[Federal Register Volume 67, Number 248 (Thursday, December 26, 2002)]
[Rules and Regulations]
[Pages 78687-78698]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-32453]
[[Page 78687]]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9034]
RIN 1545-AW65
Education Tax Credit
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations relating to the Hope
Scholarship Credit and the Lifetime Learning Credit under section 25A
of the Internal Revenue Code. The final regulations reflect changes
made to the law by the Taxpayer Relief Act of 1997. These regulations
provide guidance to individuals who may claim the Hope Scholarship
Credit or the Lifetime Learning Credit for the payment of certain
postsecondary educational expenses.
DATES: Effective Date: These regulations are effective December 26,
2002.
Applicability Dates: For dates of applicability, see Sec. 1.25A-
3(f) and Sec. 1.25A-4(d).
FOR FURTHER INFORMATION CONTACT: Marilyn E. Brookens, (202) 622-4920
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507)
under control number 1545-1630. Responses to this collection of
information are mandatory.
The collection of information is in Sec. 1.25A-1(d) and (f).
Taxpayers must elect to claim an education credit by attaching form
8863, ``Education Credits (Hope and Lifetime Learning Credits),'' to a
Federal income tax return for the taxable year in which a credit is
claimed. This collection of information is required in order for a
taxpayer to elect to claim an education credit. This information will
be used to carry out the internal revenue laws. The likely respondents
are individuals.
The reporting burden contained in Sec. 1.25A-1(d) and (f) is
reflected in the burden of form 8863, ``Education Credits (Hope and
Lifetime Learning Credits),'' and form 1040, ``U.S. Individual Income
Tax Return.''
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) regarding the Hope Scholarship Credit and the Lifetime
Learning Credit (education tax credit) under section 25A of the
Internal Revenue Code. The Taxpayer Relief Act of 1997 (Public Law 105-
34 (111 Stat. 788) (TRA '97)) added section 25A to provide the
education tax credit. In general, the education tax credit allows
taxpayers to claim a nonrefundable credit against their Federal income
tax for the payment of certain postsecondary educational expenses. The
Economic Growth and Tax Relief Reconciliation Act of 2001 (Public Law
107-16 (115 Stat. 38)) added section 222 of the Internal Revenue Code
to provide an above-the-line deduction for certain postsecondary
education expenses paid in taxable years beginning after December 31,
2001, and before January 1, 2006. Section 222 is an alternative to
section 25A, and taxpayers cannot claim a section 222 deduction and a
section 25A education tax credit in the same year with respect to the
same student.
On November 17, 1997, the IRS published Notice 97-60 (1997-2 C.B.
310) to provide general guidance on the higher education tax incentives
enacted by TRA '97, including the education tax credit. A notice of
proposed rulemaking (REG-106388-98) was published in the Federal
Register (64 FR 794) on January 6, 1999. One request for a public
hearing was received. However, the request was withdrawn, and no public
hearing was held. The IRS received written and electronic comments
responding to the notice of proposed rulemaking. After consideration of
all the comments, the proposed regulations are adopted as amended by
this Treasury decision. The revisions are discussed below.
Explanation of Provisions and Summary of Comments
1. Reporting Requirements Under Section 6050S for Eligible Educational
Institutions
Many commentators requested clarification of the information
reporting requirements under section 6050S for eligible educational
institutions (institutions) that receive payments of qualified tuition
and related expenses (qualified expenses). These comments are outside
the scope of section 25A, which relates solely to the education tax
credit allowable to taxpayers for payments of qualified expenses.
However, these comments were considered by the IRS and the Treasury
Department in drafting the proposed regulations under section 6050S
that were published in the Federal Register (67 FR 20923) on April 29,
2002.
2. Calculation of Education Tax Credit and General Eligibility
Requirements
Several commentators recommended changes to the rules for
calculating the amount of any allowable education tax credit. One
commentator recommended that the calculation of the Hope Scholarship
Credit be simplified so that the credit is allowable for the first
$1,500 of qualified expenses, rather than 100 percent of the first
$1,000 of qualified expenses, and 50 percent of the next $1,000 of
qualified expenses as provided in section 25A(b)(1). This commentator
also recommended that the calculation of the Lifetime Learning Credit
be simplified so that the credit is allowable for the first $1,000 of
qualified expenses, rather than 20 percent of the first $5,000 of
qualified expenses as provided in section 25A(c)(1). Another
commentator recommended that, for purposes of the income limitations in
section 25A(d), income realized on the conversion of a traditional
Individual Retirement Account (IRA) to a Roth IRA should be excluded
from the definition of modified adjusted gross income. The rules in the
proposed regulations regarding calculation of the amount of the
education tax credit and the definition of modified adjusted gross
income derive from the statutory provisions of section 25A. Therefore,
the final regulations do not adopt these recommendations.
Commentators requested clarification of the rules for claiming the
education tax credit in the case of a dependent. Consistent with the
legislative history to section 25A, Sec. 1.25A-1(g) of the proposed
regulations provides that if a student is a claimed dependent of a
taxpayer, only that taxpayer may claim the education tax credit for the
student's qualified expenses; however, if the taxpayer is eligible to,
but does not claim the student as a dependent, only the student may
claim the education tax credit for the student's qualified expenses.
The final regulations retain this rule.
[[Page 78688]]
Commentators asked how the student's personal exemption deduction
amount under section 151 is calculated if a parent does not claim the
student as a dependent on the parent's income tax return in order that
the student may claim the education tax credit on the student's income
tax return. Section 151(d)(2) provides a special rule for calculating
the exemption deduction amount in the case of an individual (for
example, a student) for whom a dependency exemption deduction is
allowable to another taxpayer (for example, a parent). Under this rule,
a student's personal exemption deduction amount is zero on the
student's income tax return if a parent is eligible to claim the
student as a dependent even if the parent does not in fact claim a
dependency exemption deduction for the student. The result is the same
if the amount of the dependency exemption deduction allowable to the
parent is reduced or eliminated under the phase-out rule in section
151(d)(3).
Consistent with section 25A(g)(7), the proposed regulations provide
that a nonresident alien individual is not eligible to claim an
education tax credit, unless the individual is treated as a resident
alien of the United States by reason of an election under section
6013(g) or (h). One commentator suggested that Examples 7 and 8 in
Sec. 1.25A-3(d)(2) of the proposed regulations should be revised to
avoid any confusion about the eligibility of a nonresident alien
student to claim an education tax credit. The final regulations modify
these examples to avoid any implication that a nonresident alien
student may claim an education tax credit, in the absence of an
election under section 6013(g) or (h).
Another commentator requested clarification as to whether a
nonresident alien individual who elects to be treated as a resident
alien may claim an education tax credit. A limited number of income tax
treaties allow certain individuals to elect to be treated as residents
of the United States. Because such an election is intended to apply for
all tax purposes, an individual for whom a valid election under a
treaty is in effect is treated as a resident for purposes of section
25A.
3. Definitions
Several commentators requested clarification of the definition of
academic period. The proposed regulations provide that academic period
means a quarter, semester, trimester, or other period of study (such as
a summer school session) as reasonably determined by the eligible
educational institution. As stated in the preamble of the proposed
regulations, this definition is intended to include institutions that
use traditional academic terms and institutions that do not use
academic terms, but for example use clock hours or credit hours. The
IRS and the Treasury Department invited comments on the proposed
definition. One commentator suggested that the final regulations
provide that, in the case of institutions that use clock hours or
credit hours, but do not use traditional academic terms, the term
academic period may include a payment period as defined by the
Department of Education in 34 CFR 668.4. The final regulations adopt
this recommendation.
Several commentators requested clarification of the definition of
qualified tuition and related expenses. The proposed regulations define
qualified tuition and related expenses to mean tuition and fees
required for the enrollment or attendance of a student for courses of
instruction at an eligible educational institution. The proposed
regulations provide that, in general, the test for determining whether
a fee is a qualified expense is whether the fee is required to be paid
to the institution as a condition of the student's enrollment or
attendance at the institution. However, the proposed regulations also
provide that qualified expenses do not include the costs of room and
board, insurance, medical expenses, transportation, and similar
personal, living, or family expenses, regardless of whether the payment
of such fees is required for the student's enrollment or attendance.
The final regulations retain these rules.
One commentator requested clarification as to whether an education
tax credit is allowable for amounts paid in one year for an independent
study course which the student has up to two years to complete. The
proposed regulations provide that qualified expenses paid in one
taxable year may qualify for an education tax credit in the year of the
payment if the expenses relate to education furnished during an
academic period beginning in the year of payment or within the first
three months of the next taxable year. The final regulations retain
this rule. Therefore, an education tax credit is allowable for
qualified expenses paid in one taxable year for independent study
during an academic period that begins in the taxable year of payment or
within the first three months of the next taxable year.
One commentator requested clarification as to when amounts paid for
books are qualified expenses. The proposed regulations provide that, in
general, an education tax credit is not available for expenses incurred
to purchase books. The final regulations continue to provide that
qualified expenses include fees for books, supplies, and equipment used
in a course of study only if the fees must be paid to the institution
for the enrollment or attendance of the student at the institution. In
this situation, the amount paid for books is a required fee.
