1. John Dickinson, Internal Revenue Service Kelsey Merrick, National Economic Council December 2014 2014 FSA Training Conference for Financial Aid Professionals What You Need to Know About Education Tax Benefits Session 43

2. Overview Education tax benefits are a major source of federal financial aid Knowing about these credits benefits your students, their families and your school Calculating eligible expenses for each provision varies by student and credit Help all those who qualify receive the federal tax benefits they deserve and need to help pay for higher education Claiming education credits can be complex, and some families leave money on the table 2

3. Education Tax Credits American Opportunity Tax Credit Lifetime Learning Credit 3

4. Who Benefits from Credits? American Opportunity Tax Credit Total AOTCRefunded AOTC ReturnsAverageReturnsAverage All Returns 12.8 m$1,6997.6 m$861 Returns with AGI < $50k 8.4 m$1,3607.1 m$859 Lifetime Learning Credit ReturnsAverage All Returns 2.8 m$731-- Returns with AGI <$50k 1.7 m$665-- Source: Office of Tax Policy, US Treasury for Tax Year 2011 4

5. Value of Credits as Expenses Increase 5

6. Who Qualifies? The student must meet all three of the following: Pay qualified expenses of higher education Pay the education expenses for a qualified student Must pay the expenses for themselves, their spouse, or for a dependent 6

7. Who Does Not Qualify? The student cannot claim the credit if any of the following are true: Files married filing separately Is listed as a dependent on another person’s return And…. 7

8. Education Credits and Foreign Students F1 Student Visa Is a nonresident alien Married to a nonresident alien 8

9. Basic Qualifying Education Expense Requirements Must generally be paid during the tax year (Jan-Dec). For tax year 2014, qualifying expenses must be for an academic period beginning in 2014 or the first three months of 2015 Primarily, tuition and fees required as part of the student’s enrollment. For AOTC only, books are also a qualified expense. Do not include: Room and board Transportation Personal, living, or family expenses Insurance Medical expenses (including student health fees) Sports, games, hobbies, and noncredit courses unless included in course of instruction Payments refunded to the student if they withdraw from courses 9

10. Funds that Qualify Expenses paid by the following income sources can be qualifying expenses for education tax credits: Payments for services, such as wages A loan A gift An inheritance, or A withdrawal from student’s personal savings Taxable scholarships or fellowships 10

11. Expenses that Do Not Qualify Insurance Medical expenses (including student health fees) Room and Board Transportation Personal, Living, or Family Expenses Sports, games, hobbies, and noncredit courses unless included in course of instruction 11

12. Compare the Credits Value AOTC Up to $2,500 credit per student 40% of credit up to $1,000 may be refundable Lifetime Learning Credit Up to $2,000 credit per tax return 12

13. Compare Allowable Qualifying Expenses AOTC Includes course-related books, supplies, and equipment Lifetime Learning Credit Generally does not include course-related expenses 13

14. Compare Allowable Education Limits AOTC 1st four years of postsecondary education Can still be a graduate student if within first 4 years of postsecondary education Lifetime Learning Credit No limit on years credit is taken Undergraduate and Graduate level Courses taken to acquire or improve job skills 14

15. Compare Income Ranges AOTC $80,000 - $90,000, Single, Head of Household, Qualifying Widow(er) $160,000 - $180,000, Married Filing Joint Lifetime Learning Credit $52,000 - $62,000, Single, Head of Household, Qualifying Widow(er) $104,000 - $124,000, Married Filing Joint 15

16. Other Comparisons AOTC No felony drug convictions Lifetime Learning Credit A felony drug conviction is not a barrier 16

17. Tuition Statement Form 1098-T 17

18. Form 1098-T is… Filed annually by nearly all post-secondary education institutions for most students Used by IRS to verify education spending for education related tax benefits Form 1098-T may not list all the information a student/parents need for claiming an education credit 18

19. Education Benefits and 1098-T (2010-2011) 26% of returns claiming AOTC have no Form 1098T. 37% of returns 1 with 1098T claim no benefit. 1 Returns in income range for tuition deduction 19

20. Form 1098-T and Claiming a Credit Use Form 1098-T as a guide Student/parents make the choice which dollar of expense is used for which benefit For tax purposes schools do not determine the best way to allocate expenses across benefits – this is for the student to do 20

21. Claiming Education Tax Credits AOTC Complete Form 8863 Parts I and III Lifetime Learning Credit Complete Form 8863 Parts II and III 21

