Hope credit increased. For 2006, the maximum amount of the Hope credit has been increased to $1,650 ($3,300 for a Gulf Opportunity (GO) Zone student).
Gulf Opportunity Zone students. For tax years beginning in 2006, the education credits continue to be expanded for students attending an eligible educational institution in the Gulf Opportunity (GO) Zone. See Special Rules for Gulf Opportunity Zone Students on page 3 and the instructions for Parts I and II.
Use Form 8863 to figure and claim your education credits. The education credits are:
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.
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 2006 for academic periods beginning in 2006 and the first 3 months of 2007.
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. Also, 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.
Caution: At the time these instructions went to print, Congress was considering legislation that would extend the deduction for tuition and fees that expired at the end of 2005. In some cases, taking the tuition and fees deduction may be more beneficial than taking an education credit, but you cannot take both an education credit and the tuition and fees deduction for the same student in the same year. To find out if this legislation was enacted, and for more details, go to www.irs.gov, click on More Forms and Publications, and then on What's Hot in forms and publications, or see Pub. 553.
See Pub. 970, Tax Benefits for Education, for more information about these credits.
Generally, qualified education expenses are amounts paid in 2006 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.
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 2006 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.
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 figure 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 2005, and your child began college in January 2006. You filed your 2005 tax return on February 2, 2006, and claimed a lifetime learning credit of $1,600. After you filed your return, your child dropped two courses and you received a refund of $1,400. You must refigure your 2005 lifetime learning credit using $6,600 of qualified expenses instead of $8,000. The refigured credit is $1,320. You must include the difference of $280 on your 2006 Form 1040, line 44, or Form 1040A, line 28.
Qualified education expenses paid in 2006 for an academic period that begins in the first 3 months of 2007 can be used in figuring your 2006 education credits. For example, if you pay $2,000 in December 2006 for qualified tuition for the 2007 winter quarter that begins in January 2007, you can use that $2,000 in figuring your 2006 education credits (if you meet all the other requirements).
Caution: You cannot use any amount paid in 2005 or 2007 to figure your 2006 education credits.
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.
The following rules apply only to students attending an eligible educational institution in the Gulf Opportunity (GO) Zone, which includes the following areas in three states.
Alabama. The counties of Baldwin, Choctaw, Clarke, Greene, Hale, Marengo, Mobile, Pickens, Sumter, Tuscaloosa, and Washington.
Louisiana. The parishes of Acadia, Ascension, Assumption, Calcasieu, Cameron, East Baton Rouge, East Feliciana, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Orleans, Plaquemines, Pointe Coupee, St. Bernard, St. Charles, St. Helena, St. James, St. John the Baptist, St. Martin, St. Mary, St. Tammany, Tangipahoa, Terrebonne, Vermilion, Washington, West Baton Rouge, and West Feliciana.
Mississippi. The counties of Adams, Amite, Attala, Choctaw, Claiborne, Clarke, Copiah, Covington, Forrest, Franklin, George, Greene, Hancock, Harrison, Hinds, Holmes, Humphreys, Jackson, Jasper, Jefferson, Jefferson Davis, Jones, Kemper, Lamar, Lauderdale, Lawrence, Leake, Lincoln, Lowndes, Madison, Marion, Neshoba, Newton, Noxubee, Oktibbeha, Pearl River, Perry, Pike, Rankin, Scott, Simpson, Smith, Stone, Walthall, Warren, Wayne, Wilkinson, Winston, and Yazoo.
All of the other rules discussed on page 2 (as modified by these rules) must still be met. The Hope credit for a GO Zone student is 100% of the first $2,200 of qualified education expenses and 50% of the next $2,200 of qualified education expenses for a maximum credit of $3,300 per student. The lifetime learning credit rate for a GO Zone student is 40%.
The definition of qualified education expenses is expanded for GO Zone students. In addition to tuition and fees required for enrollment or attendance at an eligible educational institution, qualified education expenses for a GO Zone student include the following.
You will need to contact the eligible educational institution for qualified room and board costs.
You may be able to take a credit of up to $1,650 ($3,300 if a GO Zone student) for qualified education expenses (defined earlier) paid for each student who qualifies for the Hope credit. The Hope credit equals 100% of the first $1,100 ($2,200 if a GO Zone student) and 50% of the next $1,100 ($2,200 if a GO Zone student) of qualified expenses paid for each eligible student. You can take the Hope credit for a student if all of the following apply.
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.
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.
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 2006 for academic periods beginning after 2005 but before April 1, 2007, as explained earlier under Prepaid Expenses. If the student's expenses are more than $2,200 ($4,400 if a GO Zone student), enter $2,200 ($4,400 if a GO Zone student). You may use the worksheet on the next page to figure the correct amount to enter in column (c).
Qualified Education Expenses Worksheet for Column (c) (Do a separate worksheet for each student)
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1. Total qualified education expenses ______
2. Less adjustments:
a. Tax-free educational assistance ______
b. Refunds of qualified education
expenses ______
c. Other adjustments (see Pub. 970) ______
3. Total adjustments (add lines 2a-2c) ______
4. Qualified education expenses (subtract
line 3 from line 1). Enter here and on Form
8863, Part I or II, column (c) ______
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The maximum lifetime learning credit is $4,000 for GO Zone students and $2,000 for all other students, regardless of the number of students. If you are claiming a lifetime learning credit for both GO Zone students 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 the GO Zone students.
Caution: You cannot take the lifetime learning credit for any student for whom you are taking the Hope credit.
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.
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 2006 for academic periods beginning after 2005 but before April 1, 2007, as explained under Prepaid Expenses on page 2. You may use the worksheet on this page to figure the correct amount to enter in column (c).
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