Other commentators requested clarification as to whether a required
student health service fee and a required transportation fee are
qualified expenses. Consistent with the legislative history to section
25A, the final regulations continue to provide that qualified expenses
do not include fees for room and board, insurance, medical expenses,
transportation, and similar personal, living, or family expenses,
regardless of whether the fee must be paid to the institution as a
condition of the student's enrollment or attendance. Therefore, a
required student health fee and a required transportation fee are not
qualified expenses. The final regulations clarify that, as stated in
the preamble to the proposed regulations, medical expenses include
student health fees.
Several commentators requested clarification of how a required
general fee (referred to as a bundled fee) should be treated in
calculating the amount of qualified expenses. These commentators
explained that often institutions will charge a bundled fee that
includes charges for both qualified expenses and personal expenses.
These commentators note that, unlike a comprehensive fee, a bundled fee
normally does not include tuition charges.
Section 1.25A-2(d)(4) of the proposed regulations describes the
treatment of a comprehensive fee, which typically includes charges for
tuition, fees, and personal expenses. The proposed regulations provide
that the portion of the comprehensive fee that is allocable to personal
expenses is not a qualified expense, and require institutions to make a
reasonable allocation between qualified expenses and personal expenses.
One commentator recommended that the final regulations provide a
similar allocation rule for bundled fees. Another commentator
recommended that institutions should not be required to allocate a
bundled fee that includes an insubstantial amount of personal expenses.
Because personal expenses do not qualify for the education tax credit,
the final regulations clarify that the allocation rule in Sec. 1.25A-
2(d)(4) applies to any required fee that combines charges for both
qualified expenses and personal expenses (such as comprehensive fees
and bundled fees).
[[Page 78689]]
One commentator noted that, under the definition of a hobby course
in Sec. 1.25A-2(d)(5) of the proposed regulations, one student may be
enrolled in a course to receive academic credit toward a degree,
another student may be enrolled in the same course on a noncredit basis
to acquire or improve job skills, while a third student may be enrolled
in the same course as a hobby. Under the proposed regulations, the
first and second students may be eligible to claim an education tax
credit, but the third student is not. Consistent with sections
25A(c)(2) and 25A(f)(1)(B), the final regulations continue to provide
that expenses paid for courses that involve sports, games, or hobbies,
or any noncredit course, are not qualified expenses, unless the course
is part of the individual's degree program, or, in the case of the
Lifetime Learning Credit, the student takes the course to acquire or
improve job skills.
4. Hope Scholarship Credit
Several commentators requested clarification of the definition of
an eligible student for purposes of the Hope Scholarship Credit. One
commentator recommended that the year of study requirement in the
regulations should be eliminated and that the credit should be allowed
for any two years of undergraduate study. The year of study requirement
derives from the statutory requirements in section 25A. Therefore, the
final regulations do not adopt this recommendation.
Another commentator requested clarification as to whether a student
who completes a one-year postsecondary certificate program and in a
later year completes another one-year postsecondary certificate program
(or enrolls in a postsecondary degree program) may claim a Hope
Scholarship Credit for both years. The final regulations include a new
example in Sec. 1.25A-3(d)(2) that illustrates that the Hope
Scholarship Credit is allowable for the first two years of
postsecondary education, which may include two one-year certificate
programs.
Commentators requested clarification of Example 3 in Sec. 1.25A-
3(d)(2). The commentators asked if an otherwise eligible student who
has not completed the first two years of undergraduate study as of the
beginning of the taxable year may include qualified expenses paid
during the entire taxable year in calculating the Hope Scholarship
Credit, even if the student completes the first two years of
undergraduate study during the year. The example has been revised to
clarify that, if a student has not completed the first two years of
undergraduate study as of the beginning of the taxable year, the
qualified expenses paid during the entire taxable year may be taken
into account in calculating the Hope Scholarship Credit. However, in no
event may a Hope Scholarship Credit be claimed for more than two
taxable years with respect to the same student.
5. Special Rules Relating to Characterization and Timing of Payments
Several commentators requested clarification of the rules for
payments of qualified expenses by a third party. One commentator asked
how the third party payment rule in Sec. 1.25A-5 of the proposed
regulations applies in the case of a taxpayer who, although not
divorced, is not treated as married within the meaning of section 7703.
The proposed regulations provide that if a third party (someone other
than the taxpayer, the taxpayer's spouse, or a claimed dependent) pays
qualified expenses on behalf of a student directly to an institution,
the student is treated as receiving the payment from the third party
and, in turn, paying the qualified expenses to the institution. The
final regulations clarify that, for purposes of Sec. 1.25A-5(b), a
third party includes the spouse of a taxpayer who is not treated as
married under section 7703. Thus, for example, if the taxpayer is a
custodial parent who is not treated as married under section 7703, then
(assuming that the taxpayer claims the student as a dependent) the
taxpayer may claim an education tax credit for qualified expenses paid
by the noncustodial parent on behalf of the student.
One commentator requested clarification as to whether an education
tax credit is allowable for the amount of any tuition reduction
provided by an eligible educational institution to its employees, or
their spouses or dependent children. The final regulations provide in
Sec. 1.25A-5(b)(2) that an education tax credit is allowable for the
amount of any reduction in tuition only if the amount of the tuition
reduction is included in the employee's gross income.
Several commentators requested clarification of the rules in Sec.
1.25A-5(c) of the proposed regulations for reducing the amount of
qualified expenses paid during the taxable year by the amount of
certain tax-free educational assistance (including any qualified
scholarship that is excludable from gross income under section 117)
received during the taxable year. The proposed regulations provide a
rule for allocating scholarships between qualified expenses and
expenses that do not qualify for an education tax credit under section
25A (nonqualified expenses). The proposed regulations provide that a
scholarship will be treated as allocated to qualified expenses, and
thus as a qualified scholarship that reduces qualified expenses, unless
the student includes the scholarship in income or the terms of the
scholarship require that it be applied to nonqualified expenses.
Several commentators asked whether a student may choose to include
in income a restricted scholarship that, by its terms, must be used to
pay qualified expenses and claim an education tax credit for qualified
expenses covered by the scholarship. The test for purposes of section
25A is whether the scholarship is excludable from gross income under
section 117, and not whether the student elects to include the
scholarship in income. The legislative history to section 25A states
that qualified expenses do not include expenses covered by ``education
assistance that is not required to be included in the gross income of
either the student or the taxpayer claiming the credit.'' See H.R.
Conf. Rep. No. 220, 105th Cong., 1st Sess., at 343 (1997). Section 117
provides, in general, that gross income shall not include a scholarship
that, consistent with the terms of the scholarship, is used to pay
certain qualified expenses. A restricted scholarship that must be used
to pay qualified expenses is a qualified scholarship excludable under
section 117. Therefore, for purposes of section 25A, a restricted
scholarship that must be used to pay qualified expenses reduces the
amount of qualified expenses that may be taken into account in
calculating the education tax credit.
An unrestricted scholarship that may be used to pay any of the
student's costs of attendance (such as room and board and any other
incidental expenses) is excludable from gross income only if used to
pay qualified expenses. To the extent that an unrestricted scholarship,
or a portion thereof, is used to pay nonqualified expenses and such use
is consistent with the terms of the scholarship, the scholarship is not
a qualified scholarship excludable under section 117. In this
situation, the scholarship is included in gross income and will not
reduce the amount of qualified expenses that may be taken into account
in calculating the education tax credit. The final regulations clarify
that, for purposes of section 25A, a scholarship or fellowship grant is
treated as a qualified scholarship excludable under section 117
(thereby reducing the amount of qualified expenses) except to the
extent: (1) The scholarship may be applied, by its terms, to expenses
other than
[[Page 78690]]
qualified expenses (such as room and board) and the student reports the
scholarship as income; or (2) the scholarship must be applied, by its
terms, to expenses other than qualified expenses (such as room and
board) and the student reports the scholarship as income.
One commentator recommended that the final regulations provide that
loans are not excludable educational assistance within the meaning of
Sec. 1.25A-5(c), and do not reduce the amount of qualified expenses.
Section 1.25A-5(e)(3) of the proposed regulations specifically provides
that amounts paid with loan proceeds may qualify for the education tax
credit. In addition, an example in Sec. 1.25A-5(c)(4) of the proposed
regulations provides that a loan is not tax-free educational assistance
within the meaning of Sec. 1.25A-5(c). The final regulations retain
these specific provisions on loans.
The proposed regulations provide that expenses paid with loan
proceeds disbursed directly to an institution are, in general, treated
as paid on the date of the disbursement of the proceeds. Several
commentators recommended that, in accordance with the Department of
Education regulations in 34 CFR 668.164(a), the date of disbursement
should be the date the institution credits the student's account with
the loan proceeds and not the date the lender disburses the loan
proceeds to the institution. In general, 34 CFR 668.164 regulates the
disbursement of Federal student loans under title IV of the Higher
Education Act of 1965 (including the Federal Perkins Loan, Federal
Family Education Loan, and William D. Ford Direct Loan Program). These
rules require an institution to verify that a student is enrolled and
is otherwise eligible to receive the loan proceeds before crediting the
student's account or releasing the funds to the student. Consistent
with these Department of Education rules, the final regulations clarify
that the qualified expenses paid with loan proceeds disbursed directly
to an institution are treated as paid at the time the loan proceeds are
actually credited to the student's account. In the case of title IV
loan programs, Department of Education rules require the institution to
notify the borrower of the date and the amount of the disbursement at
the time the institution credits the student's account. See 34 CFR
668.165(a)(2). However, the final regulations provide that if the
taxpayer does not know the date the institution credits the student's
account, the taxpayer must treat the expenses as paid on the last date
for payment prescribed by the institution.
