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PT 7 Pub 970 (2009), Tax Benefits for Education
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 Posted 6:39 PM Mar. 1, 2010 PT 7 Pub 970 (2009), Tax Benefits for Education
http://www.irs.gov/publications/p970/ch06.html Table of Contents If you fulfill certain requirements, two types of student loan assistance may be tax free. The types of assistance discussed in this chapter are:
Generally, if you are responsible for making loan payments, and the loan is canceled (forgiven), you must include the amount that was forgiven in your gross income for tax purposes. However, if your student loan is canceled, you may not have to include any amount in income. This section describes the requirements for tax-free treatment of canceled student loans. To qualify for tax-free treatment, your loan must contain a provision that all or part of the debt will be canceled if you work:
The loan must have been made by a qualified lender to assist the borrower in attending an eligible educational institution. Qualified lenders. These include the following.
Section 501(c)(3) organization. This is any corporation, community chest, fund, or foundation organized and operated exclusively for one or more of the following purposes.
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.
If you refinanced a student loan with another loan from an eligible educational institution or a tax-exempt organization, that loan may also be considered as made by a qualified lender. It is considered made by a qualified lender if it meets the requirements of item 3b under Qualified lenders earlier on this page.
Loan repayment assistance programs (LRAP) provide help in repaying student loans for those who work in public service occupations or in areas with unmet needs. Examples of such occupations are health care professionals in underserved areas, attorneys in legal-aid offices and prosecutor's or public defender's offices, and classroom teachers in subject areas with shortages. An LRAP loan refinances your original student loan(s). After you work for a certain minimum period of time in a qualifying position, all or part of your student loan indebtedness is forgiven. The amount of your loan that is forgiven is tax-free if the LRAP meets certain criteria. Repayment assistance received under the following programs has been determined to be tax free.
If your repayment assistance is from a source other than those listed, contact the program administrator to see if the LRAP qualifies for tax-free assistance. The program must meet the qualifications listed earlier in this chapter under Qualifying Loans . You cannot deduct the interest you paid on a student loan to the extent payments were made through your participation in the above programs Table of Contents You may be able to deduct qualified education expenses paid during the year for yourself, your spouse, or your dependent(s). You cannot claim this deduction if your filing status 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 education, as explained later under Qualified Education Expenses . What is the tax benefit of the tuition and fees deduction. The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000.
This deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if you do not qualify for the American opportunity, Hope, or lifetime learning credits.
Students in Midwestern disaster areas. To qualify for the special rules, a student must attend an eligible educational institution in a Midwestern disaster area. See Table 4-2 at the end of chapter 4 for a list of qualifying disaster areas. For the expanded definition of qualified education expenses, see Students in Midwestern disaster areas under Qualified Education Expenses, later in this chapter.
You can choose the education benefit that will give you the lowest tax. You may want to compare the tuition and fees deduction to one or more of the education credits (chapters 2, 3, and 4).
Table 7-1 summarizes the features of the tuition and fees deduction. 
The following rules will help you determine if you can claim the tuition and fees deduction. Generally, you can claim the tuition and fees deduction if all three of the following requirements are met.
“Qualified Education Expenses” are defined on the next page. “Eligible students” are defined 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 . Table 7-1.Tuition and Fees Deduction at a Glance
You cannot claim the tuition and fees deduction if any of the following apply.
The tuition and fees deduction is based on qualified education 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 2009 in connection with enrollment at an institution of higher education during 2009 or for an academic period beginning in 2009 or in the first 3 months of 2010. For example, if you paid $1,500 in December 2009 for qualified tuition for the spring 2010 semester beginning in January 2010, you may be able to use that $1,500 in figuring your 2009 deduction. Academic period. An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. In the case of an educational institution that uses credit hours or clock hours and does not have academic 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 deduction for the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account.
Student withdraws from class(es). You can claim a tuition and fees deduction for qualified education expenses not refunded when a student withdraws.
For purposes of the tuition and fees deduction, qualified education expenses are tuition and certain related expenses 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 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 educational institution should be able to tell you if it is an eligible educational institution.
Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.
Related expenses. Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.
In the following examples, assume that each student is an eligible student and each college or university an eligible educational institution.
