[Federal Register Volume 64, Number 3 (Wednesday, January 6, 1999)]
[Proposed Rules]
[Pages 794-805]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-177]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-106388-98]
RIN 1545-AW65
Education Tax Credits
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and requests to hold a
videoconference public hearing.
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SUMMARY: This document contains proposed regulations relating to the
Hope Scholarship Credit and the Lifetime Learning Credit in section 25A
of the Internal Revenue Code. These proposed regulations provide
guidance to individuals who may claim the Hope Scholarship Credit or
the Lifetime Learning Credit for certain postsecondary educational
expenses. This document also announces that a public hearing will be
held on the proposed regulations upon request and that persons outside
the Washington, DC, area who wish to testify at the hearing may request
that the IRS videoconference the hearing to their sites.
DATES: Written or electronically generated comments must be received by
April 6, 1999. Requests to videoconference the hearing to other sites
must be received by March 8, 1999.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-106388-98), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-
106388-98), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue., NW., Washington, DC. Alternatively, taxpayers may submit
comments electronically via the internet by selecting the ``Tax Regs''
option on the IRS Home Page, or by submitting comments directly to the
IRS internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html. The IRS will publish the time and date of the public
hearing and the locations of any videoconferencing sites in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Donna
Welch, (202) 622-4910; concerning submissions of comments, the hearing,
and/or to be placed on the building access list to attend the hearing,
contact Michael L. Slaughter, (202) 622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collection of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC
20224. Comments on the collection of information should be received by
March 8, 1999. Comments are specifically requested concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information (see below);
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
The collection of information in this proposed regulation 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 timely filed (including extensions) 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 assigned by the Office of Management and Budget.
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
The Taxpayer Relief Act of 1997 (Public Law 105-34 (111 Stat. 788)
(TRA '97)) added section 25A to the Internal Revenue Code to provide
the Hope Scholarship Credit and the Lifetime Learning Credit (education
credits). In general, the Hope Scholarship Credit and the Lifetime
Learning Credit allow taxpayers to claim a nonrefundable credit against
their federal income taxes for certain postsecondary educational
expenses. On November 17, 1997, the IRS published Notice 97-60 (1997-46
I.R.B. 8) to provide general guidance on the higher education tax
incentives enacted by TRA '97, including the Hope Scholarship Credit
and the Lifetime Learning Credit. This document contains proposed
amendments to the Income Tax Regulations (26 CFR part 1) to provide
detailed guidance on the education credits in section 25A.
TRA '97 also added section 6050S to the Code, which requires
eligible educational institutions to file
[[Page 795]]
information returns to assist taxpayer and the IRS in determining the
education credit that taxpayers may claim under section 25A. The IRS
has published several notices outlining the limited information returns
that are required for 1998 and 1999. On December 22, 1997, the IRS
published Notice 97-73 (1997-51 I.R.B. 16), which describes the
information that must be reported for 1998. On September 8, 1998, the
IRS published Notice 98-46 (1998-36 I.R.B. 21), which extends the
application of Notice 97-73 to information returns required under
section 6050S for 1999. Finally, on December 7, 1998, the IRS published
Notice 98-59 (1998-49 I.R.B. 16), which modified the two prior Notices
by providing that an eligible educational institution is not required
to file information returns under section 6050S for 1998 or 1999 with
respect to either: (1) students who are enrolled during the year only
in courses for which the student receives no academic credit from the
educational institution; or (2) nonresident alien students, unless
requested to do so by the student. The IRS and the Treasury Department
intend to issue separate regulations on the information reporting
required under section 6050S for years after 1999.
Explanation of Provisions
1. Calculation of Education Credit and General Eligibility Requirements
Under the proposed regulations, a taxpayer may claim a
nonrefundable education credit equal to the total of the Hope
Scholarship Credit and the Lifetime Learning Credit allowed for the
taxpayer, the taxpayer's spouse, and any claimed dependents. An
education credit in excess of a taxpayer's tax liability for the
taxable year can not be refunded. As with other personal credits,
section 25A does not allow a carryforward of an unused education credit
or a carryforward of excess qualified expenses.