Several commentators requested clarification as to when a taxpayer
may claim an education tax credit for qualified expenses paid through a
third party installment payment plan. One commentator explained that
institutions and taxpayers may contract with a third party installment
payment company to provide an installment payment plan for the
institution's students. The commentator explained that, in general, the
company agrees to collect tuition payments over a period of time
(usually 10 months) and remit the payments to the institution on a
predetermined schedule. The commentator asked whether a taxpayer is
treated as paying the qualified expenses when the taxpayer pays the
third party installment payment company, or when the third party
disburses the funds to the institution. The final regulations clarify
that when the expenses are treated as paid for purposes of section 25A
depends on whether, under the terms of the installment payment
agreement, the third party is acting as an agent of the taxpayer or as
an agent of the institution.
One commentator requested clarification as to whether an education
tax credit is allowable for any amounts paid for qualified expenses
that are retained by the institution, under the institution's refund
policy, when the student withdraws. Section 1.25A-5(f)(1) of the
proposed regulations provides that the amount of qualified expenses is
calculated by adding all the qualified expenses paid for the year, and
subtracting any refund received from the institution during the same
year. The final regulations retain this rule. Therefore, amounts
required to be paid for enrollment or attendance are qualified expenses
to the extent that such amounts are not refunded when the student
withdraws. The final regulations add a new paragraph Sec. 1.25A-
5(f)(4) to clarify that, with respect to qualified expenses paid with
the proceeds of a loan, any refund of loan proceeds by the institution
back to the lender on behalf of the borrower is treated as a refund of
qualified expenses.
The proposed regulations provide that if a taxpayer receives a
refund of qualified expenses paid in a prior taxable year before the
taxpayer files a Federal income tax return for the prior year, the
amount of qualified expenses for the prior taxable year is reduced by
the amount of the refund. One commentator suggested that the taxpayer
should have the option of claiming the credit for the full amount of
qualified expenses paid in the prior taxable year and then recapturing
the credit on the return filed for the taxable year in which the refund
was received. The rule in the proposed regulations is intended to
simplify the calculation of the education tax credit by avoiding the
need to recompute the allowable education tax credit in a later year
and report any resulting increase in tax. Therefore, the final
regulations do not adopt the recommendation.
The final regulations clarify that, in the case of a payment of
qualified expenses in one taxable year and a refund of qualified
expenses in a subsequent taxable year, the recapture amount for the
refund year is the difference in tax liability for the prior taxable
year (taking into account any redetermination of such tax liability by
audit or amended return) that results when the tax liability for the
prior year is calculated using the taxpayer's redetermined credit.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations, and because the regulations do not
impose a collection of information on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to
section 7805(f) of the Internal Revenue Code, the proposed regulations
preceding these regulations were submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small business.
Drafting Information
The principal author of the regulations is Donna Welch, Office of
Associate Chief Counsel (Procedure & Administration), Administrative
Provisions & Judicial Practice Division. However, other personnel from
the IRS and the Treasury Department participated in the development of
the regulations.
List of Subjects
26 CFR Part 1
Income tax, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping.
[[Page 78691]]
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.25A-1 also issued under section 26 U.S.C. 25A(i).
Section 1.25A-2 also issued under section 26 U.S.C. 25A(i).
Section 1.25A-3 also issued under section 26 U.S.C. 25A(i).
Section 1.25A-4 also issued under section 26 U.S.C. 25A(i).
Section 1.25A-5 also issued under section 26 U.S.C. 25A(i). * *
*
Par. 2. Sections 1.25A-0 through 1.25A-5 are added to read as
follows:
Sec. 1.25A-0 Table of contents.
This section lists captions contained in Sec. Sec. 1.25A-1, 1.25A-
2, 1.25A-3, 1.25A-4, and 1.25A-5.
Sec. 1.25A-1 Calculation of Education Tax Credit and General
Eligibility Requirements
(a) Amount of education tax credit.
(b) Coordination of Hope Scholarship Credit and Lifetime Learning
Credit.
(1) In general.
(2) Hope Scholarship Credit.
(3) Lifetime Learning Credit.
(4) Examples.
(c) Limitation based on modified adjusted gross income.
(1) In general.
(2) Modified adjusted gross income defined.
(3) Inflation adjustment.
(d) Election.
(e) Identification requirement.
(f) Claiming the credit in the case of a dependent.
(1) In general.
(2) Examples.
(g) Married taxpayers.
(h) Nonresident alien taxpayers and dependents.
Sec. 1.25A-2 Definitions
(a) Claimed dependent.
(b) Eligible educational institution.
(1) In general.
(2) Rules on Federal financial aid programs.
(c) Academic period.
(d) Qualified tuition and related expenses.
(1) In general.
(2) Required fees.
(i) In general.
(ii) Books, supplies, and equipment.
(iii) Nonacademic fees.
(3) Personal expenses.
(4) Treatment of a comprehensive or bundled fee.
(5) Hobby courses.
(6) Examples.
Sec. 1.25A-3 Hope Scholarship Credit
(a) Amount of the credit.
(1) In general.
(2) Maximum credit.
(b) Per student credit.
(1) In general.
(2) Example.
(c) Credit allowed for only two taxable years.
(d) Eligible student.
(1) Eligible student defined.
(i) Degree requirement.
(ii) Work load requirement.
(iii) Year of study requirement.
(iv) No felony drug conviction.
(2) Examples.
(e) Academic period for prepayments.
(1) In general.
(2) Example.
(f) Effective date.
Sec. 1.25A-4 Lifetime Learning Credit
(a) Amount of the credit.
(1) Taxable years beginning before January 1, 2003.
(2) Taxable years beginning after December 31, 2002.
(3) Coordination with the Hope Scholarship Credit.
(4) Examples.
(b) Credit allowed for unlimited number of taxable years.
(c) Both degree and nondegree courses are eligible for the credit.
(1) In general.
(2) Examples.
(d) Effective date.
Sec. 1.25A-5 Special Rules Relating to Characterization and Timing
of Payments
(a) Educational expenses paid by claimed dependent.
(b) Educational expenses paid by a third party.
(1) In general.
(2) Special rule for tuition reduction included in gross income of
employee.
(3) Examples.
(c) Adjustment to qualified tuition and related expenses for certain
excludable educational assistance.
(1) In general.
(2) No adjustment for excludable educational assistance attributable
to expenses paid in a prior year.
(3) Scholarships and fellowship grants.
(4) Examples.
(d) No double benefit.
(e) Timing rules.
(1) In general.
(2) Prepayment rule.
(i) In general.
(ii) Example.
(3) Expenses paid with loan proceeds.
(4) Expenses paid through third party installment payment plans.
(i) In general.
(ii) Example.
(f) Refund of qualified tuition and related expenses.
(1) Payment and refund of qualified tuition and related expenses in
the same taxable year.
(2) Payment of qualified tuition and related expenses in one taxable
year and refund in subsequent taxable year before return filed for
prior taxable year.
(3) Payment of qualified tuition and related expenses in one taxable
year and refund in subsequent taxable year.
(i) In general.
(ii) Recapture amount.
(4) Refund of loan proceeds treated as refund of qualified tuition
and related expenses.
(5) Excludable educational assistance received in a subsequent
taxable year treated as a refund.
(6) Examples.
Sec. 1.25A-1 Calculation of Education Tax Credit and General
Eligibility Requirements
(a) Amount of education tax credit. An individual taxpayer is
allowed a nonrefundable education tax credit against income tax imposed
by chapter 1 of the Internal Revenue Code for the taxable year. The
amount of the education tax credit is the total of the Hope Scholarship
Credit (as described in Sec. 1.25A-3) plus the Lifetime Learning
Credit (as described in Sec. 1.25A-4). For limitations on the credits
allowed by subpart A of part IV of subchapter A of chapter 1 of the
Internal Revenue Code, see section 26.
(b) Coordination of Hope Scholarship Credit and Lifetime Learning
Credit--(1) In general. In the same taxable year, a taxpayer may claim
a Hope Scholarship Credit for each eligible student's qualified tuition
and related expenses (as defined in Sec. 1.25A-2(d)) and a Lifetime
Learning Credit for one or more other students' qualified tuition and
related expenses. However, a taxpayer may not claim both a Hope
Scholarship Credit and a Lifetime Learning Credit with respect to the
same student in the same taxable year.
(2) Hope Scholarship Credit. Subject to certain limitations, a Hope
Scholarship Credit may be claimed for the qualified tuition and related
expenses paid during a taxable year with respect to each eligible
student (as defined in Sec. 1.25A-3(d)). Qualified tuition and related
expenses paid during a taxable year with respect to one student may not
be taken into account in computing the amount of the Hope Scholarship
Credit with respect to any other student. In addition, qualified
tuition and related expenses paid during a taxable year with respect to
any student for whom a Hope Scholarship Credit is claimed may not be
taken into account in computing the amount of the Lifetime Learning
Credit.
(3) Lifetime Learning Credit. Subject to certain limitations, a
Lifetime Learning Credit may be claimed for the aggregate amount of
qualified tuition and related expenses paid during a taxable year with
respect to students for whom no Hope Scholarship Credit is claimed.