Example 1. Jackson is a sophomore in University V's degree program in dentistry. This year, in addition to tuition, 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 University V for enrollment and attendance, Jackson's equipment rental fee is a qualified expense. Example 2. Donna and Charles, both first-year students 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 receive a bill directly from the college. Charles bought his books from a friend, so what he paid for them is not a qualified 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 is not a qualified education expense because the books and materials are not 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 organizations 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 student activity fee, the fee is required for Marci's enrollment and attendance at College X. Therefore, it is a qualified expense. Students in Midwestern disaster areas. The definition of qualified education expenses is expanded for students in these areas. In addition to tuition and fees required for enrollment or attendance at an eligible educational institution, qualified education expenses for students in Midwestern disaster areas include the following.
You cannot do any of the following.
If you pay qualified education expenses with certain tax-free funds, you cannot claim a deduction for those amounts. You must reduce the qualified education expenses by the amount of any tax-free educational assistance and refund(s) you received. Tax-free educational assistance. This includes:
Refunds. Qualified education expenses do not include expenses for which you, or someone else who paid qualified education expenses on behalf of a student, receive a refund. (For information on expenses paid by a dependent student or third party, see Who Can Claim a Dependent's Expenses , later.)
If a refund of expenses paid in 2009 is received before you file your tax return for 2009, simply reduce the amount of the expenses paid by the amount of the refund received. If the refund is received after you file your 2009 tax return, see When Must the Deduction Be Repaid (Recaptured) , near the end of this chapter. You are considered to receive a refund of expenses when an eligible educational institution refunds loan proceeds to the lender on behalf of the borrower. Follow the above instructions according to when you are considered to receive the refund.
Amounts that do not reduce qualified education expenses. Do not reduce qualified education expenses by amounts paid with funds the student receives as:
Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations.
Example 1. In 2009, Jackie 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 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 expenses. Because she applied it toward her tuition, the scholarship is tax free. Therefore, for purposes of figuring the tuition and fees deduction, she must first use the $2,000 scholarship to reduce her tuition (her only qualified education expense). The student loan is not tax-free educational assistance, so she does not use it to reduce her qualified expenses. Jackie is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship) in 2009. Example 2. The facts are the same as in Example 1, except that Jackie uses the $2,000 scholarship to pay room and board and, therefore, reports her entire scholarship as income on her tax return. In this case, the scholarship is allocated to expenses other than qualified education expenses. Jackie is treated as paying the entire $3,000 tuition with other funds, and can figure her tuition and fees deduction on the entire $3,000. Qualified education expenses do not include amounts paid for:
This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Sports, games, hobbies, and noncredit courses. Qualified education expenses generally do not include expenses that relate to any course of instruction or other education 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 educational institutions combine all of their fees for an academic period into one amount. If you do not receive, or do not 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 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 Deduction , later, for more information about Form 1098-T.
For purposes of the tuition and fees deduction, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (as defined under Qualified Education Expenses , earlier). The student must have either a high school diploma or a General Educational Development (GED) credential. Generally, in order to claim the tuition and fees deduction for qualified education expenses for a dependent, you must:
For you to be able to deduct qualified education expenses 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.
Expenses paid by dependent. If your dependent pays qualified education expenses and you can claim an exemption for your dependent on your tax return, 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 are not 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 do not claim an exemption for your dependent on your tax return.
However, if your dependent pays qualified education expenses and no one can claim an exemption for your dependent on his or her tax return, your dependent can take a tuition and fees deduction for those expenses, even if they are paid with the proceeds of a student loan.
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. If neither you nor anyone else can claim an exemption for a dependent who is an eligible student, the dependent can include any expenses you paid when figuring the amount of his or her tuition and fees deduction.
Expenses paid under divorce decree. Qualified education expenses paid directly to an eligible educational institution for a student under a court-approved divorce decree 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 former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified 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 are not considered to have paid the expenses and you cannot deduct them. If the student is not a dependent, only the student can deduct payments made directly to the institution for his or her expenses. If the student is your dependent, no one can deduct the payments.
Example. In 2009, Ms. Baker makes a payment directly to an eligible educational institution for her grandson Dan's qualified education expenses. For purposes of deducting tuition and fees, Dan is treated as receiving the money as a gift from his grandmother and, in turn, paying his own qualified education expenses. If an exemption cannot be claimed for Dan on anyone else's tax return, only Dan can claim a tuition and fees deduction 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 institution 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 payment of that amount and, in turn, paying it to the educational institution on behalf of the student. For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1.
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