The proposed regulations provide rules for the coordination of the
Hope Scholarship Credit and the Lifetime Learning Credit. The proposed
regulations provide that, in the same taxable year, a taxpayer may
claim a Hope Scholarship Credit for each eligible student's qualified
tuition and related expenses and a Lifetime Learning Credit for one or
more other students' qualified tuition and related expenses. The
regulations provide that a taxpayer may claim either the Hope
Scholarship Credit or the Lifetime Learning Credit, but not both, for
the qualified tuition and related expenses of the same student in the
same taxable year. A Hope Scholarship Credit may be claimed for the
qualified tuition and related expenses (up to a specified limit
described below) of each eligible student. The Lifetime Learning Credit
may be claimed for the aggregate amount of qualified tuition and
related expenses (up to a specified limit described below) of those
students for whom no Hope Scholarship Credit is claimed.
Consistent with the income limitations in section 25A(d), the
proposed regulations provide that the education credit allowed is
phased out for taxpayers with modified adjusted gross income between
$40,000 and $50,000 ($80,000 and $100,000 for taxpayers filing a joint
return) for the taxable year. For taxable years beginning after 2001,
these amounts will be adjusted for inflation. Based on the definition
in section 25A(d)(3), the regulations define modified adjusted gross
income as 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). The amount of
an otherwise allowable education credit for a taxable year that is
reduced solely by reason of the modified adjusted gross income
limitation can not be carried forward and claimed in a subsequent
taxable year.
Consistent with the requirements in section 25A(e)(1), the proposed
regulations provide that a taxpayer must elect to claim the education
credit. The election must be made by attaching Form 8863, ``Education
Credits (Hope and Lifetime Learning Credits),'' to the taxpayer's
federal income tax return for the taxable year in which the credit is
claimed. Consistent with the identification requirements in section
25A(g)(1), the regulations provide that a taxpayer must include on the
federal income tax return the name and taxpayer identification number
of each student for whom the credit is claimed.
Consistent with the requirements in section 25A(e)(2), the proposed
regulations provide that no education credit is allowed for a taxable
year for the qualified tuition and related expenses of a student if:
(1) During the taxable year, a distribution is made to, or on behalf
of, the student from an education individual retirement account
described in section 530(b); and (2) any portion of the distribution is
excluded from gross income under section 530(d)(2).
The proposed regulations provide guidance on the rules for claiming
an education credit in the case of a dependent. The regulations provide
that, if the student is a claimed dependent of another taxpayer, only
that taxpayer may claim the education credit for the student's
qualified tuition and related expenses. The regulations explain that,
if the taxpayer is eligible to, but does not, claim the student as a
dependent, only the student may claim the education credit for the
student's qualified tuition and related expenses.
2. Definitions
The proposed regulations provide that a claimed dependent is a
dependent (as defined in section 152) for whom a deduction under
section 151 is allowed on the taxpayer's federal income tax return for
the taxable year in which the credit is claimed.
Based on the requirements of section 25A(f)(2), the proposed
regulations provide that an eligible educational institution means a
college, university, vocational school, or other postsecondary
educational institution that: (1) Is described in section 481 of the
Higher Education Act of 1965 (HEA) (20 U.S.C. 1088) as in effect on
August 5, 1997 (generally all accredited public, nonprofit, and
proprietary postsecondary institutions); and (2) participates in a
federal student financial aid program under title IV of the HEA (20
U.S.C. 1070 et seq.) or is certified by the Department of Education as
eligible to participate in such a program but chooses not to
participate.
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. Neither section 25A nor its legislative
history defines the term academic period. Additionally, the Department
of Education does not have a recognized definition of academic period.
The definition in the regulation 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 Treasury invite comments on this definition of academic period
as well as suggestions on alternative definitions.
Based on the definition in section 25A(f)(1), the proposed
regulations define qualified tuition and related expenses as the
tuition and fees required for the enrollment or attendance of a student
for courses of instruction at an eligible educational institution. This
definition is generally consistent with the definition of tuition and
fees contained in section 472(1) of
[[Page 796]]
the HEA (20 U.S.C. 1087ll(1)). See H.R. Conf. Rep. No. 599, 105th
Cong., 2d Sess., at p. 321 (1998). The regulations provide that, in
general, the test for determining whether a fee is treated as a
qualified tuition and related expense is whether the fee is required to
be paid to the eligible educational institution by students as a
condition of the students' enrollment or attendance at the institution.
The regulations specifically provide that 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. Similarly, the regulations provide that, in
general, qualified tuition and related expenses include nonacademic
fees (fees charged by an eligible educational institution that are not
used directly for, or allocated to, an academic 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.
