Link and Learn - Education Credits Flashcards
Education Credits
Education credits reduce the amount of tax due. The amount of the credit is based on qualified education expenses the taxpayer paid during the tax year.
There are two education credits:
The American opportunity credit and
The lifetime learning credit
The American opportunity credit allows 40% of the credit to be refundable. There are general rules that apply to these credits, as well as specific rules for each credit. For example, taxpayers can take education credits for themselves, their spouse, and/or dependents (claimed on their tax return) who attended an eligible postsecondary educational institution during the tax year.
For an overview of the various education tax benefits, review the Volunteer Resource Guide, Education Benefits tab, Highlights of Education Tax Benefits.
Basic Requirements
Certain basic requirements apply to both the American opportunity and the lifetime learning credits. To guide your interview about education credits, use Education Credits in the Volunteer Resource Guide, Education Benefits tab. If a taxpayer paid expenses for education, ask if any of the following disqualifying conditions apply:
The taxpayer can be claimed as a dependent on someone else’s tax return
The taxpayer files as Married Filing Separately
The taxpayer’s Adjusted Gross Income (AGI) is above the limit for the taxpayer’s filing status
The taxpayer (or spouse) was a nonresident alien for any part of the tax year who did not elect to be treated as a resident alien for tax purposes
Dependents
To claim the credit for a student’s qualified expenses, the taxpayer must claim the dependent on the return. Qualified education expenses paid by a dependent for whom the taxpayer can claim an exemption, or by a third party for that dependent, are considered paid by the taxpayer.
Tuition and Related Expenses
Qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. However, for the American opportunity credit, the definition for “certain related expenses” is different from the lifetime learning credit. For the current tax year, “qualified tuition and related expenses” was expanded to include expenditures for course materials for the American opportunity credit.
Ask to see documentation, such as receipts or the Form 1098-T, Tuition Statement, issued by the school. Identify the expenses that qualify for education credits.
Because of the American opportunity credit, “qualified tuition and expenses” were expanded to include expenditures for course materials. The term “course materials” means books, supplies, and equipment needed for a course whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance.
From an accredited institution for degree or bettering oneself
Excluded Amounts
Taxpayers who pay qualified higher education expenses with tax-free funds cannot claim a credit for those amounts. Qualified expenses must be reduced by the amount of any tax-free educational assistance taxpayers receive. Ask the taxpayer if the student received any of these tax-free educational benefits:
Pell grants.
Employer-provided educational assistance.
Veteran’s educational assistance.
Tax-free portions of scholarships and fellowships.
Any other nontaxable payments received as educational assistance (other than gifts or inheritances). For example, distributions from a 529 plan reported on Form 1099-Q, Payments From Qualified Education Programs (Under Sections 529 and 530).
Refunds of the year’s qualified expenses paid on behalf of a student (e.g., if the student dropped a class and received a refund of tuition)
Prepaid Expenses
Taxpayers can claim payments that were prepaid for the academic period that begins in the first three months of the next calendar year.
What It Covers -AOC
The American opportunity credit allows taxpayers to claim a credit of up to $2,500 based on qualified tuition and related expenses paid for each eligible student. The credit covers 100% of the first $2,000 and 25% of the second $2,000 of eligible expenses per student, up to the amount of tax. Forty percent of the American opportunity credit is a refundable credit, which means the taxpayer can receive up to $1,000 even if no taxes are owed. Taxpayers under age 24 cannot claim the refundable portion of the credit if certain conditions are met. Refer to Volunteer Resource Guide, Education Benefits tab, Student Under Age 24 Claiming American Opportunity Credit, for details.
The American opportunity credit is available for the first four years of college per eligible student (generally, freshman through senior years).
Tip
If the student doesn’t meet all of the conditions for the American opportunity credit, the taxpayer may be able to take the lifetime learning credit for part or all of the student’s qualified expenses.
Eligibility - AOC
To be eligible for the American opportunity credit, the student must meet the basic requirements for an education credit, and answer the following questions as indicated:
Enrolled in a program that leads to a degree, certificate or other recognized educational credential? — Yes
Taking at least one-half of the normal full-time workload for the course of study for at least one academic period beginning during the current tax year? — Yes
Enrolled in the current tax year as a student in the first four years of postsecondary study (generally, the freshman, sophomore, junior, and senior years), as of the beginning of the tax year? — Yes
Free of any felony conviction for possessing or distributing a controlled substance? — Yes
Lifetime Learning Credit
The lifetime learning credit can be up to $2,000 per tax return, depending on the amount of eligible expenses and the amount of tax liability. The credit is 20% of the first $10,000 of eligible expenses paid for all students, up to the amount of tax on the return.
Requirements - LLC
The taxpayer can take the lifetime learning credit if the expenses meet the requirements described under “What basic requirements must the taxpayer meet?” Refer to Education Credits in the Volunteer Resource Guide, Education Benefits tab. The student is not required to be enrolled at least half-time or in a degree program, and a felony drug conviction does not disqualify the student
George, an engineer, plans to vacation in Europe next year. In preparation for the trip, he enrolls in a noncredit photography class at a local community college. Because George is not taking the course as part of a degree program or to acquire or improve his job skills, the cost of the course is not a qualifying expense for claiming the lifetime learning credit.
How do the Credits Differ?
How do the Credits Differ?
There are several differences between the two credits.
The American opportunity credit:
Can be claimed based on the same student’s expenses for no more than four tax years, including any years the Hope credit was claimed
Qualified tuition and related expenses include expenses for course materials—books, supplies, and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance
Generally, 40% of the credit is a refundable credit, which means taxpayers can receive up to $1,000 even if they owe no taxes
Lifetime learning credit:
There is no limit on the number of years the lifetime learning credit can be claimed for each student
Course-related books, supplies, fees, and equipment are included in qualified education expenses only if they must be paid to the institution as a condition of enrollment or attendance
No portion of the credit is refundable
Figuring the Credit
Here are the general steps for figuring the amount of education credits:
Review the list of qualifying students and expenses, and decide if the American opportunity credit or lifetime learning credit is more suitable. See the requirements discussed earlier.
Form 8863, Part III, page 2, requests information about the student, the student’s eligibility for the credit, and the educational institution(s). Taxpayers must complete Part III for each eligible student for whom they are claiming an education credit before completing Parts I and II.
Enter each student’s expenses. Be sure that these:
Include only qualified expenses
Are reduced by untaxed benefits
Do not exceed the limit for the credit
Find the totals for each section and apply the limits, then transfer the amounts to Part I and II to determine the refundable and nonrefundable credits. Apply the income test and do the calculations.
