Many people do not realize that education credits are not only available for your child’s tuition. Instead, they are also available for you, your spouse, or your dependents. Even if you attend school part-time, these credits may still be available.
There are two education-related credits available: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). For either credit, the student must be enrolled in an eligible educational institution for at least one academic period (semester, trimester or quarter) during the year. An eligible educational institution is any accredited public, nonprofit, or proprietary post-secondary institution that can participate in the U.S. Department of Education’s student aid programs.
The credits phase out for higher-income taxpayers who are married filing jointly (MFJ) or who are unmarried. Those who are married filing separately (MFS) do not qualify for either credit.
The following table provides the qualifications for both credits:
QUALIFICATIONS AOTC LLC Allowance Period First 4 years of post-secondary education Any post-secondary education for any number of years Enrollment Must be considered at least a half-time student by the educational institution Not required to be enrolled at least half-time Program Type Must be pursuing a program leading to a degree or another recognized educational credential Not required to be enrolled for the purpose of obtaining a degree or other credential Credit Applied Per student Per family Credit Amount 100% of the first $2,000 and 25% of the next $2,000 in qualified expenses 20% of up to $10,000 in qualified expenses Qualified Expenses Qualified tuition and related expenses, which include books, supplies and equipment required for enrollment or attendance Qualified tuition and related expenses; the books, supplies and equipment must be purchased from the educational institution High Income Phase-out Based upon filing status and adjusted gross income (inflation-adjusted annually; 2017 amounts shown) MFJ: $160,000 to $180,000MFS: No credit allowedUnmarried: $80,000 to $90,000 MFJ: $112,000 to $132,00MFS: No credit allowedUnmarried: $56,000 to $66,000 Refundable* Partially; 40% of the credit is treated as refundable No
*Generally, credits are nonrefundable, meaning that they can only be used to offset your tax liability; any amount exceeding your current-year tax liability is lost. However, unlike other credits, the AOTC is partially refundable in most cases.
Many individuals who both work and attend school can be enrolled less than halftime and still qualify for the LLC.
Another interesting twist to education credits is that the taxpayer who qualifies for and claims the student’s exemption for the year gets the credit—even if someone else pays the expenses. Thus, for example, even if a noncustodial parent pays a child’s college expenses, the custodial parent gets the credit if he or she is otherwise qualified. The same applies when grandparents help pay for their grandchild’s education; the grandparents do not qualify for the credit unless they, and not the child’s parents, claim the student as a dependent.
Generally, the educational institution sends a Form 1098-T to the taxpayer (or dependent); this includes the information necessary to complete the IRS form and claim the credit. Unless the IRS has exempted the educational institution from having to file a 1098-T, the law requires the taxpayer to have this 1098-T in hand to claim either of the credits.
If you have questions about how this these education tax credit provisions apply to you, please give Dagley & Co. a call.
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Tax fraud is currently a huge issue which has cost the government billions of tax dollars. New laws are taking effect that clamp down on individuals who have fraudulently claimed the American Opportunity Tax Credit (AOTC), the Child Tax Credit (CTC) or the Earned Income Tax Credit (EITC). Details on these credits are as follows:
- The AOTC is the college tuition credit for low-income families that provides a credit for each eligible student equal to 100% of the first $2,000 and 25% of the next $2,000 spent on college tuition and related expenses; the maximum credit is $2,500, of which 40% is refundable. The credit is phased out depending on income.
- The CTC is a tax credit of $1,000 for each of the taxpayer’s qualifying dependent children. A portion of the credit that is not used to offset the taxpayer’s tax liability can be refundable; the refund is based in part on the number children in the family and in part on the taxpayer’s earned income. This credit may also be phased out for higher-income taxpayers.
- The EITC is a refundable credit awarded to low-income taxpayers who work. The credit is based on the amount of the taxpayer’s income that comes from working as well as on total income and on number of children. In 2016, this credit can be worth as much as $6,269.
We have your rundown of some of the new provisions that the government has put in place to defend against fraud:
Retroactive Claims – Individuals are now prevented from retroactively claiming the AOTC, CTC or EITC if the individual, dependent child or student for whom the credit is claimed does not have a taxpayer identification number (TIN). In other words, the TIN must be issued prior to the due date for filing the original return in the tax year for which the credit is claimed; the IRS will deny the credit if the TIN is not issued on time. In most cases, the TIN is a Social Security number.
Disallowance Periods – When a taxpayer improperly claims the AOTC, CTC or EITC (either fraudulently or recklessly), he or she will be barred from claiming that credit for a period of time. The disallowance periods are 10 years for fraud and 2 years for reckless or intentional disregard of rules and regulations.
Preparer Due Diligence Requirements – In the past, paid tax preparers have always abided by a set of due-diligence guidelines for EITC qualification before including that credit on any return that they prepared. These due-diligence requirements have been expanded to include the CTC and the AOTC. This adds additional work for paid preparers and increases their liability for errors, as each disallowed credit could be subject to a $510 preparer penalty.
1098-T Required to Claim Education Credits – Education credits can no longer be claimed unless the taxpayer includes the employer identification number of the educational institution to which the tuition was paid. This number, as well as the other information needed to determine the credit, can be found on the Form 1098-T (Tuition Statement) issued by the educational institution. The new rules require that the taxpayer (or the dependent who is a student) receive a 1098-T form to claim the credit, although some exceptions are provided.
Refunds that Include the EITC or CTC Will Be Purposely Delayed – Refunds from returns that include an EITC or a refundable CTC will not be issued prior to February 15th, which gives the IRS additional time to verify the validity of the credit claims and to match them against the taxpayers’ income amounts and the informational returns that are filed with the IRS to verify tuition.
If you have questions related to any of the foregoing safeguards, the delayed refunds or the credits themselves, please give Dagley & Co. a call.
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