Federal Form 8863 - Education Credits Instructions

General Instructions for Form 8863

What's New

Hope credit increased. For 2008, the maximum amount of the Hope credit has been increased to $1,800 ($3,600 for students in Midwestern disaster areas).

Students in Midwestern disaster areas. For tax years beginning in 2008 and 2009, the education credits are expanded for students attending an eligible educational institution in a Midwestern disaster area. See Special Rules for Students in Midwestern Disaster Areas on page 3 and the specific instructions for Parts I and II

Purpose of Form

Use Form 8863 to figure and claim your education credits. The education credits are:

• The Hope credit, and
• The lifetime learning credit

These credits are based on qualified education expenses paid to an eligible postsecondary educational institution. See Qualified Education Expenses and Eligible Educational Institution, later, for more information

Who Can Take the Credits

You may be able to take the credits if you, your spouse, or a dependent you claim on your tax return was a student enrolled at or attending an eligible educational institution. The credits are based on the amount of qualified education expenses paid for the student in 2008 for academic periods beginning in 2008 and the first 3 months of 2009

CAUTION: Qualified education expenses must be reduced by any expenses paid directly or indirectly using tax-free educational assistance. See Tax-Free Educational Assistance and Refunds of Qualified Education Expenses on this page

Note. If a student is claimed as a dependent on another person's tax return, only the person who claims the student as a dependent can claim the credits for the student's qualified education expenses. If a student is not claimed as a dependent on another person's tax return, only the student can claim the credits

Generally, qualified education expenses paid on behalf of the student by someone other than the student (such as a relative) are treated as paid by the student. However, qualified education expenses paid (or treated as paid) by a student who is claimed as a dependent on your tax return are treated as paid by you. Therefore, you are treated as having paid expenses that were paid from your dependent student's earnings, gifts, inheritances, savings, etc You cannot take the education credits if any of the following apply

• You are claimed as a dependent on another person's tax return, such as your parent's return (but see the Note above).
• Your filing status is married filing separately.
• Your adjusted gross income on Form 1040, line 38, or Form 1040A, line 22, is (a) $116,000 or more if married filing jointly, or (b) $58,000 or more if single, head of household, or qualifying widow(er).
• You (or your spouse) were a nonresident alien for any part of 2008 and the nonresident alien did not elect to be treated as a resident alien

Additional Information See Pub. 970, Tax Benefits for Education, for more information about these credits

Rules That Apply to Both Credits

Qualified Education Expenses

Generally, qualified education expenses are amounts paid in 2008 for tuition and fees required for the student's enrollment or attendance at an eligible educational institution. It does not matter whether the expenses were paid in cash, by check, by credit card, or with borrowed funds

Qualified education expenses do not include amounts paid for:

• Room and board, insurance, medical expenses (including student health fees), transportation, or other similar personal, living, or family expenses.
• Course-related books, supplies, equipment, and nonacademic activities, except for amounts required to be paid to the institution as a condition of enrollment or attendance.
• Any course or other education involving sports, games, or hobbies, or any noncredit course, unless such course or other education is part of the student's degree program or (for the lifetime learning credit only) helps the student acquire or improve job skills

You should receive Form 1098-T, Tuition Statement, from the college or university reporting either payments received in box 1 or amounts billed in box 2. However, the amounts in boxes 1 and 2 of Form 1098-T may be different than what you actually paid. On Form 8863, lines 1 and 3, enter only the amounts you paid in 2008 for qualified expenses. See chapters 2 and 3 of Pub. 970

If you or the student take a deduction for higher education expenses, such as on Schedule A or Schedule C (Form 1040), you cannot use those expenses when figuring your education credits

CAUTION: Any qualified expenses used to figure the education credits cannot be taken into account in determining the amount of a distribution from a Coverdell ESA or a qualified tuition program that is excluded from gross income. See Pub. 970, chapter 7, for more information

Tax-Free Educational Assistance and Refunds of Qualified Education Expenses

Tax-free educational assistance includes a tax-free scholarship or Pell grant or tax-free employer-provided educational assistance. See Pub. 970 for specific information

You must reduce the total of your qualified education expenses by any tax-free educational assistance and by any refunds of your expenses. If the refund or tax-free assistance is received in the same year in which the expenses were paid or in the following year before you file your tax return, reduce your qualified education expenses by the amount received and figure your education credits using the reduced amount of qualified expenses. If the refund or tax-free assistance is received after you file your return for the year in which the expenses were paid, you must recapture the excess credit. You do this by figuring the amount by which your education credits would have been reduced if the refund or tax-free assistance had been received in the year for which you claimed the education credits. Include that amount as an additional tax for the year the refund or tax-free assistance was received

Example. You paid $8,000 tuition and fees in December 2007, and your child began college in January 2008. You filed your 2007 tax return on February 2, 2008, and claimed a lifetime learning credit of $1,600 ($8,000 qualified expenses paid x .20). After you filed your return, your child dropped two courses and you received a refund of $1,400.

