Publication 970
Tax Benefits for Education

For use in preparing 2002 Returns

2. Lifetime Learning Credit

Important Changes for 2002

Lifetime learning credit and distribution from Coverdell ESA or QTP.   Beginning in 2002, you may be able to claim a lifetime learning credit in the same year in which you receive a distribution from either a Coverdell education savings account (ESA), formerly called an education IRA, or a qualified tuition program (QTP). However, you cannot use the same expenses to figure both the lifetime learning credit and the taxable portion of a Coverdell ESA or QTP distribution. See No Double Benefit Allowed, under What Expenses Qualify, later.

Income limits for credit reduction increased.   For 2002, the amount of your lifetime learning credit is gradually reduced if your modified adjusted gross income (MAGI) is between $41,000 and $51,000 ($82,000 and $102,000 if you file a joint return). You cannot claim a Hope credit if your MAGI is $51,000 or more ($102,000 or more if you file a joint return). This is an increase from the 2001 limits of $40,000 and $50,000 ($80,000 and $100,000 if filing a joint return). See Does the Amount of Your Income Affect the Amount of Your Credit, later.

Important Change for 2003

Maximum lifetime learning credit increases to $2,000.   Beginning in 2003, the amount of qualified tuition and related expenses you may take into account in figuring your lifetime learning credit increases from $5,000 to $10,000. The credit will equal 20% of these qualified expenses, with the maximum credit being $2,000.

Introduction

The Hope and lifetime learning credits may be available to you if you pay higher education costs.

The Hope credit is discussed in chapter 1.

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 the credit is figured,
• How the credit is claimed, and
• When the credit must be repaid.

What is the tax benefit of the lifetime learning credit?   You may be able to claim a lifetime learning credit of up to $1,000 for qualified tuition and related expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number 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 you are allowed may be limited by the amount of your income and the amount of your tax.

Can you claim both education tax credits this year?   For each student, you can elect for any year only one of the credits. For example, if you elect to take the lifetime learning credit for a child on your 2002 tax return, you cannot, for that same child, also claim the Hope credit for 2002.

Tax credit for one student.   You can claim the lifetime learning credit for any qualified expenses of a student's postsecondary education, including the following.

• Expenses for any year of postsecondary education.
• Expenses of courses taken to acquire or improve job skills, even if the courses are not part of a degree program.

If you are eligible to claim either the Hope or lifetime learning credit for a student, you can choose to claim either credit, but not both.

Tax credits for more than one student.   If you pay qualified expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. This means that, for example, you can claim the Hope credit for one student and the lifetime learning credit for another student in the same year.

Table 2-1 (see next page) summarizes the differences between the lifetime learning and Hope credits. For 2002, if you are eligible to claim both credits based on the qualified higher education expenses of one student, it will generally be to your benefit to claim the Hope credit.

Can You Claim the Credit?

The following rules will help you determine if you are eligible to claim the lifetime learning credit on your tax return.

Who Cannot Claim the Credit?

You cannot claim the lifetime learning credit if any of the following apply.

• Your filing status is married filing separately.
• You are listed as a dependent in the Exemptions section on another person's tax return (such as your parents'). See Who Can Claim a Dependent's Expenses, later.

• Your modified adjusted gross income is $51,000 or more ($102,000 or more in the case of a joint return). Modified adjusted gross income is explained later under Does the Amount of Your Income Affect the Amount of Your Credit.
• You (or your spouse) were a nonresident alien for any part of 2002 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens.
• You claim the Hope credit for the same student in 2002.

Who Can Claim the Credit?

Generally, you can claim the lifetime learning credit if all three of the following requirements are met.

1. You pay qualified tuition and related expenses of higher education.
2. You pay the tuition and related expenses for an eligible student.
3. The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.

Qualified tuition and related expenses are defined below under What Expenses Qualify. Eligible students are defined later under Who Is an Eligible Student.

What Expenses Qualify?

The lifetime learning credit is based on qualified tuition and related 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 qualified tuition and related expenses paid in 2002 for an academic period beginning in 2002 or in the first 3 months of 2003.

For example, if you paid $1,500 in December 2002 for qualified tuition for the Spring 2003 semester beginning in January 2003, you may be able to use that $1,500 in figuring your 2002 credit.