However, based on the legislative history to section 25A, the
proposed regulations provide that qualified tuition and related
expenses do not include the costs of room and board, insurance, medical
expenses (such as student health fees), transportation, and similar
personal, living, or family expenses, regardless of whether the fees
must be paid to the eligible educational institution for the enrollment
or attendance of the student at the institution. See H.R. Conf. Rep.
No. 220, 105th Cong., 1st Sess., at pp. 343, 346 (1997). Further, based
on the limitations in section 25A (f)(1)(B) and (c)(2)(B), the
regulations provide that qualified tuition and related expenses do not
include expenses that relate to any course of instruction or other
education that involves sports, games, hobbies, or any noncredit
course, unless the course is part of the student's degree program or,
in the case of the Lifetime Learning Credit, is taken by the student to
acquire or improve job skills.
3. Hope Scholarship Credit
The Hope Scholarship Credit is a per student credit that may be
claimed for each eligible student. Consistent with the provisions of
section 25A(b)(1), the proposed regulations provide that for taxable
years beginning before 2002 the maximum Hope Scholarship Credit amount
is $1,500 (100 percent of the first $1,000 of the qualified tuition and
related expenses paid during the taxable year for education furnished
to an eligible student during any academic period beginning in the
taxable year or treated as beginning in the taxable year, plus 50
percent of the next $1,000 of such expenses paid with respect to that
student). For taxable years beginning after 2001, the $1,000 amounts
will be adjusted for inflation. Consistent with the provisions of
section 25A(b)(2)(A), the regulations provide that the Hope Scholarship
Credit is allowed for only two taxable years for each eligible student.
Based on the requirements in section 25A(b) (2) and (3), the
proposed regulations define an eligible student for purposes of the
Hope Scholarship Credit as a student who meets all of the following
requirements: (1) For at least one academic period during the taxable
year, the student enrolls at an eligible educational institution in a
program leading toward a postsecondary degree, certificate, or other
recognized postsecondary educational credential (degree requirement);
(2) for at least one academic period during the taxable year, the
student enrolls for at least half of the normal full-time work load for
the course of study the student is pursuing (work load requirement);
(3) 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 (year of study requirement); and (4) the
student has not been convicted of a federal or state felony offense for
the possession or distribution of a controlled substance as of the end
of the taxable for which the credit is claimed (felony drug conviction
restriction).
The proposed regulations explain that the student meets the work
load requirement if the student is enrolled for at least half of the
normal full-time work load, as determined by the eligible educational
institution. The regulations provide that the educational institution's
standards for a half-time work load must equal or exceed the standards
established by the Department of Education under the HEA and set forth
in 34 CFR 674.2(b) for a half-time undergraduate student.
The proposed regulations explain that whether a student has
completed the first two years of postsecondary education as of the
beginning of the taxable year is based on whether the eligible
educational institution the student is enrolled in awards the student
two years of academic credit for postsecondary course work completed by
the student prior to the beginning of the taxable year. However, the
regulations provide that any academic credit awarded by the educational
institution solely on the basis of the student's performance on
proficiency examinations is not taken into account.
The proposed regulations provide that the Hope Scholarship Credit
is effective for expenses paid after December 31, 1997, for education
furnished in academic periods beginning after that date.
4. Lifetime Learning Credit
The Lifetime Learning Credit is a per taxpayer credit, rather than
a per student credit. For taxable years beginning before 2003, the
maximum Lifetime Learning Credit amount is $1,000 (20 percent of up to
$5,000 of the aggregate 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). For taxable years beginning on or after 2003, the maximum credit
amount is $2,000 (20 percent of up to $10,000 of the aggregate
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).
In contrast to the Hope Scholarship Credit, the Lifetime Learning
Credit is allowed for an unlimited number of years for each student and
does not have a degree requirement, year of study requirement, work
load requirement, or a felony drug conviction restriction. See H.R.
Conf. Rep. No. 220, 105th Cong., 1st Sess., at p. 346-347 (1997).
Therefore, a taxpayer may claim a Lifetime Learning Credit for a
student's qualified tuition and related expenses even if the taxpayer
could not claim a Hope Scholarship Credit for those expenses.
Based on the provisions of section 25A(c)(2)(B) and the legislative
history to section 25A, the proposed regulations provide that, for
purposes of claiming a Lifetime Learning Credit, amounts that a
taxpayer is required to pay 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 part of a nondegree
program that is taken by the student to acquire or improve job skills.