(4) Examples. The following examples illustrate the rules of this
paragraph (b):
Example 1. In 1999, Taxpayer A pays qualified tuition and
related expenses for his
[[Page 78692]]
dependent, B, to attend College Y during 1999. Assuming all other
relevant requirements are met, Taxpayer A may claim either a Hope
Scholarship Credit or a Lifetime Learning Credit with respect to
dependent B, but not both. See Sec. 1.25A-3(a) and Sec. 1.25A-
4(a).
Example 2. In 1999, Taxpayer C pays $2,000 in qualified tuition
and related expenses for her dependent, D, to attend College Z
during 1999. In 1999, Taxpayer C also pays $500 in qualified tuition
and related expenses to attend a computer course during 1999 to
improve Taxpayer C's job skills. Assuming all other relevant
requirements are met, Taxpayer C may claim a Hope Scholarship Credit
for the $2,000 of qualified tuition and related expenses
attributable to dependent D (see Sec. 1.25A-3(a)) and a Lifetime
Learning Credit (see Sec. 1.25A-4(a)) for the $500 of qualified
tuition and related expenses incurred to improve her job skills.
Example 3. The facts are the same as in Example 2, except that
Taxpayer C pays $3,000 in qualified tuition and related expenses for
her dependent, D, to attend College Z during 1999. Although a Hope
Scholarship Credit is available only with respect to the first
$2,000 of qualified tuition and related expenses paid with respect
to D (see Sec. 1.25A-3(a)), Taxpayer C may not add the $1,000 of
excess expenses to her $500 of qualified tuition and related
expenses in computing the amount of the Lifetime Learning Credit.
(c) Limitation based on modified adjusted gross income--(1) In
general. The education tax credit that a taxpayer may otherwise claim
is phased out ratably for taxpayers with modified adjusted gross income
between $40,000 and $50,000 ($80,000 and $100,000 for married
individuals who file a joint return). Thus, taxpayers with modified
adjusted gross income above $50,000 (or $100,000 for joint filers) may
not claim an education tax credit.
(2) Modified adjusted gross income defined. The term modified
adjusted gross income means the adjusted gross income (as defined in
section 62) of the taxpayer for the taxable year increased by any
amount excluded from gross income under section 911, 931, or 933
(relating to income earned abroad or from certain U.S. possessions or
Puerto Rico).
(3) Inflation adjustment. For taxable years beginning after 2001,
the amounts in paragraph (c)(1) of this section will be increased for
inflation occurring after 2000 in accordance with section 1(f)(3). If
any amount adjusted under this paragraph (c)(3) is not a multiple of
$1,000, the amount will be rounded to the next lowest multiple of
$1,000.
(d) Election. No education tax credit is allowed unless a taxpayer
elects to claim the credit on the taxpayer's Federal income tax return
for the taxable year in which the credit is claimed. The election is
made by attaching form 8863, ``Education Credits (Hope and Lifetime
Learning Credits),'' to the Federal income tax return.
(e) Identification requirement. No education tax credit is allowed
unless a taxpayer includes on the Federal income tax return claiming
the credit the name and the taxpayer identification number of the
student for whom the credit is claimed. For rules relating to
assessment for an omission of a correct taxpayer identification number,
see section 6213(b) and (g)(2)(J).
(f) Claiming the credit in the case of a dependent--(1) In general.
If a student is a claimed dependent of another taxpayer, only that
taxpayer may claim the education tax credit for the student's qualified
tuition and related expenses. However, if another taxpayer is eligible
to, but does not, claim the student as a dependent, only the student
may claim the education tax credit for the student's qualified tuition
and related expenses.
(2) Examples. The following examples illustrate the rules of this
paragraph (f):
Example 1. In 1999, Taxpayer A pays qualified tuition and
related expenses for his dependent, B, to attend University Y during
1999. Taxpayer A claims B as a dependent on his Federal income tax
return. Therefore, assuming all other relevant requirements are met,
Taxpayer A is allowed an education tax credit on his Federal income
tax return, and B is not allowed an education tax credit on B's
Federal income tax return. The result would be the same if B paid
the qualified tuition and related expenses. See Sec. 1.25A-5(a).
Example 2. In 1999, Taxpayer C has one dependent, D. In 1999, D
pays qualified tuition and related expenses to attend University Z
during 1999. Although Taxpayer C is eligible to claim D as a
dependent on her Federal income tax return, she does not do so.
Therefore, assuming all other relevant requirements are met, D is
allowed an education tax credit on D's Federal income tax return,
and Taxpayer C is not allowed an education tax credit on her Federal
income tax return, with respect to D's education expenses. The
result would be the same if C paid the qualified tuition and related
expenses on behalf of D. See Sec. 1.25A-5(b).
(g) Married taxpayers. If a taxpayer is married (within the
meaning of section 7703), no education tax credit is allowed to the
taxpayer unless the taxpayer and the taxpayer's spouse file a joint
Federal income tax return for the taxable year.
(h) Nonresident alien taxpayers and dependents. If a taxpayer or
the taxpayer's spouse is a nonresident alien for any portion of the
taxable year, no education tax credit is allowed unless the nonresident
alien is treated as a resident alien by reason of an election under
section 6013(g) or (h). In addition, if a student is a nonresident
alien, a taxpayer may not claim an education tax credit with respect to
the qualified tuition and related expenses of the student unless the
student is a claimed dependent (as defined in Sec. 1.25A-2(a)).
Sec. 1.25A-2 Definitions.
(a) Claimed dependent. A claimed dependent means a dependent (as
defined in section 152) for whom a deduction under section 151 is
allowed on a taxpayer's Federal income tax return for the taxable year.
Among other requirements under section 152, a nonresident alien student
must be a resident of a country contiguous to the United States in
order to be treated as a dependent.
(b) Eligible educational institution--(1) In general. In general,
an eligible educational institution means a college, university,
vocational school, or other postsecondary educational institution that
is--
(i) Described in section 481 of the Higher Education Act of 1965
(20 U.S.C. 1088) as in effect on August 5, 1997 (generally all
accredited public, nonprofit, and proprietary postsecondary
institutions); and
(ii) Participating in a Federal financial aid program under title
IV of the Higher Education Act of 1965 or is certified by the
Department of Education as eligible to participate in such a program
but chooses not to participate.
(2) Rules on Federal financial aid programs. For rules governing an
educational institution's eligibility to participate in Federal
financial aid programs, see 20 U.S.C. 1070; 20 U.S.C. 1094; and 34 CFR
600 and 668.
(c) Academic period. Academic period means a quarter, semester,
trimester, or other period of study as reasonably determined by an
eligible educational institution. In the case of an eligible
educational institution that uses credit hours or clock hours, and does
not have academic terms, each payment period (as defined in 34 CFR
668.4, revised as of July 1, 2002) may be treated as an academic
period.
(d) Qualified tuition and related expenses--(1) In general.
Qualified tuition and related expenses means tuition and fees required
for the enrollment or attendance of a student for courses of
instruction at an eligible educational institution.
(2) Required fees--(i) In general. Except as provided in paragraph
(d)(3) of this section, the test for determining whether any fee is a
qualified tuition and related expense is whether the fee is required to
be paid to the eligible educational institution as a condition of the
student's enrollment or attendance at the institution.
[[Page 78693]]
(ii) Books, supplies, and equipment. Qualified tuition and related
expenses include fees for books, supplies, and equipment used in a
course of study only if the fees must be paid to the eligible
educational institution for the enrollment or attendance of the student
at the institution.
(iii) Nonacademic fees. Except as provided in paragraph (d)(3) of
this section, qualified tuition and related expenses include fees
charged by an eligible educational institution that are not used
directly for, or allocated to, an academic course of instruction only
if the fee must be paid to the eligible educational institution for the
enrollment or attendance of the student at the institution.
(3) Personal expenses. Qualified tuition and related expenses do
not include the costs of room and board, insurance, medical expenses
(including student health fees), transportation, and similar personal,
living, or family expenses, regardless of whether the fee must be paid
to the eligible educational institution for the enrollment or
attendance of the student at the institution.
(4) Treatment of a comprehensive or bundled fee. If a student is
required to pay a fee (such as a comprehensive fee or a bundled fee) to
an eligible educational institution that combines charges for qualified
tuition and related expenses with charges for personal expenses
described in paragraph (d)(3) of this section, the portion of the fee
that is allocable to personal expenses is not included in qualified
tuition and related expenses. The determination of what portion of the
fee relates to qualified tuition and related expenses and what portion
relates to personal expenses must be made by the institution using a
reasonable method of allocation.
(5) Hobby courses. Qualified tuition and related expenses do not
include expenses that relate to any course of instruction or other
education that involves sports, games, or hobbies, or any noncredit
course, unless the course or other education is part of the student's
degree program, or in the case of the Lifetime Learning Credit, the
student takes the course to acquire or improve job skills.
(6) Examples. The following examples illustrate the rules of this
paragraph (d). In each example, assume that the institution is an
eligible educational institution and that all other relevant
requirements to claim an education tax credit are met. The examples are
as follows:
Example 1. University V offers a degree program in dentistry. In
addition to tuition, all students enrolled in the program are
required to pay a fee to University V for the rental of dental
equipment. Because the equipment rental fee must be paid to
University V for enrollment and attendance, the tuition and the
equipment rental fee are qualified tuition and related expenses.
