Ch 17 Education Credits

A tax deduction (for example, the standard deduction) reduces taxable income. A tax credit (for example, the Child Tax Credit) is a direct, dollar for-dollar reduction of tax liability. Some credits are refundable (such as the Additional Child Tax Credit), which means they can actually be paid out to taxpayers.

Under current law, the AOC is available only for Tax Years 2009 through 2017.

The AOC, much like the Child Tax Credit, is a credit that has a nonrefundable component and may have a refundable component.

The maximum allowable AOC is $2,500 per student. Up to 40% of the AOC may be refundable

The taxpayer must meet all of these requirements: • Pay qualified expenses of higher education. • Must have paid the qualified education expenses for an eligible student. • Ensure that the eligible student is the taxpayer, spouse, or dependent for whom the taxpayer actually claims an exemption.

Taxpayers who meet any of the following may not claim the AOC: • The taxpayer is filing MFS.

• The taxpayer is claimed as a dependent on anyone else's tax return. • The taxpayer's MAGI is above a certain amount.

Any qualified expenses paid on behalf of a dependent student are treated as paid by the person who claims the dependency exemption. Therefore, the person claiming the dependency exemption may claim the AOC if they meet all necessary requirements.

Tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.

All eligible educational institutions must be eligible to participate in student aid programs administered by the USDOE.

The institution can tell the taxpayer if it is an eligible institution.

Yes. ***The expenses qualify even if the student does not purchase the materials from the school.***

NO. Room and board are not qualifying education expenses for the AOC?

The expenses must be reduced by the amount of any tax-free funds received.

Student loans are not considered tax-free funds (plus, they have to be repaid).

Qualifying expenses do not need to be reduced by student loan proceeds.

Such expenses are treated as paid by the student, not by the party who actually made the payment.

The student has not claimed the AOC in any four earlier years (including years in which the Hope credit was claimed). • The student has not completed the first four years of postsecondary education.

• The student was enrolled at least half-time for at least one academic period beginning in 2012. • The student has not been convicted of any federal or state drug felony as of the end of 2012.

The AOC is the sum of: 1. 100% of the first $2,000 of qualified education expenses per eligible student. 2.

25% of the next $2,000 of qualified education expenses per eligible student.

Form 8863.

The AOC phases out for taxpayers with MAGI above certain levels *Note that Form 8863 handles the computation of the allowable amount and the applicable phaseout.*

Form 1098-T.

The maximum is $2,000 per return.

It is 20% of the first $10,000 of qualifying expenses per return.

There is no course load requirement for the Lifetime Learning Credit. Unlike the AOC, the qualifying student does need to be at least half-time.

Generally, books and supplies are not allowed as expenses for the lifetime learning credit (there is an exception if the books and supplies are required for enrollment and the materials are purchased directly from the qualifying educational institution).

The deduction has a higher modified AGI limitation. However, neither tax break is available for MFS filers.

$4,000 for taxpayers with modified AGIs up to $65,000 ($130,000 MFJ), or $2,000 for taxpayers with modified AGIs between $65,001 and $80,000 ($130,001 and $160,000 MFJ)

No, the maximum deduction abruptly drops down, then out. If the taxpayer's modified AGI exceeds $80,000 ($160,000 MFJ), no deduction is allowed at all

No. Any taxpayer who claims an education credit may not claim the tuition and fees deduction for the same student in the same year.

No. If someone claims the student as a dependent, the person claiming the exemption may take a deduction for the expenses they paid themselves, and the dependent may take no deduction.

If someone qualifies to claim the student as a dependent but opts not to do so, no one may take the deduction. However, if no one qualifies to claim the student as a dependent, all expenses are considered paid by the student, and the student may claim the deduction.

The deduction is figured on Form 8917 and reported on Form 1040, line 34, or on Form 1040A, line 19.