The legislative history explains that the Lifetime Learning Credit is
available with respect to any course of instruction at any eligible
educational institution (whether the student is enrolled on a full-
time, half-time, or less than half-time basis) to acquire or improve
job skills of the student. See
[[Page 797]]
H.R. Conf. Rep. No. 220, 105th Cong., 1st Sess., at p. 346-347 (1997).
The proposed regulations provide that the Lifetime Learning Credit
is effective for expenses paid after June 30, 1998, for education
furnished in academic periods beginning after that date.
5. Special Rules Relating to Characterization and Timing of Payments
The proposed regulations provide guidance on qualified tuition and
related expenses paid by a third party. The regulations provide that,
solely for purposes of section 25A, if a third party 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.
Consistent with the provisions of section 25A(g)(3), the proposed
regulations provide that qualified tuition and related expenses paid by
a student are treated as paid by the taxpayer if the student is a
claimed dependent of the taxpayer.
The proposed regulations provide rules for adjustments to qualified
tuition and related expenses for certain excludable educational
assistance. Consistent with the provisions of section 25A(g)(2) and the
legislative history, the regulations provide that the amount of
otherwise allowable qualified tuition and related expenses paid during
a taxable year must be reduced by the following amounts paid to, or on
behalf of, a student during the taxable year: (1) a qualified
scholarship that is excludable from gross income under section 117; (2)
a veterans' or member of the armed forces' educational assistance
allowance under chapter 30, 31, 32, 34, or 35 of title 38, U.S.C., or
chapter 1606 of title 10, U.S.C.; (3) employer-provided educational
assistance that is excludable from gross income under section 127; and
(4) 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)). See H.R. Conf. Rep. No. 220, 105th
Cong., 1st Sess., at p. 343, 347 (1997).
The proposed regulations provide rules for allocating scholarships
and fellowship grants among expenses. The regulations provide that a
scholarship or fellowship grant is treated as a qualified scholarship
excludable from income under section 117 (and thereby reduces the
amount of qualified tuition and related expenses that a taxpayer may
otherwise include in claiming an education credit) unless either: (1)
the student reports the grant as income on the student's federal income
tax return; or (2) the grant 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.
The proposed regulations provide guidance on the timing rules for
claiming an education credit. Consistent with the general rule in
section 25A(b)(1) and (c)(1), the regulations provide that an education
credit generally is allowed only for payments of qualified tuition and
related expenses that cover an academic period beginning in the same
taxable year as the year the payment is made. However, consistent with
the specific prepayment rule in section 25A(g)(4), the regulations
provide that, if qualified tuition and related expenses are paid during
a taxable year to cover an academic period that begins during the first
three months of the taxpayer's next taxable year, an education credit
is allowed only in the taxable year in which the expenses are paid.
Note, however, that because the Hope Scholarship Credit does not apply
to expenses paid before January 1, 1998, and the Lifetime Learning
Credit does not apply to expenses paid before July 1, 1998, the
prepayment rule does not apply for tuition paid in 1997 to cover an
academic period beginning in 1998.
Consistent with the legislative history to section 25A, the
proposed regulations provide that an education credit may be claimed
for the qualified tuition and related expenses paid with the proceeds
of a loan only in the taxable year in which the expenses are paid, and
not in the taxable year in which the loan is repaid. See H.R. Conf.
Rep. No. 220, 105th Cong., 1st Sess., at p. 342, 346 (1997). In order
to provide taxpayers with a date certain for payment, the regulations
provide that loan proceeds disbursed directly to an educational
institution are treated as paid on the date of the disbursement.
However, if the taxpayer does not know the date of the disbursement,
the taxpayer must treat qualified tuition and related expenses as paid
on the last date prescribed for payment by the educational institution.
Consistent with the directive in section 25A(i), the proposed
regulations provide rules for refunds of qualified tuition and related
expenses. The regulations provide that, if a payment and a refund of
qualified tuition and related expenses occur in the same taxable year,
the amount of qualified tuition and related expenses for the taxable
year is calculated by adding all qualified tuition and related expenses
paid for the taxable year, and subtracting any refund of the expenses
received from the eligible educational institution during the same
taxable year.
The proposed regulations provide that, if, in a taxable year, a
taxpayer (or the taxpayer's spouse or a claimed dependent) receives a
refund from an eligible educational institution of qualified tuition
and related expenses paid 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 must be reduced by the amount of
the refund.