Example 2. First-year students at College W are required to
obtain books and other reading materials used in its mandatory
first-year curriculum. The books and other reading materials are not
required to be purchased from College W and may be borrowed from
other students or purchased from off-campus bookstores, as well as
from College W's bookstore. College W bills students for any books
and materials purchased from College W's bookstore. The fee that
College W charges for the first-year books and materials purchased
at its bookstore is not a qualified tuition and related expense
because the books and materials are not required to be purchased
from College W for enrollment or attendance at the institution.
Example 3. All students who attend College X are required to pay
a separate student activity fee in addition to their tuition. The
student activity fee 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 enrollment or attendance at College X. Therefore, the
fee is a qualified tuition and related expense.
Example 4. The facts are the same as in Example 3, except that
College X offers an optional athletic fee that students may pay to
receive discounted tickets to sports events. The athletic fee is not
required for enrollment or attendance at College X. Therefore, the
fee is not a qualified tuition and related expense.
Example 5. College Y requires all students to live on campus. It
charges a single comprehensive fee to cover tuition, required fees,
and room and board. Based on College Y's reasonable allocation,
sixty percent of the comprehensive fee is allocable to tuition and
other required fees not allocable to personal expenses, and the
remaining forty percent of the comprehensive fee is allocable to
charges for room and board and other personal expenses. Therefore,
only sixty percent of College Y's comprehensive fee is a qualified
tuition and related expense.
Example 6. As a degree student at College Z, Student A is
required to take a certain number of courses outside of her chosen
major in Economics. To fulfill this requirement, Student A enrolls
in a square dancing class offered by the Physical Education
Department. Because Student A receives credit toward her degree
program for the square dancing class, the tuition for the square
dancing class is included in qualified tuition and related expenses.
Sec. 1.25A-3 Hope Scholarship Credit.
(a) Amount of the credit--(1) In general. Subject to the phaseout
of the education tax credit described in Sec. 1.25A-1(c), the Hope
Scholarship Credit amount is the total of--
(i) 100 percent of the first $1,000 of qualified tuition and
related expenses paid during the taxable year for education furnished
to an eligible student (as defined in paragraph (d) of this section)
who is the taxpayer, the taxpayer's spouse, or any claimed dependent
during any academic period beginning in the taxable year (or treated as
beginning in the taxable year, see Sec. 1.25A-5(e)(2)); plus
(ii) 50 percent of the next $1,000 of such expenses paid with
respect to that student.
(2) Maximum credit. For taxable years beginning before 2002, the
maximum Hope Scholarship Credit allowed for each eligible student is
$1,500. For taxable years beginning after 2001, the amounts used in
paragraph (a)(1) of this section to determine the maximum credit will
be increased for inflation occurring after 2000 in accordance with
section 1(f)(3). If any amount adjusted under this paragraph (a)(2) is
not a multiple of $100, the amount will be rounded to the next lowest
multiple of $100.
(b) Per student credit--(1) In general. A Hope Scholarship Credit
may be claimed for the qualified tuition and related expenses of each
eligible student (as defined in paragraph (d) of this section).
(2) Example. The following example illustrates the rule of this
paragraph (b). In the example, assume that all the requirements to
claim an education tax credit are met. The example is as follows:
Example. In 1999, Taxpayer A has two dependents, B and C, both
of whom are eligible students. Taxpayer A pays $1,600 in qualified
tuition and related expenses for dependent B to attend a community
college. Taxpayer A pays $5,000 in qualified tuition and related
expenses for dependent C to attend University X. Taxpayer A may
claim a Hope Scholarship Credit of $1,300 ($1,000 + (.50 x $600))
for dependent B, and the maximum $1,500 Hope Scholarship Credit for
dependent C, for a total Hope Scholarship Credit of $2,800.
(c) Credit allowed for only two taxable years. For each eligible
student, the Hope Scholarship Credit may be claimed for no more than
two taxable years.
(d) Eligible student--(1) Eligible student defined. For purposes of
the Hope Scholarship Credit, the term eligible student means a student
who satisfies all of the following requirements--
(i) Degree requirement. For at least one academic period that
begins during the taxable year, the student enrolls at an eligible
educational institution in a program leading toward a postsecondary
[[Page 78694]]
degree, certificate, or other recognized postsecondary educational
credential;
(ii) Work load requirement. For at least one academic period that
begins during the taxable year, the student enrolls for at least one-
half of the normal full-time work load for the course of study the
student is pursuing. The standard for what is half of the normal full-
time work load is determined by each eligible educational institution.
However, the standard for half-time may not be lower than the
applicable standard for half-time established by the Department of
Education under the Higher Education Act of 1965 and set forth in 34
CFR 674.2(b) (revised as of July 1, 2002) for a half-time undergraduate
student;
(iii) Year of study requirement. As of the beginning of the taxable
year, the student has not completed the first two years of
postsecondary education at an eligible educational institution. Whether
a student has completed the first two years of postsecondary education
at an eligible educational institution as of the beginning of a taxable
year is determined based on whether the institution in which the
student is enrolled in a degree program (as described in paragraph
(d)(1)(i) of this section) awards the student two years of academic
credit at that institution for postsecondary course work completed by
the student prior to the beginning of the taxable year. Any academic
credit awarded by the eligible educational institution solely on the
basis of the student's performance on proficiency examinations is
disregarded in determining whether the student has completed two years
of postsecondary education; and
(iv) No felony drug conviction. The student has not been convicted
of a Federal or State felony offense for possession or distribution of
a controlled substance as of the end of the taxable year for which the
credit is claimed.
(2) Examples. The following examples illustrate the rules of this
paragraph (d). In each example, assume that the student has not been
convicted of a felony drug offense, that the institution is an eligible
educational institution unless otherwise stated, that the qualified
tuition and related expenses are paid during the same taxable year that
the academic period begins, and that a Hope Scholarship Credit has not
previously been claimed for the student (see paragraph (c) of this
section). The examples are as follows:
Example 1. Student A graduates from high school in June 1998 and
is enrolled in an undergraduate degree program at College U for the
1998 Fall semester on a full-time basis. For the 1999 Spring
semester, Student A again is enrolled at College U on a full-time
basis. For the 1999 Fall semester, Student A is enrolled in less
than half the normal full-time course work for her degree program.
Because Student A is enrolled in an undergraduate degree program on
at least a half-time basis for at least one academic period that
begins during 1998 and at least one academic period that begins
during 1999, Student A is an eligible student for taxable years 1998
and 1999 (including the 1999 Fall semester when Student A enrolls at
College U on less than a half-time basis).
Example 2. Prior to 1998, Student B attended college for several
years on a full-time basis. Student B transfers to College V for the
1998 Spring semester. College V awards Student B credit for some
(but not all) of the courses he previously completed, and College V
classifies Student B as a first-semester sophomore. During both the
Spring and Fall semesters of 1998, Student B is enrolled in at least
one-half the normal full-time work load for his degree program at
College V. Because College V does not classify Student B as having
completed the first two years of postsecondary education as of the
beginning of 1998, Student B is an eligible student for taxable year
1998.
Example 3. The facts are the same as in Example 2. After taking
classes on a half-time basis for the 1998 Spring and Fall semesters,
Student B is enrolled at College V for the 1999 Spring semester on a
full-time basis. College V classifies Student B as a second-semester
sophomore for the 1999 Spring semester and as a first-semester
junior for the 1999 Fall semester. Because College V does not
classify Student B as having completed the first two years of
postsecondary education as of the beginning of 1999, Student B is an
eligible student for taxable year 1999. Therefore, the qualified
expenses and required fees paid for the 1999 Spring semester and the
1999 Fall semester are taken into account in calculating any Hope
Scholarship Credit.
Example 4. Prior to 1998, Student was not enrolled at another
eligible educational institution. At the time that Student C enrolls
in a degree program at College W for the 1998 Fall semester, Student
C takes examinations to demonstrate her proficiency in several
subjects. On the basis of Student C's performance on these
examinations, College W classifies Student C as a second-semester
sophomore as of the beginning of the 1998 Fall semester. Student C
is enrolled at College W during the 1998 Fall semester and during
the 1999 Spring and Fall semesters on a full-time basis and is
classified as a first-semester junior as of the beginning of the
1999 Spring semester. Because Student C was not enrolled in a
college or other eligible educational institution prior to 1998 (but
rather was awarded three semesters of academic credit solely because
of proficiency examinations), Student C is not treated as having
completed the first two years of postsecondary education at an
eligible educational institution as of the beginning of 1998 or as
of the beginning of 1999. Therefore, Student C is an eligible
student for both taxable years 1998 and 1999.
Example 5. During the 1998 Fall semester, Student D is a high
school student who takes classes on a half-time basis at College X.
Student D is not enrolled as part of a degree program at College X
because College X does not admit students to a degree program unless
the student has a high school diploma or equivalent. Because Student
D is not enrolled in a degree program at College X during 1998,
Student D is not an eligible student for taxable year 1998.
Example 6. The facts are the same as in Example 5. In addition,
during the 1999 Spring semester, Student D again attends College X
but not as part of a degree program. Student D graduates from high
school in June 1999. For the 1999 Fall semester, Student D enrolls
in College X as part of a degree program, and College X awards
Student D credit for her prior course work at College X. During the
1999 Fall semester, Student D is enrolled in more than one-half the
normal full-time work load of courses for her degree program at
College X. Because Student D is enrolled in a degree program at
College X for the 1999 Fall term on at least a half-time basis,
Student D is an eligible student for all of taxable year 1999.