22. Education Credits – Form 8863 22

23. Getting the Most Out of Education Credits 23

24. Top Tax Expenditures for Education FY2013 Provision$(billons) American Opportunity Tax Credit (AOTC) Total16.6 AOTC Received as a Refund4.0 Lifetime Learning Credit1.8 Parental Personal Exemption for Students >185.2 Exclusion of Scholarship and Fellowship Income2.9 Deductibility of Student Loan Interest1.7 Prepaid Tuition & Savings Plans (Excluded Earnings)1.7 Total for Select Expenditures29.9 Source: Table 14-1, Fiscal Year 2015 Analytical Perspectives, Budget of the U.S. Government 24

25. Scholarships and Education Credits No double benefit: Tuition and related expenses paid for with scholarships or grants do not qualify for education credits in order to prevent double benefits for the same expenses. Trade-off between qualified expenses for education credits and taxability of grants: Scholarships and grants allocated to tuition and related expenses are tax-free, but they may also reduce the value of education credits. (If allocated to living expenses, grants are counted as taxable income.) Taxpayers can choose how to allocate their scholarships and grants for tax purposes, regardless of how the institution allocated the funds (as long as the choice is in accordance with the terms of the scholarship or grant). 25

26. Scholarships and Education Credits Students at low-cost institutions are more likely to be affected by this trade-off: Up to $4,000 in qualified expenses can be used to claim the AOTC and up to $10,000 in qualified expenses can be used to claim LLC. Students with tuition and related expenses in excess of these amounts will have at least some qualified expenses to claim an education credit, regardless of whether they allocate their scholarships and grants to tuition and related expenses or to living expenses. 26

27. Pell Grants and AOTC The AOTC made education credits available to many Pell Grant recipients for the first time. Pell Grant recipients can face complicated decisions at tax time and, in total, forgo hundreds of millions of dollars in education credit each year. Even if a student’s Pell Grant fully covers tuition and related expenses, the student may still have unmet need for living expenses.  These taxpayers must choose between claiming an education credit and making their Pell Grant taxable 27

28. Pell Grants and AOTC Many students do not realize that they have this choice, and that they could increase their AOTC by treating a portion of their Pell Grants as taxable income. Most Pell Grant recipients should claim at least $2,000 in tuition and related expenses for the AOTC even if that means allocating some or all of their Pell Grant to living expenses and therefore including that amount as taxable income. Beyond this rule of thumb, the right choice depends on the student’s and their family’s circumstances. 28

29. Example 1 This family minimizes tax by including $4,000 of Pell as taxable income for the dependent student in order for the parents to claim $4,000 in qualified expenses for the AOTC. 29

30. Example 2 This independent student minimizes tax by including $2,000 of Pell as taxable income in order to claim $2,000 in qualified expenses for the AOTC. 30

31. Save the Date!! Tax Credits Webinar: Its not just college credits its education credits too! December 8 th, 2014 31

32. There are tools to help IRS.gov – Tax Benefits for Education: Information CenterTax Benefits for Education: Information Center IRS.gov - Education Credits – AOTC and LLCEducation Credits – AOTC and LLC Publication 970, Tax Benefits for Education. Publication 970 Form 8863, Education Credit Instructions Form 8863 Publication 929, Tax Rules for Children and Dependents Publication 929 IRS videos can be found at www.youtube.com. Department of Education website at: https://studentaid.ed.gov/types/tax-benefits https://studentaid.ed.gov/types/tax-benefits Pub. 5081, Education Credit Online Resource Tool Pub. 5081 To help determine if you are eligible for education credits, use the IRS’ Interactive Tax Assistant tool available on IRS.gov.Interactive Tax Assistant 32

33. Resources On Grant/Credit Interaction Treasury Blog Post: Helping students and families access college tax benefits http://www.treasury.gov/connect/blog/Pages/Helping-students- and-families-access-college-tax-benefits.aspx http://www.treasury.gov/connect/blog/Pages/Helping-students- and-families-access-college-tax-benefits.aspx Treasury Fact Sheet: Interaction of Pell Grants and Tax Credits: Students May be Foregoing Tax Benefits by Mistake http://www.treasury.gov/connect/blog/Documents/Pell%20AO TC%204%20pager.pdf http://www.treasury.gov/connect/blog/Documents/Pell%20AO TC%204%20pager.pdf IRS Tax Benefits for Education http://www.irs.gov/pub/irs-pdf/p970.pdf 33

34. eitc.irs.goveitc.irs.gov – one stop for resources 34

35. QUESTIONS? 35

36. Reach out to us at: eitc.program@irs.gov 36