Similar to the tax benefit rule, the proposed regulations provide
that, if, in a taxable year, a taxpayer (or the taxpayer's spouse or a
claimed dependent) receives a refund of qualified tuition and related
expenses for which the taxpayer claimed an education credit in a prior
taxable year, the tax for the subsequent taxable year is increased by
the recapture amount. The recapture amount is the difference between
the credit claimed in the prior taxable year and the redetermined
credit. The redetermined credit is computed by reducing the amount of
the qualified tuition and related expenses for which a credit was
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 credit using the redetermined qualified
expenses and the relevant facts and circumstance of the prior taxable
year, such as modified adjusted gross income.
The proposed regulations provide that, if, in a taxable year, any
excludable educational assistance is received for the qualified tuition
and related expenses paid during a prior taxable year, the educational
assistance is treated as a refund of qualified tuition and related
expenses. In this situation, if a taxpayer (or the taxpayer's spouse or
a claimed dependent) receives any excludable educational assistance
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. However, if a taxpayer (or the taxpayer's
spouse or claimed dependent) receives excludable educational assistance
after the taxpayer has filed a federal income tax return for the prior
taxable year, any education credit claimed for the prior taxable year
is subject to recapture.
[[Page 798]]
6. Proposed Effective Date
These regulations are proposed to be effective on the date they are
published in the Federal Register as final regulations. Taxpayers may
rely on these proposed regulations for guidance pending the issuance of
final regulations. If, and to the extent, future guidance is more
restrictive than the guidance in the proposed regulations, the future
guidance will be applied without retroactive effect.
Special Analyses
It has been determined that these proposed regulations are 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), this notice of proposed rulemaking will be submitted
to the Chief Counsel for Advocacy of the Small Business Administration
for comment on their impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written and electronic comments that
are submitted timely to the IRS. The IRS and Treasury specifically
request comments on the clarity of the proposed regulations and how
they can be made easier to understand. All comments will be available
for public inspection and copying.
A public hearing will be scheduled in the Internal Revenue
Building, 1111 Constitution Avenue, NW., Washington, DC. The IRS
recognizes that persons outside the Washington, DC, area may also wish
to testify at the public hearing through videoconferencing. Requests to
include videoconferencing sites must be received by March 8, 1999. If
the IRS receives sufficient indications of interest to warrant
videoconferencing to a particular city, and if the IRS has
videoconferencing facilities available in that city on the date the
public hearing is to be scheduled, the IRS will try to accommodate the
requests.
The IRS will publish the time and date of the public hearing and
the locations of any videoconferencing sites in an announcement in the
Federal Register.
Drafting information. The principal author of the regulations is
Donna Welch, Office of Assistant Chief Counsel (Income Tax and
Accounting). However, other personnel from the IRS and the Treasury
Department participated in the development of the regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be 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-0 also issued under section 26 U.S.C. 25A(i).
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 Secs. 1.25A-1, 1.25A-2,
1.25A-3, 1.25A-4, and 1.25A-5.
Sec. 1.25A-1 Calculation of education credit and general
eligibility requirements.
(a) Amount of education 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) Coordination with Education IRA.
(f) Identification requirement.
(g) Claiming the credit in the case of a dependent.
(1) In general.
(2) Examples.
(h) Married taxpayers.
(i) 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 comprehensive fees.
(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) Payments of educational expenses by a third party.
(1) In general.
(2) Example.
(b) Expenses paid by dependent.
(1) In general.
(2) Example.
(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) Allocation of 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.
(f) Refund of qualified tuition and related expenses.
(1) Payment and refund of qualified tuition and related expenses
in the same taxable year.
[[Page 799]]
(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) Excludable educational assistance received in a subsequent
taxable year treated as refund.
(5) Examples.
Sec. 1.25A-1 Calculation of education credit and general eligibility
requirements.
(a) Amount of education credit. An individual taxpayer is
allowed a nonrefundable education credit against income tax imposed
by chapter 1 of the Internal Revenue Code for the taxable year. The
amount of the education 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, 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 any student for
whom a Hope Scholarship Credit is claimed may not be taken into account
in computing the amount of the Hope Scholarship Credit with respect to
any other student or 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 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 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 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 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 credit is allowed unless a taxpayer
elects to claim the credit on the taxpayer's timely filed (including
extensions) 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),'' (or its
successor) to that federal income tax return.
