Education credits Spring 2018, lamc

Introduction What are education credits? Qualified education credits that a taxpayer paid may reduce the amount of tax due. Two types of education credits: American Opportunity Credit (allows 40% of the credit to be refundable) Lifetime Learning Credit Who can take the education credit? Taxpayers can take education credit for themselves, spouse, or dependents claimed on the tax return.

Requirements for education credit Basic Requirements Taxpayer cannot be claimed as a dependent on a tax return. Cannot file as MFS. AGI is below limitations for their filing status. They were not nonresidents for any part of the tax year, or they elected to be treated as resident aliens. Dependents Taxpayer must claim the student as a dependent to claim the education credit.

Requirements for education credit Eligible Institution Accredited public, nonprofit, or private college, university, vocational school, or other postsecondary institution eligible to participate in a student aid program administered by the U.S. Dept. of Education. Qualifying Expenses Tuition and certain related expenses required for enrollment or attendance at an eligible institution. Includes nonacademic fees, such as student activity fees, athletic fees, or other expenses unrelated to the academic course that is a condition of enrollment or attendance. Nonqualified Expenses Room and board, insurance, medical expenses (including student health fees), transportation costs, personal living, or family expenses. Courses involving sports, games or hobbies unless part of degree program or for lifetime learning credit helps student acquire or improve job skills.

Requirements for education credit Amounts Excluded from Qualified Expenses Pell grants Employer-provided educational assistance Veterans’ educational assistance Tax-free portions of scholarships and fellowships Any other nontaxable benefits received as educational assistance (other than gifts or inheritances) Refunds of the year’s qualified expenses paid on behalf of a student

Requirements for education credit Payments for next academic calendar Prepaid payments for the academic period that begins in the first three months of the next calendar year can be claimed. American Opportunity Credit Can be claimed for no more than four tax years, including any years that Hope credit was claimed Students cannot have completed the first four years of post-secondary education before the beginning of the tax year Qualified tuition and related expenses include expenses for course materials Books Supplies Equipment needed for course study 40% of educational expenses are refundable (taxpayer can receive up to $1,000 even if they owe no taxes)

requirements for education credit Lifetime Learning Credit No limit on number of years credit can be claimed Available for all years of post-secondary education and for courses to acquire or improve job skills Course-related books, supplies, fees, and equipment are included in qualified education expenses only if they must be paid to institution as condition of enrollment or attendance No portion of credit is refundable.

American opportunity credit Questions to ask taxpayers to determine eligibility requirement for American Opportunity Credit: As of the beginning of the tax year, was the student still in the first 4 years of postsecondary education? Yes Was the student enrolled in a program that leads to a degree, certificate, or other credential? Yes Was the student taking at least one-half the normal full-time workload for the course of study, for at least one academic period beginning in the current tax year? Yes. Has the student been convicted of a felony for possessing or distributing a controlled substance? No. Did the taxpayer and student have a taxpayer identification number (TIN) by the due date of the return, including extensions? Yes. Note: If do not meet all the conditions of American Opportunity Credit, may qualify for other education benefits. Amount of credit: $2,500 credit per eligible student. Credit is 100% of the first $2,000, and 25% of the second $2,000 of eligible expenses per student, up to the amount of tax. 40% of American Opportunity Credit is refundable (can receive up to $1,000 even if no tax is owed).

Lifetime learning credit Nonrefundable credit of up to $2,000. Available for all years of postsecondary education and for courses to acquire or improve job skills. Available for unlimited number of tax years. Felony drug convictions do not disqualify taxpayer from receiving the credit. Qualified expenses are tuition and required enrollment fees (including those required to be paid to institution for course-related books, supplies, and equipment) Refer to Publication 4012, Tab J, Education Benefits; J-4, Education Credits

Can taxpayer claim multiple education benefits? Education expenses can be taken in the following ways: Education credits Work-related deduction on Schedule A Business expense on Schedule C or C-EZ Reduction of taxable portion of scholarships, fellowships grants, distributions from education savings accounts. The expenses can generally be used only once. Cannot take both the American Opportunity Credit and the Lifetime Learning Credit A taxpayer who takes an early distribution from an IRA is an exception to the 10% additional tax if it is used for an education benefit. Generally taxpayers will benefit most from claiming the education credit. If choosing between the credits, the American Opportunity Credit is better than the Lifetime Learning Credit

Exercises Billy is a full-time student and fifth-year senior. He has only claimed the American Opportunity and Hope credit in three earlier years. Does he qualify for the American Opportunity Credit? Janet works full time and takes one course a month at night school. Some courses are not for credit but they are meant to advance her career. Which credit is appropriate for her? George is an older student who has gone back to college half time after serving 18 months in prison for a felony drug possession. Which credit is appropriate for him?

Exercises Linda is married but did not live with or have contact with her spouse this tax year. She does not know where he is. She indicated on her intake sheet that she is not legally separated. Linda does not have any children or any other dependents. Linda worked as a clerk and earned $47,000 in wages. She had no other income. In 2017, she took a computer class at the community college to improve her job skills. She has a student account statement showing she paid $900 for tuition. Which education benefit is Linda eligible to claim? American opportunity credit Lifetime learning credit Tuition and fees deduction She does not qualify for any education benefit. Answer: d. She does not qualify for any education benefit.