 32
Claiming the deduction 34
Eligible educational institution 31
Eligible student 30
Figuring the deduction 33, 34
Include as interest 31
Income level, effect on amount of
deduction 33
Loan repayment assistance 32
Modified adjusted gross income
(MAGI) 33, 34
Table 4-2 34
Not included as interest 32
Phaseout 34
Qualified education expenses 31
Qualified employer plans 31
Qualified student loans 30, 31
Reasonable period of time 30
Related persons 31
Student loan interest, defined 30, 32
Third party interest payments 33
When interest must be paid 32
Worksheet 4-1 35
Student loan repayment assistance 37
Surviving spouse:
Coverdell ESA transfer to 55
T
Tables and figures:
American opportunity credit:
Eligible student requirements (Figure
2-2) 17
Overview (Table 2-1) 10
Qualifying to claim (Figure 2-1) 11
Comparison of education tax benefits
(Appendix B) 84
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) 10
Overview of lifetime learning credit
(Table 3-1) 22
Lifetime learning credit:
Overview (Table 3-1) 22
Qualifying to claim (Figure 3-1) 24
Scholarships and fellowship grants,
taxability of (Table 1-1) 5
Student loan interest deduction:
MAGI, effect of (Table 4-2) 34
Overview (Table 4-1) 30
Summary chart of differences between
education tax benefits (Appendix
B) 84
Tuition and fees deduction:
MAGI, effect of (Table 6-2) 42
Overview (Table 6-1) 37
Work-related education, qualifying
(Figure 112-1) 67
Taxable scholarships and fellowship
grants 6
Tax-free educational assistance:
American opportunity credit 13
Coverdell ESA 52
Early distributions from IRAs 62
Education savings bond program 63
Lifetime learning credit 23
Qualified tuition program (QTP) 58
Tuition and fees deduction 39
Work-related education 71
Tax help 76
Teachers 67, 68
Temporary-basis student,
transportation expenses of 69
Title IV need-based education grants 7
Transfers:
Coverdell ESA 51
Qualified tuition program (QTP) 60, 61
Transportation expenses:
Work-related education 69, 70
Travel expenses:
50% limit on meals 70
Not deductible as form of education 70
Work-related education 70
TTY/TDD information 76
Tuition and fees deduction 37–43
Academic period 38
Adjustments to qualified education
expenses 39, 40
Can you claim the deduction 37
Claiming dependent's expenses 41
Claiming the deduction 42
Double benefit not allowed 39
Eligible educational institution 38
Eligible student 41
Expenses not qualifying for 40
Expenses qualifying for 38–40
Figuring the deduction 42
Income level, effect on amount of
deduction 42
Loan used to pay tuition and fees 38
Modified adjusted gross income
(MAGI) 42
Table 6-2 42
Worksheet 6-1 44
Overview (Table 6-1) 37
Qualified education expenses 38, 40
Qualifying for deduction 37
Tax benefit of 37
Tax-free educational assistance 39
Tuition reduction:
American opportunity credit 19
Lifetime learning credit 28
Qualified 7, 8
Tuition and fees deduction 42
U
U.S. savings bonds 63
Unclaimed reimbursement:
Work-related education 69
V
Veterans' benefits 7
W
Withholding 3
Working condition fringe benefit 65
Work-related education (See Business
deduction for work-related education)
Worksheets:
American opportunity credit MAGI
calculation (Worksheet 2-1) 20
Coverdell ESA:
Page 94 Publication 970 (2016)
Contribution limit (Worksheet
6-2) 49
MAGI, calculation of (Worksheet
6-1) 49
Taxable distributions and basis
(Worksheet 6-3) 57
Taxable distributions and basis
(Worksheet 7-3) 57
Lifetime learning credit MAGI
calculation (Worksheet 3-1) 28
Scholarships and fellowship grants,
taxable income (Worksheet 1-1) 6
Student loan interest deduction
(Worksheet 4-1) 35
Tuition and fees deduction, MAGI
calculation (Worksheet 6-1) 44
Publication 970 (2016) Page 95