(e) Coordination with Education IRA. No education credit is allowed
for a taxable year for the qualified tuition and related expenses of a
student if--
(1) During the taxable year, a distribution is made to, or on
behalf of, the student from an education individual retirement account
described in section 530(b) (Education IRA); and
(2) Any portion of the distribution is excluded from gross income
under section 530(d)(2).
(f) Identification requirement. No education 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).
(g) 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 credit for the student's qualified
tuition and related expenses. However, if the taxpayer is eligible to,
but does not, claim the student as a dependent, only the student may
claim the education credit for the student's qualified tuition and
related expenses.
(2) Examples. The following examples illustrate the rules of this
paragraph (g):
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 credit on his federal income tax
return, and B is not allowed an education 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(b).
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 credit on D's federal income tax return, and
Taxpayer C is not allowed an education 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(a).
(h) Married taxpayers. If a taxpayer is married (within the meaning
of section 7703), no education credit is allowed unless the taxpayer
and the taxpayer's
[[Page 800]]
spouse file a joint federal income tax return for the taxable year.
(i) 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 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 credit with respect to the
qualified tuition and related expenses of the student unless the
student is a dependent as defined in section 152. Among other
requirements under section 152, the nonresident alien student must be a
resident of a country contiguous to the United States in order to be
treated as a dependent.
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.
(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 (20 U.S.C. 1070 et seq.) 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 et seq.; 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 (such as a summer school session)
as reasonably determined by an eligible educational institution.
(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.
(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 fee 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,
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 comprehensive fees. If a student is required to
pay a comprehensive fee to an eligible educational institution that
includes charges for tuition, fees, and personal expenses described in
paragraph (d)(3) of this section, the portion of the comprehensive fee
that is allocable to personal expenses is not a qualified tuition and
related expense. The allocation must be made by the institution using a
reasonable method.
(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, is
taken by the student to acquire or improve job skills.
(6) Examples. The following examples illustrate the rules of this
paragraph (d). In each example, assume that all other relevant
requirements to claim an education 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
not allocable to personal expenses, 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.
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 phase out
of the education 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
[[Page 801]]
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 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 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
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 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 standards 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) 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
enrolls full-time in an undergraduate degree program at College U
for the 1998 Fall semester. For the 1999 Spring semester, Student A
again enrolls at College U on a full-time basis. For the 1999 Fall
semester, Student A enrolls 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 enrolls in half the
normal full-time work load for his degree program. 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 enrolls in a full-time work load at College V for the 1999
Spring semester. 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.
Example 4. 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 takes a full-time
work load during the 1998 Fall semester and during the 1999 Spring
and Fall semesters. Because Student C was not enrolled in a college
or other eligible educational institution prior to 1998 (but rather
was classified as a second-semester sophomore by College W as of the
start of the 1998 Fall semester 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. During the
1999 Spring semester,
[[Page 802]]
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 takes more than 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 more than 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 located in Country S. College S is not an eligible
educational institution for purposes of the education credits. At
the end of 1998, Student E moves to the United States and enrolls in
an undergraduate degree program at College Z on a full-time basis
for the 1999 Spring semester. 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 was born and raised in Country R, and she
received a degree in 1998 from College R located in Country R.
College R is not an eligible educational institution for purposes of
the education credits. During 1999, Student F moves to the United
States and enrolls for the 1999 Fall semester on a full-time basis
in a graduate-degree program at College Y. 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.
(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 enrolls full-time 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 phase out of the education 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
phase out of the education 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 he 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.
0(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
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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) Payments of educational expenses 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, 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) Example. The following example illustrates the rule of this
paragraph (a). In the example, assume that all the requirements to
claim an education credit are met. The example is as follows:
Example. 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 credit, Student E is treated as
receiving the money from her grandparent and, in turn, paying her
qualified tuition and related expenses.
(b) Expenses paid by dependent--(1) In general. Qualified tuition
and related expenses paid by a student are treated as paid by a
taxpayer if the student is a claimed dependent of the taxpayer for the
taxable year in which the expenses are paid.
(2) Example. The following example illustrates the rule of this
paragraph (b). In the example, assume that all the requirements to
claim an education credit are met. The example is as follows:
Example. 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 (a) of this section, Student C is treated
as receiving the money from Parent A and, in turn, paying his
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. Parent B may claim an education credit for the qualified
tuition and related expenses paid directly to the institution by
Parent A.
