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tuition tax credits: IRS8863 vs. FAFSA

tr09tr09 Posts: 9Registered User New Member
edited February 2010 in Financial Aid & Scholarships
IRS Form 8863 clearly delineates three different credits - American Opportunity, Hope, and Lifetime Learning. But the FAFSA only asks whether you've taken Hope or Lifetime. Does that mean you're not supposed to report American Opportunity on the FAFSA?
Post edited by tr09 on
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Replies to: tuition tax credits: IRS8863 vs. FAFSA

  • swimcatsmomswimcatsmom Posts: 14,942Registered User Senior Member
    That's interesting. I wonder if they are behind as the AO is new this year. In the EFC formula the tax credits are deducted from income so that your EFC is not penalized by the tax reduction (otherwise taking a tax credit would make more income available to the EFC). I don't see why the AO would be treated any differently. They are all reported on the same line of the tax return. I would just treat them the same way on FAFSA, if it will let you. My guess is that it is an oversight.
  • father05father05 Posts: 254Registered User Junior Member
    In fact, after talking with the live FAFSA chat and calling the 1-800 number for studentaid.gov today, it is even less clear. I was told that anything on line 49 is fair game, even though all the instructions specifically omit the American Opportunity Credit. When I asked why it was omitted, the supervisor told me it was because the FAFSAs were printed long before the AO Act. I find that hard to believe, since that Act was passed last spring and I am pretty sure the formula isn't approved until summer, then the forms would be made.

    Furthermore, I was told by all levels to only take the education credits on line 49, not line 66 of 1040. That means the non-refundable portion only. So you actually are going to have a higher EFC by using AO instead of Hope where you could get $1800 and it would all be on line 49. And again there is wording right in the FAFSA instructions to take the "total education credits".

    For most, it will still be worth it. For some near the border of Pell Eligble or not, it would be a huge mistake to take AO, especially if you were SMART grant eligible as well. It could cost you thousands of dollars a year if you were to lose the $4000 a year SMART.

    Furthermore, the instructions could not be more confusing. It says to enter the total of all education credits from for 1040, but then proceeds to say only line 49. It does not mention AO at all.

    There will be 3 scenarios.

    One will be that people who take AO don't put anything in box 92a on FAFSA because the AO is not listed.

    One is that people will just put $2500 on line 92a because that's their total education credit.

    One is that people will put $1500 down and get a higher EFC than they would have with a Hope credit. This seems most likely, but inherently against the spirit of the AO Act in the first place.

    I find it hard to believe that the intent of the credit was to raise EFCs. Then again, it could be another thing where we are sold one thing but in reality we don't really get that much.

    I will bet tens of thousands of people will put $2500 in that 92a box. And thousands will put zero.

    The question is, who is actually right. Even the feds don't know, based on what I was told today.
  • swimcatsmomswimcatsmom Posts: 14,942Registered User Senior Member
    Even the feds don't know, based on what I was told today[.quote]
    I'm shocked!
  • rockvillemomrockvillemom Posts: 5,173Registered User Senior Member
    Put me in the group that put the entire $2500 AO credit in - did not read directions closely apparently. Did that hurt us? Our EFC did increase by $3000. Should I correct this?
  • father05father05 Posts: 254Registered User Junior Member
    The more you put in there, the lower your EFC. Of course, the people I spoke to all said that you should only put the line 49 amount in so theoretically, you have an artificially low EFC. That clearly is against the spirit of the credits. Higher credits should not have been designed to give higher EFCs. The question is if someone is paying attention and going to do something about it.
  • swimcatsmomswimcatsmom Posts: 14,942Registered User Senior Member
    The point of reporting the education credits on FAFSA is so that you are not penalized for having taken them. Taxes are used as an allowance against income so reduce available income in the EFC formula. By reducing your taxes with the credit you are increasing the income available for the EFC. Which has a negative effect on the EFC. So FAFSA has you report the education credit and takes uses it as an allowance against income in the EFC formula just as if you never took the credit in the first place.