Therefore, the qualified tuition and required fees paid for classes
taken at College X during both the 1999 Spring semester (during
which Student D was not enrolled in a degree program) and the 1999
Fall semester are taken into account in computing any Hope
Scholarship Credit.
Example 7. Student E completed two years of undergraduate study
at College S. College S is not an eligible educational institution
for purposes of the education tax credit. At the end of 1998,
Student E enrolls in an undergraduate degree program at College Z,
an eligible educational institution, for the 1999 Spring semester on
a full-time basis. College Z awards Student E two years of academic
credit for his previous course work at College S and classifies
Student E as a first-semester junior for the 1999 Spring semester.
Student E is treated as having completed the first two years of
postsecondary education at an eligible educational institution as of
the beginning of 1999. Therefore, Student E is not an eligible
student for taxable year 1999.
Example 8. Student F received a degree in 1998 from College R.
College R is not an eligible educational institution for purposes of
the education tax credit. During 1999, Student F is enrolled in a
graduate-degree program at College Y, an eligible educational
institution, for the 1999 Fall semester on a full-time basis. By
admitting Student F to its graduate degree program, College Y treats
Student F as having completed the first two years of postsecondary
education as of the beginning of 1999. Therefore, Student F is not
an eligible student for taxable year 1999.
Example 9. Student G graduates from high school in June 2001. In
January 2002, Student G is enrolled in a one-year postsecondary
certificate program on a full-time basis to obtain a certificate as
a travel agent. Student G completes the program in December 2002 and
is awarded a certificate. In January 2003, Student G enrolls in a
one-year postsecondary certificate program on a full-time basis to
obtain a certificate as a computer programer. Student G meets the
degree requirement, the work load requirement, and the year of study
[[Page 78695]]
requirement for the taxable years 2002 and 2003. Therefore, Student
G is an eligible student for both taxable years 2002 and 2003.
(e) Academic period for prepayments--(1) In general. For purposes
of determining whether a student meets the requirements in paragraph
(d) of this section for a taxable year, if qualified tuition and
related expenses are paid during one taxable year for an academic
period that begins during January, February or March of the next
taxable year (for taxpayers on a fiscal taxable year, use the first
three months of the next taxable year), the academic period is treated
as beginning during the taxable year in which the payment is made.
(2) Example. The following example illustrates the rule of this
paragraph (e). In the example, assume that all the requirements to
claim a Hope Scholarship Credit are met. The example is as follows:
Example. Student G graduates from high school in June 1998.
After graduation, Student G works full-time for several months to
earn money for college. Student G is enrolled on a full-time basis
in an undergraduate degree program at University W, an eligible
educational institution, for the 1999 Spring semester, which begins
in January 1999. Student G pays tuition to University W for the 1999
Spring semester in December 1998. Because the tuition paid by
Student G in 1998 relates to an academic period that begins during
the first three months of 1999, Student G's eligibility to claim a
Hope Scholarship Credit in 1998 is determined as if the 1999 Spring
semester began in 1998. Thus, assuming Student G has not been
convicted of a felony drug offense as of December 31, 1998, Student
G is an eligible student for 1998.
(f) Effective date. The Hope Scholarship Credit is applicable for
qualified tuition and related expenses paid after December 31, 1997,
for education furnished in academic periods beginning after December
31, 1997.
Sec. 1.25A-4 Lifetime Learning Credit.
(a) Amount of the credit--(1) Taxable years beginning before
January 1, 2003. Subject to the phaseout of the education tax credit
described in Sec. 1.25A-1(c), for taxable years beginning before 2003,
the Lifetime Learning Credit amount is 20 percent of up to $5,000 of
qualified tuition and related expenses paid during the taxable year for
education furnished to the taxpayer, the taxpayer's spouse, and any
claimed dependent during any academic period beginning in the taxable
year (or treated as beginning in the taxable year, see Sec. 1.25A-
5(e)(2)).
(2) Taxable years beginning after December 31, 2002. Subject to the
phaseout of the education tax credit described in Sec. 1.25A-1(c), for
taxable years beginning after 2002, the Lifetime Learning Credit amount
is 20 percent of up to $10,000 of qualified tuition and related
expenses paid during the taxable year for education furnished to the
taxpayer, the taxpayer's spouse, and any claimed dependent during any
academic period beginning in the taxable year (or treated as beginning
in the taxable year, see Sec. 1.25A-5(e)(2)).
(3) Coordination with the Hope Scholarship Credit. Expenses paid
with respect to a student for whom the Hope Scholarship Credit is
claimed are not eligible for the Lifetime Learning Credit.
(4) Examples. The following examples illustrate the rules of this
paragraph (a). In each example, assume that all the requirements to
claim a Lifetime Learning Credit or a Hope Scholarship Credit, as
applicable, are met. The examples are as follows:
Example 1. In 1999, Taxpayer A pays qualified tuition and
related expenses of $3,000 for dependent B to attend an eligible
educational institution, and Taxpayer A pays qualified tuition and
related expenses of $4,000 for dependent C to attend an eligible
educational institution. Taxpayer A does not claim a Hope
Scholarship Credit with respect to either B or C. Although Taxpayer
A paid $7,000 of qualified tuition and related expenses during the
taxable year, Taxpayer A may claim the Lifetime Learning Credit with
respect to only $5,000 of such expenses. Therefore, the maximum
Lifetime Learning Credit Taxpayer A may claim for 1999 is $1,000
(.20 x $5,000).
Example 2. In 1999, Taxpayer D pays $6,000 of qualified tuition
and related expenses for dependent E, and $2,000 of qualified
tuition and related expenses for dependent F, to attend eligible
educational institutions. Dependent F has already completed the
first two years of postsecondary education. For 1999, Taxpayer D
claims the maximum $1,500 Hope Scholarship Credit with respect to
dependent E. In computing the amount of the Lifetime Learning
Credit, Taxpayer D may not include any of the $6,000 of qualified
tuition and related expenses paid on behalf of dependent E but may
include the $2,000 of qualified tuition and related expenses of
dependent F.
(b) Credit allowed for unlimited number of taxable years. There is
no limit to the number of taxable years that a taxpayer may claim a
Lifetime Learning Credit with respect to any student.
(c) Both degree and nondegree courses are eligible for the credit--
(1) In general. For purposes of the Lifetime Learning Credit, amounts
paid for a course at an eligible educational institution are qualified
tuition and related expenses if the course is either part of a
postsecondary degree program or is not part of a postsecondary degree
program but is taken by the student to acquire or improve job skills.
(2) Examples. The following examples illustrate the rule of this
paragraph (c). In each example, assume that all the requirements to
claim a Lifetime Learning Credit are met. The examples are as follows:
Example 1. Taxpayer A, a professional photographer, enrolls in
an advanced photography course at a local community college.
Although the course is not part of a degree program, Taxpayer A
enrolls in the course to improve her job skills. The course fee paid
by Taxpayer A is a qualified tuition and related expense for
purposes of the Lifetime Learning Credit.
Example 2. Taxpayer B, a stockbroker, plans to travel abroad on
a ``photo-safari'' for his next vacation. In preparation for the
trip, Taxpayer B enrolls in a noncredit photography class at a local
community college. Because Taxpayer B is not taking the photography
course as part of a degree program or to acquire or improve his job
skills, amounts paid by Taxpayer B for the course are not qualified
tuition and related expenses for purposes of the Lifetime Learning
Credit.
(d) Effective date. The Lifetime Learning Credit is applicable for
qualified tuition and related expenses paid after June 30, 1998, for
education furnished in academic periods beginning after June 30, 1998.
Sec. 1.25A-5 Special rules relating to characterization and timing of
payments.
(a) Educational expenses paid by claimed dependent. For any taxable
year for which the student is a claimed dependent of another taxpayer,
qualified tuition and related expenses paid by the student are treated
as paid by the taxpayer to whom the deduction under section 151 is
allowed.
(b) Educational expenses paid by a third party--(1) In general.
Solely for purposes of section 25A, if a third party (someone other
than the taxpayer, the taxpayer's spouse if the taxpayer is treated as
married within the meaning of section 7703, or a claimed dependent)
makes a payment directly to an eligible educational institution to pay
for a student's qualified tuition and related expenses, the student is
treated as receiving the payment from the third party and, in turn,
paying the qualified tuition and related expenses to the institution.
(2) Special rule for tuition reduction included in gross income of
employee. Solely for purposes of section 25A, if an eligible
educational institution provides a reduction in tuition to an employee
of the institution (or to the spouse or dependent child of an employee,
as described in section 132(h)(2)) and the amount of the tuition
reduction is
[[Page 78696]]
included in the employee's gross income, the employee is treated as
receiving payment of an amount equal to the tuition reduction and, in
turn, paying such amount to the institution.
(3) Examples. The following examples illustrate the rules of this
paragraph (b). In each example, assume that all the requirements to
claim an education tax credit are met. The examples are as follows:
Example 1. Grandparent D makes a direct payment to an eligible
educational institution for Student E's qualified tuition and
related expenses. Student E is not a claimed dependent in 1999. For
purposes of claiming an education tax credit, Student E is treated
as receiving the money from her grandparent and, in turn, paying her
qualified tuition and related expenses.