(c) Adjustment to qualified tuition and related expenses for
certain excludable educational assistance--(1) In general. In
determining the amount of an education credit, qualified tuition and
related expenses paid during the taxable year must be reduced by any
amount paid to, or on behalf of, a student during the taxable year with
respect to attendance at an eligible educational institution during an
academic period beginning in that taxable year that is--
(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)(4) of this section.
(3) Allocation of scholarships and fellowship grants. For purposes
of paragraph (c)(1) of this section, a scholarship or fellowship grant
is treated as a qualified scholarship excludable from income under
section 117 unless--
(i) The student reports the grant as income on the student's
federal income tax return; or
(ii) The grant 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.
(4) Examples. The following examples illustrate the rules of this
paragraph (c). In each example, assume that all the requirements to
claim an education 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 a $2,000 scholarship to Student A, which University X
applies against Student A's $8,000 total bill. 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 and room and board.
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 classes. Student A does
not report any portion of the scholarship as income on Student A's
federal income tax return. The scholarship is a qualified
scholarship that is excludable from Student A's income under section
117 and is allocable first to Student A's qualified tuition and
related expenses. Therefore, for purposes of calculating an
education 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
in addition to the scholarship that University X awards to Student
A, University X also provides Student A with a student loan and pays
Student A for working in a work/study job in the campus dining hall.
The loan is not excludable educational assistance. 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 3. 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 credit, Student B is treated as having paid no qualified
tuition and related expenses to University Y during 1999.
Example 4. The facts are the same as in Example 3, 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
wages to Student B. Because the reimbursement is not excludable
employer-provided educational assistance, Student B is not required
to reduce his qualified tuition and related expenses by the $1,000
reimbursement he received from his
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employer. Therefore, for purposes of calculating an education
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 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 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 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 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 the 1999 Spring semester, which begins in January 1999.
Taxpayer A may claim an education credit only in 1998 for payments
made in 1998 for the 1999 Spring semester.
(3) Expenses paid with loan proceeds. An education credit may be
claimed for the 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 of disbursement. If a
taxpayer does not know the date of disbursement, the taxpayer must
treat the qualified tuition and related expenses as paid on the last
date for payment prescribed by the institution.
(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.
(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 the
taxpayer's spouse or a claimed dependent) receives a refund from an
eligible educational institution of qualified tuition and related
expenses paid 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 the taxpayer's spouse
or a claimed dependent) receives a refund of qualified tuition and
related expenses for which the taxpayer claimed an education 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
between the credit claimed in the prior taxable year and the
redetermined credit. The redetermined credit is computed by reducing
the amount of the qualified tuition and related expenses for which a
credit was 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 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). Any redetermination of the tax liability for the
prior taxable year (by audit or amended return) will be taken into
account in computing the redetermined credit.
(4) Excludable educational assistance received in a subsequent
taxable year treated as a refund. If, in a taxable year, any excludable
educational assistance (described in paragraph (c)(1) of this section)
is received for the qualified tuition and related expenses paid 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
a taxpayer (or the taxpayer's spouse or a claimed dependent) receives
any excludable educational assistance 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 a taxpayer (or the
taxpayer's spouse or a claimed dependent) receives excludable
educational assistance after the taxpayer has filed a federal income
tax return for the prior taxable year, any education credit claimed for
the prior taxable year is subject to recapture as provided in paragraph
(f)(3) of this section.
(5) Examples. The following examples illustrate the rules of this
paragraph (f). In each example, assume that all the requirements to
claim an education 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 an $800 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 $200
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 ($800 + $200 = $1,000);
and, then
(iii) Subtracting (ii) from (i) ($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.
(ii) She calculates the increase in tax for 1999 by:
(A) Calculating the redetermined qualified expenses ($2,000--
$500 = $1,500);
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(B) Calculating the redetermined credit for the redetermined
qualified expenses ($1,500 x .20 = $300); and
(C) 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). 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 credit claimed by Student C for 1998
is subject to recapture. Because Student C paid no net qualified
tuition and related expenses in 1998, the redetermined credit for
1998 is zero. Student C must increase the amount of Student C's 1999
taxes by the recapture amount, which is $240 (the education credit
claimed for 1998 ($240) minus the redetermined credit for 1998
($0)). Because the $1,200 reimbursement is taken into account in
calculating the $240 recapture amount for 1999, the reimbursement
does not reduce the amount of any qualified tuition and related
expenses that Student C paid in 1999.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 99-177 Filed 1-5-99; 8:45 am]
BILLING CODE 4830-01-U