You must refigure your 2007 lifetime learning credit using $6,600 ($8,000 qualified expenses - $1,400 refund). The refigured credit is $1,320. You must include the difference of $280 ($1,600 credit originally claimed - $1,320 refigured credit) on your 2008 Form 1040, line 44, or Form 1040A, line 28. Also, enter "$280" and "ECR" on the dotted line next to line 44 (if filing Form 1040) or line 28 (Form 1040A)

Prepaid Expenses

Qualified education expenses paid in 2008 for an academic period that begins in the first 3 months of 2009 can be used only in figuring your 2008 education credits. For example, if you pay $2,000 in December 2008 for qualified tuition for the 2009 winter quarter that begins in January 2009, you can use that $2,000 in figuring your 2008 education credits (if you meet all the other requirements)

CAUTION: You cannot use any amount paid in 2007 or 2009 to figure your 2008 education credits

Eligible Educational Institution

An eligible educational institution is generally any accredited public, nonprofit, or proprietary (private) college, university, vocational school, or other postsecondary institution. Also, the institution must be eligible to participate in a student aid program administered by the Department of Education. Virtually all accredited postsecondary institutions meet this definition

Special Rules for Students in Midwestern Disaster Areas

The following rules apply only to students attending an eligible educational institution in a Midwestern disaster area in the states of Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, and Wisconsin. See Table 1 on page 4 for the eligible counties

All of the other rules discussed on pages 2 through 4 (as modified by these rules) must still be met The Hope credit for students in Midwestern disaster areas is 100% of the first $2,400 of qualified education expenses and 50% of the next $2,400 of qualified education expenses for a maximum credit of $3,600 per student. The lifetime learning credit rate for students in Midwestern disaster areas is 40%

The definition of qualified education expenses is expanded for students in Midwestern disaster 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

1. Books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.
2. For a special needs student, expenses that are necessary for that person's enrollment or attendance at an eligible educational institution.
3. For a student who is at least a half-time student, the reasonable costs of room and board, but only to the extent that the costs are not more than the greater of the following two amounts
   • 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 purposes) for a particular academic period and living arrangement of the student.
   • The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution

You will need to contact the eligible educational institution for qualified room and board costs

Specific Instructions

Part I

Hope Credit

You may be able to take a credit of up to $1,800 ($3,600 if a student in a Midwestern disaster area) for qualified education expenses (defined earlier) paid for each student who qualifies for the Hope credit. The Hope credit equals 100% of the first $1,200 ($2,400 if a student in a Midwestern disaster area) and 50% of the next $1,200 ($2,400 if a student in a Midwestern disaster area) of qualified expenses paid for each eligible student. You can take the Hope credit for a student if all of the following apply

• As of the beginning of 2008, the student had not completed the first 2 years of postsecondary education (generally, the freshman and sophomore years of college), as determined by the eligible educational institution. For this purpose, do not include academic credit awarded solely because of the student's performance on proficiency examinations.
• The student was enrolled in 2008 in a program that leads to a degree, certificate, or other recognized educational credential.
• The student was taking at least one-half the normal full-time workload for his or her course of study for at least one academic period beginning in 2008.
• The Hope credit was not claimed for that student's expenses in more than one prior tax year.
• The student has not been convicted of a felony for possessing or distributing a controlled substance

TIP: If a student does not meet all of the above conditions, you may be able to take the lifetime learning credit for part or all of that student's qualified education expenses instead

Line 1

Complete columns (a) through (f) on line 1 for each student who qualifies for and for whom you elect to take the Hope credit

Note. If you have more than three students who qualify for the Hope credit, enter "See attached" next to line 1 and attach a statement with the required information for each additional student. Include the amounts from line 1, column (f), for all students in the total you enter on line 2

Column (c). For each student, enter the amount of qualified education expenses remaining after reduction by certain tax-free amounts and refunds, as explained earlier. The expenses must have been paid for the student in 2008 for academic periods beginning after 2007 but before April 1, 2009, as explained earlier under Prepaid Expenses. If the student's expenses are more than $2,400 ($4,800 if a student in a Midwestern disaster area), enter $2,400 ($4,800 if a student in a Midwestern disaster area). You may use the worksheet that follows to figure the correct amount to enter in column (c)

Qualified Education Expenses Worksheet for Column (c)

(Do a separate worksheet for each student)

Part II

Lifetime Learning Credit

The lifetime learning credit equals 20% of qualified expenses paid, up to a maximum of $10,000 of qualified expenses per return. Therefore, the maximum lifetime learning credit you can claim on your return for the year is $2,000, regardless of the number of students for whom you are claiming the credit

For students in Midwestern disaster areas, this is modified to 40% of qualified expenses paid, with a maximum lifetime learning credit allowed on your return of $4,000. If you are claiming a lifetime learning credit for both students in Midwestern disaster areas and other students, the qualified education expenses taken into account in Part II for other students cannot exceed $10,000 reduced by the qualified education expenses of students in the Midwestern disaster areas

CAUTION: You cannot take the lifetime learning credit for any student for whom you are taking the Hope credit in the same tax year

Table1

Line 3

Complete columns (a) through (c) for each student for whom you are taking the lifetime learning credit

Note. If you are taking the lifetime learning credit for more than three students, enter "See attached" next to line 3 and attach a statement with the required information for each additional student. Include the amounts from line 3, column (c), for all students in the total you enter on line 4

Column (c). For each student, enter the amount of qualified education expenses remaining after reduction by certain tax-free amounts and refunds, as explained earlier. The expenses must have been paid for the student in 2008 for academic periods beginning after 2007 but before April 1, 2009, as explained earlier under Prepaid Expenses. You may use the worksheet on page 3 to figure the correct amount to enter in column (c)

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