Tax Credits

<p>Just wanted to remind students not to forget about tax credits. </p>

<p>They can obtain an American Opportunity Credit that covers up to $2,500 of university undergraduate expenses.</p>

<p>Also, available is the Lifetime Learning Credit covers up to $2,000 for grad school or other training.</p>


Again, not 100% correct. The parents of the student may claim American Opportunity Tax Credit (up to $2500) if they paid their students’ qualified educational expenses out of pocket (up to $2000 tax credit on first $2000 expenses, up to $500 tax credit on second $2000 expenses.) See [American</a> Opportunity Tax Credit](<a href=“]American”>American Opportunity Tax Credit | Internal Revenue Service)</p>

<p>Most families are eligible for the full credits if they paid $4,000 of qualified college expenses from sources other than grants, 529 accounts, etc. You can’t double dip and count the same dollar for more than one tax break. </p>

<p>If you paid less than $4,000 of expenses, you can be eligible for a partial credit. If you don’t owe $2,500 in federal taxes, many families can get a partial refund. Federal student loans can be used to count towards the $4,000 of expenses for the tax credit.</p>

<p>American Opp. Credits can be used for 4 tax years per student. Most students getting an undergrad degree have expenses over 5 calendar years, so you could choose to use the credit in the 5th year instead of the 1st year of college, if you expect to have more taxes due in that future year. The credits have been authorized through the end of 2017. </p>

<p>If you have 2 kids in college this year, and won’t be able to make full use of the tax credits for both kids, you might save the credits for one of the students until their 5th year when only one of them is in college.</p>

<p>You also can’t combine the Am. Opportunity Credit and the Lifetime Learning for the same student in the same year.</p>

<p>Question - Family is over income for any credits. College is paid from 529 plus loans. Child graduates in May 2013. In 2013 tax return can child claim credits for last semester of school? If so, can they claim the full amount.
Would it be better for parents to just claim the child deduction or for child to file with 1 exemption.

<p>It’s important to note that the American Opportunity Credit is broken down into $2000 credit for the first $2000 in qualified out of pocket expense, and $500 (or 25%) for the next $2000. </p>

<p>We are looking at paying for college for DS who starts in fall of 2014 with a combination of 529 funds, state education awards, savings and hopefully merit aid. If he ends up with $2000 out of pocket for fall 2014, we may cover that with savings rather than 529 funds and get the $2000 credit, but not stretch to cover another $2000 for just $500 additional credit.</p>

<p>If there’s something wrong in this scenario, tell me now so I can adjust my thinking!</p>

<p>^Does the child has any earned incomes and pay any income taxes? If so,

See [Publication</a> 970 (2012), Tax Benefits for Education](<a href=“Publication 970 (2022), Tax Benefits for Education | Internal Revenue Service”>Publication 970 (2022), Tax Benefits for Education | Internal Revenue Service)</p>

<p>If you can’t claim the child as a dependent, the child can take the credit but page 17 of IRS Pub 970 lists restrictions on the refundable part of the AOC for those under 24 years of age.</p>

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<p>Amounts paid with the 529 funds can’t be used for the AOC unless the student reports the earnings portion of the 529 distribution as taxable income. Amounts paid with loans can be used for the AOC.</p>

<p>Your second question depends on the student’s situation after graduation. If someone graduates in May with a decently paying full time job, goes on their own health insurance etc., can you say the student didn’t provide over 50% of their support? You’d have to run the numbers. I’ve seen some post here that they somehow finagle the numbers for a May graduate but I would want to be able to back up claiming a dependent with the numbers.</p>

<p>Wow, thanks for the link to Pub 970 p17. The clear as mud part is about student supporting themselves for the year with after graduation wages. What do you think is a reasonable AGI - 10K, 15K, 25K? So it seems maybe doable but would raise a flag?
Never heard that health insurance would be a test. That’s interesting.
Again thanks</p>

<p>I have been independent for tax purposes since my freshman year of college and took the AOC in 2011 and 2012. It’s never been an issue. I will be taking it this year, too (though I’m not sure how this is going to work out as I will be both an UG and grad in the same tax year. Hm)</p>

<p>flyaround, what do you mean what is a reasonable AGI? When January comes around you will know what the student’s actual income was for 2013. Medical insurance is an expense of support. If you pay for it, it helps you meet the support test for a qualifying child claimed as a dependent. If your student pays for it, it is support they provided themselves. Pub 501 starting on page 11 has the tests that need to be met to claim a child as a dependent, including the support test.</p>

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<p>Again, the tests on page 17 of 970 apply only to the refundable part(up to $1000) of the AOC.</p>

<p>jeannemar, that is exactly what we have done in some years. It’s a no-brainer, really, pay $2000 out of pocket toward tuition, get a $2000 tax credit! Save the 529 funds for future years.</p>

<p>How do you prove you paid it? Charge it and print off the bill? Or send check in? Or will there be a special tax form the school sends? And expenses like computers and such count too?</p>

<p>Also, is that per tax return, or per student? So if I have 2 in college at once, can I claim twice as much?</p>

<p>AOC is per student. </p>

<p>LLC is per return.</p>

<p>The college will send out to you and to the IRS a form that lists billed expenses for the year. However, those forms rarely line up with what a family actually paid for college. One reason is that families have a choice whether they pay Spring expenses in December or January of the next year. Also, those billed expenses do not include all legitimate higher education expenses, including books and off-campus housing and food. The IRS does not typically require that a great deal of detail be provided in tax returns to justify college expenses. </p>

<p>The mis-match between what you actually paid in authorized college expenses for tax purposes and what the college reported on its IRS form is not a problem in most cases, but you need to keep good records in case the IRS comes back and requires you to submit additional information (which happens to some but not all people).</p>

<p>You should take any withdrawal from 529 accounts during the same calendar year as you actually pay the bill. </p>

<p>Yes, you can take the Am. Opportunity Tax Credit for each child each year, for up to 4 years per student.</p>

<p>I agree with charlieschm that the amounts on Form 1098-T do not always line up with what a family actually pays, and that this is not a problem in most cases if you keep good records. However – and this is important – room and board are not “legitimate higher education expenses” when calculating the American Opportunity Tax Credit. Room and board are, however, qualified educational expenses for 529 withdrawals for a full-time student.</p>