Example 2. Under a court-approved divorce decree, Parent A is
required to pay Student C's college tuition. Parent A makes a direct
payment to an eligible educational institution for Student C's 1999
tuition. Under paragraph (b)(1) of this section, Student C is
treated as receiving the money from Parent A and, in turn, paying
the qualified tuition and related expenses. Under the divorce
decree, Parent B has custody of Student C for 1999. Parent B
properly claims Student C as a dependent on Parent B's 1999 Federal
income tax return. Under paragraph (a) of this section, expenses
paid by Student C are treated as paid by Parent B. Thus, Parent B
may claim an education tax credit for the qualified tuition and
related expenses paid directly to the institution by Parent A.
Example 3. University A, an eligible educational institution,
offers reduced tuition charges to its employees and their dependent
children. F is an employee of University A. F's dependent child, G,
enrolls in a graduate-level course at University A. Section 117(d)
does not apply, because it is limited to tuition reductions provided
for education below the graduate level. Therefore, the amount of the
tuition reduction received by G is treated as additional
compensation from University A to F and is included in F's gross
income. For purposes of claiming a Lifetime Learning Credit, F is
treated as receiving payment of an amount equal to the tuition
reduction from University A and, in turn, paying such amount to
University A on behalf of F's child, G.
(c) Adjustment to qualified tuition and related expenses for
certain excludable educational assistance--(1) In general. In
determining the amount of an education tax credit, qualified tuition
and related expenses for any academic period must be reduced by the
amount of any tax-free educational assistance allocable to such period.
For this purpose, tax-free educational assistance means--
(i) A qualified scholarship that is excludable from income under
section 117;
(ii) A veterans' or member of the armed forces' educational
assistance allowance under chapter 30, 31, 32, 34 or 35 of title 38,
United States Code, or under chapter 1606 of title 10, United States
Code;
(iii) Employer-provided educational assistance that is excludable
from income under section 127; or
(iv) Any other educational assistance that is excludable from gross
income (other than as a gift, bequest, devise, or inheritance within
the meaning of section 102(a)).
(2) No adjustment for excludable educational assistance
attributable to expenses paid in a prior year. A reduction is not
required under paragraph (c)(1) of this section if the amount of
excludable educational assistance received during the taxable year is
treated as a refund of qualified tuition and related expenses paid in a
prior taxable year. See paragraph (f)(5) of this section.
(3) Scholarships and fellowship grants. For purposes of paragraph
(c)(1)(i) of this section, a scholarship or fellowship grant is treated
as a qualified scholarship excludable under section 117 except to the
extent--
(i) The scholarship or fellowship grant (or any portion thereof)
may be applied, by its terms, to expenses other than qualified tuition
and related expenses within the meaning of section 117(b)(2) (such as
room and board) and the student reports the grant (or the appropriate
portion thereof) as income on the student's Federal income tax return
if the student is required to file a return; or
(ii) The scholarship or fellowship grant (or any portion thereof)
must be applied, by its terms, to expenses other than qualified tuition
and related expenses within the meaning of section 117(b)(2) (such as
room and board) and the student reports the grant (or the appropriate
portion thereof) as income on the student's Federal income tax return
if the student is required to file a return.
(4) Examples. The following examples illustrate the rules of this
paragraph (c). In each example, assume that all the requirements to
claim an education tax credit are met. The examples are as follows:
Example 1. University X charges Student A, who lives on X's
campus, $3,000 for tuition and $5,000 for room and board. University
X awards Student A a $2,000 scholarship. The terms of the
scholarship permit it to be used to pay any of a student's costs of
attendance at University X, including tuition, room and board, and
other incidental expenses. University X applies the $2,000
scholarship against Student A's $8,000 total bill, and Student A
pays the $6,000 balance of her bill from University X with a
combination of savings and amounts she earns from a summer job.
University X does not require A to pay any additional fees beyond
the $3,000 in tuition in order to enroll in or attend classes.
Student A does not report any portion of the scholarship as income
on her Federal income tax return. Since Student A does not report
the scholarship as income, the scholarship is treated under
paragraph (c)(3) of this section as a qualified scholarship that is
excludable under section 117. Therefore, for purposes of calculating
an education tax credit, Student A is treated as having paid only
$1,000 ($3,000 tuition-$2,000 scholarship) in qualified tuition and
related expenses to University X.
Example 2. The facts are the same as in Example 1, except that
Student A reports the entire scholarship as income on the student's
Federal income tax return. Since the full amount of the scholarship
may be applied to expenses other than qualified expenses (room and
board) and Student A reports the scholarship as income, the
exception in paragraph (c)(3) of this section applies and the
scholarship is not treated as a qualified scholarship excludable
under section 117. Therefore, for purposes of calculating an
education tax credit, Student A is treated as having paid $3,000 of
qualified tuition and related expenses to University X.
Example 3. The facts are the same as in Example 1, except that
the terms of the scholarship require it to be used to pay tuition.
Under paragraph (c)(3) of this section, the scholarship is treated
as a qualified scholarship excludable under section 117. Therefore,
for purposes of calculating an education tax credit, Student A is
treated as having paid only $1,000 ($3,000 tuition-$2,000
scholarship) in qualified tuition and related expenses to University
X.
Example 4. The facts are the same as in Example 1, except that
the terms of the scholarship require it to be used to pay tuition or
room and board charged by University X, and the scholarship amount
is $6,000. Under the terms of the scholarship, Student A may
allocate the scholarship between tuition and room and board in any
manner. However, because room and board totals $5,000, that is the
maximum amount that can be applied under the terms of the
scholarship to expenses other than qualified expenses and at least
$1,000 of the scholarship must be applied to tuition. Therefore, the
maximum amount of the exception under paragraph (c)(3) of this
section is $5,000 and at least $1,000 is treated as a qualified
scholarship excludable under section 117 ($6,000 scholarship-$5,000
room and board). If Student A reports $5,000 of the scholarship as
income on the student's Federal income tax return, then Student A
will be treated as having paid $2,000 ($3,000 tuition-$1,000
qualified scholarship excludable under section 117) in qualified
tuition and related expenses to University X.
Example 5. The facts are the same as in Example 1, except that
in addition to the scholarship that University X awards to Student
A, University X also provides Student A with an education loan and
pays Student A for working in a work/study job
[[Page 78697]]
in the campus dining hall. The loan is not excludable educational
assistance within the meaning of paragraph (c) of this section. In
addition, wages paid to a student who is performing services for the
payor are neither a qualified scholarship nor otherwise excludable
from gross income. Therefore, Student A is not required to reduce
her qualified tuition and related expenses by the amounts she
receives from the student loan or as wages from her work/study job.
Example 6. In 1999, Student B pays University Y $1,000 in
tuition for the 1999 Spring semester. University Y does not require
Student B to pay any additional fees beyond the $1,000 in tuition in
order to enroll in classes. Student B is an employee of Company Z.
At the end of the academic period and during the same taxable year
that Student B paid tuition to University Y, Student B provides
Company Z with proof that he has satisfactorily completed his
courses at University Y. Pursuant to an educational assistance
program described in section 127(b), Company Z reimburses Student B
for all of the tuition paid to University Y. Because the
reimbursement from Company Z is employer-provided educational
assistance that is excludable from Student B's gross income under
section 127, the reimbursement reduces Student B's qualified tuition
and related expenses. Therefore, for purposes of calculating an
education tax credit, Student B is treated as having paid no
qualified tuition and related expenses to University Y during 1999.
Example 7. The facts are the same as in Example 6 except that
the reimbursement from Company Z is not pursuant to an educational
assistance program described in section 127(b), is not otherwise
excludable from Student B's gross income, and is taxed as additional
compensation to Student B. Because the reimbursement is not
excludable educational assistance within the meaning of paragraph
(c)(1) of this section, Student B is not required to reduce his
qualified tuition and related expenses by the $1,000 reimbursement
he received from his employer. Therefore, for purposes of
calculating an education tax credit, Student B is treated as paying
$1,000 in qualified tuition and related expenses to University Y
during 1999.
(d) No double benefit. Qualified tuition and related expenses do
not include any expense for which a deduction is allowed under section
162, section 222, or any other provision of chapter 1 of the Internal
Revenue Code.
(e) Timing rules--(1) In general. Except as provided in paragraph
(e)(2) of this section, an education tax credit is allowed only for
payments of qualified tuition and related expenses for an academic
period beginning in the same taxable year as the year the payment is
made. Except for certain individuals who do not use the cash receipts
and disbursements method of accounting, qualified tuition and related
expenses are treated as paid in the year in which the expenses are
actually paid. See Sec. 1.461-1(a)(1).
(2) Prepayment rule--(i) In general. If qualified tuition and
related expenses are paid during one taxable year for an academic
period that begins during the first three months of the taxpayer's next
taxable year (i.e., in January, February, or March of the next taxable
year for calendar year taxpayers), an education tax credit is allowed
with respect to the qualified tuition and related expenses only in the
taxable year in which the expenses are paid.
(ii) Example. The following example illustrates the rule of this
paragraph (e)(2). In the example, assume that all the requirements to
claim an education tax credit are met. The example is as follows:
Example. In December 1998, Taxpayer A, a calendar year taxpayer,
pays College Z $1,000 in qualified tuition and related expenses to
attend classes during the 1999 Spring semester, which begins in
January 1999. Taxpayer A may claim an education tax credit only in
1998 for payments made in 1998 for the 1999 Spring semester.