    I can see a reason for not allowing the part of the credit that is refundable to be reported on FAFSA if it is actually refundable (ie over and above the taxes incurred). But if it is a credit against taxes incurred then I don't understand why FAFSA is treating it any differently than the Hope credit, LLC, or non refundable portion of the AO. But then I was also surprised to see the way the $1000 refundable portion is treated on the tax return.
  • 'rentof2'rentof2 Posts: 4,327Registered User Senior Member
    I am a tax dummy, so I'm sure I'm missing something, but didn't the 2010-11 FAFSA ask about your Hope credit that you received in 2009 (meaning it was based on your 2008 tuition expenses)?

    I mean, I already submitted an estimated FAFSA for my D, but looking at 92a on the print-out version I have, I see I listed the Hope tax credit we actually received in 2009. I didn't put the AO credit we expect to receive this spring based on our 2009 tuition expenses. (I don't even know what that will work out to yet.) Maybe I read the FAFSA question wrong, but I don't see how any reference to the AO could have been mentioned on the FAFSA. They won't be able to reference that until the 2011-12 FAFSA, right?
  • father05father05 Posts: 254Registered User Junior Member
    The FAFSA asks for information from your 2009 taxes. It doesn't matter that you are doing your taxes in 2010, it is for tax year 2009.

    This is really a huge mess. Is there anyone who is a FAO that can confirm the correct reporting and what your school plans to do when there are thousands of applicants applying with 2500, or 0 in that box if 1500 is supposed to be the right amount?

    Also, any FAOs that might know, are there any talks at the Congressional level that anyone knows of that might clarify and correct this? Since thousands have already filed their FAFSA, no matter what the decision is, there are going to be hundreds of thousands of wrong FAFSAs.

    So much for FAFSA simplification.......


    SCM, I am not sure that really the refundable portion should be counted to raise your EFC, any more than scholarships or PELL and State grants should. The idea seems to be that if you are "poor" enough to get a refundable credit, then you really need the aid.
  • mamabear1234mamabear1234 Posts: 2,956Registered User Senior Member
    You don't have to be that "poor" to get a refundable credit. I have only estimated our taxes, but with the Making Work Pay Credit, Child Tax Credit, and credit for a new furnace this year, I expect to have some refundable credit from the AO, and we are solidly middle class. I am still waiting on forms I need to get started.
  • JustAMomOf4JustAMomOf4 Posts: 4,563Registered User Senior Member
    i just did this last night. I will have to check later but I am sure I put $1500. On the left the directions indicated which line on the 1040 to report.
    I guess I will check on this and see if I need to change it.
  • JustAMomOf4JustAMomOf4 Posts: 4,563Registered User Senior Member
    IRS Form 8863 clearly delineates three different credits - American Opportunity, Hope, and Lifetime Learning
    as far as this goes - the Hope basically became the AO. One would only use Hope if in a midwestern disaster area college - right?
  • rockvillemomrockvillemom Posts: 5,173Registered User Senior Member
    So I figured I would solve this problem for my situation and I called my son's university finaid office and asked them what is correct - zero, $1500 or $2500 - they did not know. I was apparently the first caller with this question. They are going to research it and get back to me. Oh well.
  • swimcatsmomswimcatsmom Posts: 14,942Registered User Senior Member
    justamom - Yes. To use Hope you must be claiming at least one student in a mid western disaster area college. Then it is either or. If you file AO for one then have to file AO for the others. Can't file Hope for one and AO for the other.
  • msmayormsmayor Posts: 317Registered User Member
    My take was...when in doubt, follow the directions. In my mind, if you enter the number on line 49 of your 1040 just as the directions tell you to, then they can't come back and say you didn't follow instructions correctly.

    I'd rather smack it back into their court and say "Hey, I entered the number you specifically asked for." Let them figure it out.
  • JustAMomOf4JustAMomOf4 Posts: 4,563Registered User Senior Member
    I brought up both forms to see what I did. I followed the instructions and reported the non-refundable AO credit which is $1500.

    father05 - I guess I see your point about the Hope. the difference is only $300 which won't make a huge difference in anyone's efc, I don't think.
    also, you can only use the Hope for two years.
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