LO 8.3.1: Determine which education tax credits may be utilized to reduce the net cost of education in a given client’s situation.

Question 1

American Opportunity Tax Credit (AOTC)

Answer 1

To help families pay for the first four years of college.

Question 2

How much does the AOTC reduce a family’s tax liability?

Answer 2

• (2019) 100% of the first $2,000 of qualified education expenses in 1st 4 years,
• 25% of the next $2,000.

Question 3

AOTC | What is the max credit?

Answer 3

Max credit of $2,500 is allowed.

Question 4

AOTC | What are qualified expenses?

Answer 4

Tuition, fees, and course materials (books, equipment).

Question 5

AOTC | Are room and board included as a qualified expense?

Answer 5

No.

Question 6

AOTC | If no tax liability, how much of the credit is refundable?

Answer 6

• 40%, so $1,000 for each eligible student.
• However, no refund of the credit if:
  
  • (1) taxpayer is under 18 (or a student who is at least 18 and under age 24 and whose income does not exceed 1/2 of her own support)
  • (2) Has at least 1 living parent, and
  • (3) does not file a joint return.

Question 7

AOTC | How does one qualify?

Answer 7

• Must be in an educational program leading to a degree, certificate, or other recognized credential, and
• Must be enrolled in at least half the minimum hours of a full-time student.

Question 8

AOTC | Is the $2,500 maximum considered and issued on a per student basis?

Answer 8

Yes.

Question 9

AOTC | Does the qualifying child have be listed on the tax return of the dependent of the taxpayer?

Answer 9

Yes.

Question 10

AOTC | What are the phaseout ranges?

Answer 10

• (2019) $160K-$180K of modified AGI for married filing jointly;
• $80K-$90K for filing single.

Question 11

AOTC | Is this available to married taxpayers who file jointly?

Answer 11

No.

Question 12

AOTC | is this available for students who have felony drug convictions?

Answer 12

No.

Question 13

Lifetime Learning Credit

Answer 13

• May be claimed for an unlimited number of years while the student is pursuing their education.
• Neither requires enrollment in a degree program, nor at least half-time enrollment.

Question 14

How much does the Lifetime Learning Credit reduce a family’s tax liability?

Answer 14

(2019) 20% of the first $10,000 of qualified tuition expenses paid by the taxpayer in which the AOTC is not claimed for the same student

Question 15

What is the maximum nonrefundable Lifetime Learning Credit per return or per family?

Answer 15

$2,000

Question 16

Is the Lifetime Learning Credit available per eligible family?

Answer 16

Yes.

Question 17

American Opportunity Tax Credit | Key points

Answer 17

• Up to $2,500 credit per student
• Available first four years of postsecondary education
• Student must be pursuing and undergrad degree or other credential
• Student must be enrolled in at least half time for academic period
• No felony drug conviction is permitted on student’s record, or credit is unavailable

Question 18

Lifetime Learning Credit | Key points

Answer 18

• Up to $2,500 credit per taxpayer return
• Available for all years of postsecondary education and courses
• Student does not need to be pursuing an undergrad degree or other credential
• Credit is available for one or more courses w/o regard to enrollment status
• Felony drug conviction rule does not apply.

Question 19

Which tax credits can a family use if two or more children in the same household incur qualified expenses in the same year?

Answer 19

• The parents can:
  
  • claim a Lifetime Learning Credit for the family;
  • an AOTC for each eligible child, or
• A Lifetime Learning Credit for one child, and AOTC for each of the other eligible children.

Question 20

Student Loan Interest Deduction

Answer 20

For the student or parent (if it is a PLUS loan) for interest paid on loans incurred solely to pay for qualified higher education expenses at an eligible educational institution.

Question 21

What is the maximum Student Loan Interest Deduction?

Answer 21

$2,500

Question 22

What are the Student Loan Interest Deduction phaseout limits?

Answer 22

• Married filing jointly: $140K-$170K of modified AGI

* Single taxpayers: $70K-$85K of modified AGI

Question 23

Student Loan Interest Deduction | Can borrowers deduct interest over the term of their loan?

Answer 23

Yes.

Question 24

Coordination Rules (Internal Revenue Code)

Answer 24

• A taxpayer can claim an AOTC or Lifetime Learning Credit for the taxable year and can also exclude from gross income amts distributed from a Section 529 plan or CESA, but only if the latter tax-free distributions are not used to pay for the same expenses as the AOTC or Lifetime Learning Credit.
• The AOTC and Lifetime Learning Credit may not be claimed for the same student in the same year.
• Taxpayers may waive the AOTC or Lifetime Learning Credit even when they qualify for one of the credits. This may be the case if the tax savings from the credit is less than the savings from the income tax0free treatment of 529 plan withdrawals.
• The student loan interest deduction may be used in combination with any of the other educational tax benefits, including the AOTC or Lifetime Learning Credit.