(3) Expenses paid with loan proceeds. An education tax credit may
be claimed for qualified tuition and related expenses paid with the
proceeds of a loan only in the taxable year in which the expenses are
paid, and may not be claimed in the taxable year in which the loan is
repaid. Loan proceeds disbursed directly to an eligible educational
institution will be treated as paid on the date the institution credits
the proceeds to the student's account. For example, in the case of any
loan issued or guaranteed as part of a Federal student loan program
under title IV of the Higher Education Act of 1965, loan proceeds will
be treated as paid on the date of disbursement (as defined in 34 CFR
668.164(a), revised as of July 1, 2002) by the eligible educational
institution. If a taxpayer does not know the date the institution
credits the student's account, the taxpayer must treat the qualified
tuition and related expenses as paid on the last date for payment
prescribed by the institution.
(4) Expenses paid through third party installment payment plans--
(i) In general. A taxpayer, an eligible educational institution, and a
third party installment payment company may enter into an agreement in
which the company agrees to collect installment payments of qualified
tuition and related expenses from the taxpayer and to remit the
installment payments to the institution. If the third party installment
payment company is the taxpayer's agent for purposes of paying
qualified tuition and related expenses to the eligible educational
institution, the taxpayer is treated as paying the qualified expenses
on the date the company pays the institution. However, if the third
party installment payment company is the eligible educational
institution's agent for purposes of collecting payments of qualified
tuition and related expenses from the taxpayer, the taxpayer is treated
as paying the qualified expenses on the date the taxpayer pays the
company.
(ii) Example. The following example illustrates the rule of this
paragraph (e)(4). The example is as follows:
Example. Student A, Company B, and College C enter into a
written agreement in which Student A agrees to pay the tuition
required to attend College C in 10 equal monthly installments to
Company B. Under the written agreement, Student A is not relieved of
her obligation to pay College C until Company B remits the payments
to College C. Under the written agreement, Company B agrees to
disburse the monthly installment payments to College C within 30
days of receipt. Because Company B acts as Student A's agent for
purposes of paying qualified expenses to College C, Student A is
treated as paying qualified expenses on the date Company B disburses
payments to College C.
(f) Refund of qualified tuition and related expenses--(1) Payment
and refund of qualified tuition and related expenses in the same
taxable year. With respect to any student, the amount of qualified
tuition and related expenses for a taxable year is calculated by adding
all qualified tuition and related expenses paid for the taxable year,
and subtracting any refund of such expenses received from the eligible
educational institution during the same taxable year (including refunds
of loan proceeds described in paragraph (f)(4) of this section).
(2) Payment of qualified tuition and related expenses in one
taxable year and refund in subsequent taxable year before return filed
for prior taxable year. If, in a taxable year, a taxpayer or someone
other than the taxpayer receives a refund (including refunds of loan
proceeds described in paragraph (f)(4) of this section) of qualified
tuition and related expenses paid on behalf of a student in a prior
taxable year and the refund is received before the taxpayer files a
Federal income tax return for the prior taxable year, the amount of the
qualified tuition and related expenses for the prior taxable year is
reduced by the amount of the refund.
(3) Payment of qualified tuition and related expenses in one
taxable year and refund in subsequent taxable year--(i) In general. If,
in a taxable year (refund year), a taxpayer or someone other than the
taxpayer receives a refund (including refunds of loan proceeds
described in paragraph (f)(4) of
[[Page 78698]]
this section) of qualified tuition and related expenses paid on behalf
of a student for which the taxpayer claimed an education tax credit in
a prior taxable year, the tax imposed by chapter 1 of the Internal
Revenue Code for the refund year is increased by the recapture amount.
(ii) Recapture amount. The recapture amount is the difference in
tax liability for the prior taxable year (taking into account any
redetermination of such tax liability by audit or amended return) that
results when the tax liability for the prior year is calculated using
the taxpayer's redetermined credit. The redetermined credit is computed
by reducing the amount of the qualified tuition and related expenses
taken into account in determining any credit claimed in the prior
taxable year by the amount of the refund of the qualified tuition and
related expenses (redetermined qualified expenses), and computing the
allowable credit using the redetermined qualified expenses and the
relevant facts and circumstances of the prior taxable year, such as
modified adjusted gross income (redetermined credit).
(4) Refund of loan proceeds treated as refund of qualified tuition
and related expenses. If loan proceeds used to pay qualified tuition
and related expenses (as described in paragraph (e)(3) of this section)
during a taxable year are refunded by an eligible educational
institution to a lender on behalf of the borrower, the refund is
treated as a refund of qualified tuition and related expenses for
purposes of paragraphs (f)(1), (2), and (3) of this section.
(5) Excludable educational assistance received in a subsequent
taxable year treated as a refund. If, in a taxable year, a taxpayer or
someone other than the taxpayer receives any excludable educational
assistance (described in paragraph (c)(1) of this section) for the
qualified tuition and related expenses paid on behalf of a student
during a prior taxable year (or attributable to enrollment at an
eligible educational institution during a prior taxable year), the
educational assistance is treated as a refund of qualified tuition and
related expenses for purposes of paragraphs (f)(2) and (3) of this
section. If the excludable educational assistance is received before
the taxpayer files a Federal income tax return for the prior taxable
year, the amount of the qualified tuition and related expenses for the
prior taxable year is reduced by the amount of the excludable
educational assistance as provided in paragraph (f)(2) of this section.
If the excludable educational assistance is received after the taxpayer
has filed a Federal income tax return for the prior taxable year, any
education tax credit claimed for the prior taxable year is subject to
recapture as provided in paragraph (f)(3) of this section.
(6) Examples. The following examples illustrate the rules of this
paragraph (f). In each example, assume that all the requirements to
claim an education tax credit are met. The examples are as follows:
Example 1. In January 1998, Student A, a full-time freshman at
University X, pays $2,000 for qualified tuition and related expenses
for a 16-hour work load for the 1998 Spring semester. Prior to
beginning classes, Student A withdraws from 6 course hours. On
February 15, 1998, Student A receives a $750 refund from University
X. In September 1998, Student A pays University X $1,000 to enroll
half-time for the 1998 Fall semester. Prior to beginning classes,
Student A withdraws from a 2-hour course, and she receives a $250
refund in October 1998. Student A computes the amount of qualified
tuition and related expenses she may claim for 1998 by:
(i) Adding all qualified expenses paid during the taxable year
($2,000 + 1,000 = $3,000);
(ii) Adding all refunds of qualified tuition and related
expenses received during the taxable year ($750 + $250 = $1,000);
and, then
(iii) Subtracting paragraph (ii) of this Example 1 from
paragraph (i) of this Example 1 ($3,000 -$1,000 = $2,000).
Therefore, Student A's qualified tuition and related expenses for
1998 are $2,000.
Example 2. (i) In December 1998, Student B, a senior at College
Y, pays $2,000 for qualified tuition and related expenses for a 16-
hour work load for the 1999 Spring semester. Prior to beginning
classes, Student B withdraws from a 4-hour course. On January 15,
1999, Student B files her 1998 income tax return and claims a $400
Lifetime Learning Credit for the $2,000 qualified expenses paid in
1998, which reduces her tax liability for 1998 by $400. On February
15, 1999, Student B receives a $500 refund from College Y.
(ii) Student B calculates the increase in tax for 1999 by--
(A) Calculating the redetermined qualified expenses for 1998
($2,000 - $500 = $1,500);
(B) Calculating the redetermined credit for the redetermined
qualified expenses ($1,500 x .20 = $300); and
(C) Calculating the difference in tax liability for 1998
resulting from the redetermined credit. Because Student B's tax
liability for 1998 was reduced by the full amount of the $400
education tax credit claimed on her 1998 income tax return, the
difference in tax liability can be determined by subtracting the
redetermined credit from the credit claimed in 1998 ($400 -$300 =
$100).
(iii) Therefore, Student B must increase the tax on her 1999
Federal income tax return by $100.
Example 3. In September 1998, Student C pays College Z $1,200 in
qualified tuition and related expenses to attend evening classes
during the 1998 Fall semester. Student C is an employee of Company
R. On January 15, 1999, Student C files a Federal income tax return
for 1998 claiming a Lifetime Learning Credit of $240 (.20 x $1,200),
which reduces Student C's tax liability for 1998 by $240. Pursuant
to an educational assistance program described in section 127(b),
Company R reimburses Student C in February 1999 for the $1,200 of
qualified tuition and related expenses paid by Student C in 1998.
The $240 education tax credit claimed by Student C for 1998 is
subject to recapture. Because Student C paid no net qualified
tuition and related expenses for 1998, the redetermined credit for
1998 is zero. Student C must increase the amount of Student C's 1999
tax by the recapture amount, which is $240 (the difference in tax
liability for 1998 resulting from the redetermined credit for 1998
($0)). Because the $1,200 reimbursement relates to expenses for
which the taxpayer claimed an education tax credit in a prior year,
the reimbursement does not reduce the amount of any qualified
tuition and related expenses that Student C paid in 1999.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 3. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 4. In section 602.101, paragraph (b) is revised by adding the
following entry in numerical order to the table:
Sec. 602.101 OMB Control numbers.
* * * * *
(b) * * *
Current OMB
CFR part or section where identified and described control No.
* * * * *
1.25A-1.............................................. 1545-1630
* * * * *
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: December 13, 2002.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 02-32453 Filed 12-24-02; 8:45 am]
BILLING CODE 4830-01-P