Use Form 8863 to figure and claim the education credits, which are based on qualified education expenses paid to an eligible postsecondary educational institution. There are two education credits.
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The American opportunity credit, part of which may be refundable. Complete Parts I, III, and IV.
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The lifetime learning credit, which is nonrefundable. Complete Parts II and IV.
A refundable credit can give a refund for any part of the credit that is more than taxpayer's total tax. A nonrefundable credit can reduce their tax, but any excess is not refunded to them.
Who Can Claim an Education Credit
The taxpayer may be able to claim an education credit if primary or spouse, or a dependent claimed on the 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 tax year for academic periods beginning in the current tax year and in the first 3 months of following year.
Qualified education expenses must be reduced by any expenses paid directly or indirectly using tax-free educational assistance. See on page 2.
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 the taxpayer. Therefore, the taxpayer is treated as having paid expenses that were paid from their dependent student's earnings, gifts, inheritances, savings, etc. For more information and an example, see Who Can Claim a Dependent's Expenses in Pub. 970, chapter 2 or 3.
There are a number of factors, such as the filing status, AGI, and whether the taxpayer is subject to the alternative minimum tax, that will affect the amount of any education credit you are eligible to claim. When you figure the taxes, you may want to compare the different education credits in order to choose the method(s) that gives the taxpayer the lowest tax liability. If they qualify, you may find that a combination of credits and other education benefits gives you the lowest tax. See Pub. 970 for information on other benefits.
Qualified Education Expenses
Generally, qualified education expenses are amounts paid in the tax year 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 or debit card, or with borrowed funds.
Only certain expenses for course-related books, supplies, and equipment qualify.
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American opportunity credit: Qualified education expenses include amounts spent on books, supplies, and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance.
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Lifetime learning credit: Qualified education expenses include only amounts for books, supplies, and equipment required to be paid to the institution as a condition of enrollment or attendance.
Qualified education expenses for either credit do not include amounts paid for the following.
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Personal expenses. This means room and board, insurance, medical expenses (including student health fees), transportation, and other similar personal, living, or family expenses.
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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 institution reporting either payments received in 2014 (box 1) or amounts billed in 2014 (box 2). However, the amount on your Form 1098-T, box 1 or 2, may be different from the amount you paid (or are treated as having paid). In completing Form 8863, use only the amounts you actually paid (plus any amounts you are treated as having paid) in 2014, reduced as necessary, as described in Adjustments to Qualified Education Expenses , later. See chapters 2 and 3 of Pub. 970 for more information on Form 1098-T.
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. 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.
If you or the student takes a deduction for higher education expenses, such as on Schedule A or C (Form 1040), you cannot use those expenses in your qualified education expenses when figuring your education credits.