EDUCATION TAX CREDIT NUANCES. DON'T LEAVE MONEY ON THE TABLE.

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Tax Relief R Us
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EDUCATION TAX CREDIT NUANCES. DON'T LEAVE MONEY
ON THE TABLE.
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• There are actually two higher-education tax
  credits. The American Opportunity Tax Credit
  (AOTC) provides up to 2,500 worth of credit for
  each student, 40 of which is refundable. The
  credit is equal to 100 of the first 2,000 of
  college tuition and qualified expenses and 25 of
  the next 2,000. The AOTC only applies to the
  first 4 years of post-secondary education.
• The other credit is the Lifetime Learning Credit
  (LLC), which only provides a maximum 2,000 of
  credit (20 of up to 10,000 of eligible
  expenses) per family. None of it is refundable,
  meaning it can only be used to offset the
  taxpayers tax liability, and any additional
  credit amount is lost.
• When it comes to these credits, it is easy to
  leave money on the table. Here are the reasons
  why
• Many students attend local colleges for the first
  two years and then transfer to a university for
  the remainder of their education. Knowing the
  university tuition will be higher, some parents
  take the LLC and wait on the AOTC, thinking they
  can use it in years with higher tuition and get a
  larger credit. What they dont realize is that
  the AOTC credit is only good for the first four
  years of post-secondary education. Thus, it is
  always better to claim the AOTC in the first four
  years. 

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• A special rule allows the tuition for an academic
  period that begins in the first three months of
  the next year to be paid in advance and thus
  increase the amount of tuition qualifying for the
  credit in the year the tuition is paid. This
  allows for planning when to make tuition payments
  to maximize credits, especially in the first
  partial calendar year.
• Example Cameron just graduated from high school
  and will be beginning college in September. Her
  tuition and credit-qualifying expenses for the
  semester covering the last four months of the
  year and January of the next year are 1,500. Her
  mother, Tricia, is aware of the 3-month rule, and
  in December she prepays Camerons 1,500 tuition
  for the semester beginning February 1 of the next
  year, bringing the qualifying expenses to a total
  of 3,000. The AOTC is equal to 100 of the first
  2,000 of qualifying expenses and 25 of the next
  2,000. Thus the AOTC for Cameron is 2,250
  (2,000 25 of 1,000). Tricia could increase
  the credit for the year to the full 2,500
  maximum by purchasing 1,000 worth of course
  materials needed for meaningful attendance or
  enrollment in Camerons course of study.

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• Qualifying expenses other than tuition are often
  overlooked, especially in light of a recent tax
  regulation change that specifies for the AOTC
  that qualifying expenses include course materials
  needed for meaningful attendance or enrollment
  whether purchased from the school or an outside
  vendor. Previously, only course material
  purchased from the school qualified (and this is
  still the rule for the Lifetime Learning Credit).
  This is a significant change and opens up the
  possibilities of including expenses not
  previously allowed. 
• Taxpayers also often overlook another very
  important fact Whoever claims the tax exemption
  for the student gets to claim the education
  credit even if someone else paid for the tuition
  and qualified expenses. 
• Example Suppose Camerons Uncle Lee pays her
  tuition but Tricia, her mother, claims Cameron on
  her tax return. Tricia is the one who qualifies
  for and receives the credit. 

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• What many also overlook is the fact that the AOTC
  is phased out for higher-income taxpayers based
  on their adjusted gross income (AGI). It phases
  out for AGIs between 160,000 and 180,000 for
  married taxpayers filing jointly, and between
  80,000 and 90,000 for others. The LLC phases
  out a little quicker than the AOTC between
  112,000 and 132,000 for joint filers and
  between 56,000 and 66,000 for others. As an
  exception, married taxpayers filing separately
  arent eligible to claim either credit. (Note
  the LLC phaseout ranges are adjusted for
  inflation annually, and the one quoted is for
  2017.) 
• Thus, in cases when the parent claiming the
  student has an AGI above the phaseout range,
  regardless of who paid the tuition and qualified
  expanses, no one will be able to claim the
  credit. So it is important to consider the income
  of the individual who is claiming the student
  when there is an option of who claims the child,
  such as in cases of divorced parents. 
• Because of gift tax issues, a person other than
  the one qualifying for the credit, such as a
  grandparent, may hesitate to volunteer to pay a
  tuition expense. Where payments are made directly
  to the educational institution, they are excluded
  from gift tax rules. However, depending on the
  amounts involved, there may be a gift tax
  reporting requirement if a monetary gift is given
  to the student or the individual who is claiming
  the credit and then the gift money is used to pay
  tuition. 

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• A question often arises as to whether tuition
  payments to a trade school or foreign university
  will count toward the education credit. To
  qualify for the credit, the tuition must be paid
  to any accredited public, nonprofit or
  proprietary post-secondary institution eligible
  to participate in the student aid programs
  administered by the Department of Education. This
  would rule out foreign educational institutions
  because they dont qualify for the student aid
  program administered by the Department of
  Education, but it would generally include most
  accredited public nonprofit or privately owned,
  profit-making post-secondary educational
  institutions in the U.S. 
• As you can see, there are several nuances
  associated with the education credits that must
  be considered. Please call this office if you
  need assistance with education planning or the
  application of the education tax credits to your
  particular circumstances.

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  -tax-credit-nuances-dont-leave-money-on-the-table/
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