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.

Payments with borrowed funds.   You can claim a lifetime learning credit for qualified tuition and related 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.

Qualified Tuition and Related Expenses

In general, qualified tuition and related expenses are tuition and fees required for enrollment in a course at an eligible educational institution. The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills.

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 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.

Related expenses.   Student-activity fees and fees for course-related books, supplies, and equipment are included in qualified tuition and related expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. For examples, see Related expenses in chapter 1 under Qualified Tuition and Related Expenses.

No Double Benefit Allowed

You cannot do any of the following:

• Deduct higher education expenses on your income tax return (as, for example, a business expense or a tuition and fees deduction) and also claim a lifetime learning credit based on those same expenses.
• Claim a Hope credit and a lifetime learning credit based on the same qualified higher education expenses.
• Claim a lifetime learning credit based on the same expenses used to figure the taxable portion of a Coverdell ESA or QTP distribution. See Coordination With Hope and Lifetime Learning Credits in chapter 5 (Coverdell ESA) and chapter 6 (QTP).
• Claim a credit based on expenses paid with tax-free scholarship, grant, or employer-provided educational assistance. See Adjustments to Qualified Expenses, next.

Adjustments to Qualified Expenses

If you pay qualified higher education expenses with certain tax-free funds, you cannot claim a credit for those amounts. You must reduce the qualified expenses by the amount of any tax-free educational assistance you received.

Tax-free educational assistance could include:

• Scholarships,
• Pell grants,
• Employer-provided educational assistance,
• Veterans' educational assistance, and
• Any other nontaxable payments (other than gifts, bequests, or inheritances) received for education expenses.

Do not reduce the qualified expenses by amounts paid with the student's:

• Earnings,
• Loans,
• Gifts,
• Inheritances, and
• Personal savings.

Also, do not reduce the qualified expenses by any scholarship reported as income on the student's return or any scholarship which, by its terms, cannot be applied to qualified tuition and related expenses. For examples, see Adjustments to Qualified Expenses in chapter 1.

Refunds.   Qualified tuition and related expenses do not include expenses for which you receive a refund. If you paid expenses in 2002, and you receive a refund of those expenses before you file your tax return for 2002, simply reduce the amount of the expenses paid by the amount of the refund received. If you receive the refund after you file your 2002 tax return, see When Must the Credit Be Repaid (Recaptured), later.

Expenses That Do Not Qualify

Qualified tuition and related expenses do not include the cost of:

• Insurance,
• Medical expenses (including student health fees),
• Room and board,
• Transportation, or
• Similar personal, living, or family expenses.

This is true even if the fee must be paid to the institution as a condition of enrollment or attendance.

Qualified tuition and related 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 or is taken by the student to acquire or improve job skills, these expenses can qualify.

Who Is an Eligible Student?

For purposes of the lifetime learning credit, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution.

Who Can Claim a Dependent's Expenses?

If there are qualified higher education costs for your dependent for a year, either you or your dependent, but not both of you, can claim a lifetime learning credit for that dependent's expenses for that year.

For you to be able to claim a lifetime learning credit for your dependent's expenses, you must also claim an exemption for that person. You do this by listing his or her name and other required information on line 6c, Form 1040 (or Form 1040A).

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

Qualified tuition and related expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent.

Expenses paid by others.   If someone other than you, your spouse, or your dependent (such as a relative or former spouse) makes a payment directly to an eligible educational institution to pay for an eligible student's qualified tuition and related expenses, the student is treated as receiving the payment from the other person. The student is treated as paying the qualified tuition and related expenses to the institution. If you claim an exemption on your tax return for the student, you are considered to have paid the expenses.

Example.   Ms. Allen makes a payment directly to an eligible educational institution in 2002 for her grandson Todd's qualified tuition and related expenses. For purposes of claiming a lifetime learning credit, Todd is treated as receiving the money as a gift from his grandmother and, in turn, paying his qualified tuition and related expenses himself.

If anyone, such as Todd's parents, claims an exemption for Todd on his or her tax return, whoever claims the exemption may be able to use the expenses to claim a Hope credit. If anyone else claims an exemption for Todd, Todd cannot claim a Hope credit.

- Continue -