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    Education Tax Credit Essentials
    Education Tax Credit Essentials
    Education Tax Credit Essentials
    Ebook163 pages1 hour

    Education Tax Credit Essentials

    By Dana Bell

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    About this ebook

    Education Tax Credit Essentials provides details for preparing tax returns with education tax credits such as the American Opportunity Tax Credit. This systematic analysis guides preparers in the steps required to process education credit claims, from researching scholarships and calculating the maximum credit to coordinating with educational savings accounts and Pell grants.
    Beginning with an overview of education credits it then discusses treasury regulations, types of scholarships, scholarship treatments, and scholarship research. This book also discusses 1098T reporting rules, coordinating tax benefits, and tax planning.
    Illustrated aids assist in document preparation and student account tabulation with examples of records from two local institutions. The AOTC worksheet included is instrumental in calculating the maximum credit and a collection of tax preparation techniques are discussed to simplify credit calculations based on individual circumstances. A section on software solutions also shows recommended steps for claiming the credit in some of the major tax software systems.
    Planning includes a discussion of claiming strategies and coordination with other forms of educational assistance, amending returns to claim the credit for prior years, and coordinating tax returns for family members when there is a education credit claim. Some special issues discussed include AGI considerations, AOTC phase-outs, changes in EITC, common errors, and a discussion of alternate treatments.
    The book comes at a time when there are mixed signals from Washington about education credits. While the IRS and Treasury Department has been promoting the use of treasury regulations to increase the refund amount available with a claim, the Treasury Inspector General for Tax Administration (TIGTA) is saying there may be potentially billions in education credit fraud. Although the TIGTA estimates may be exaggerated, it's important that returns with education credits clearly comply with tax law and regulations and can be documented.

    LanguageEnglish
    PublisherDana Bell
    Release dateMay 29, 2015
    ISBN9781310741821
    Education Tax Credit Essentials
    Author

    Dana Bell

    Dana Bell has degrees in Accounting and Computer Information Systems. He graduated summa cum laude from the University of Texas at Tyler in 2012, and received his Enrolled Agent designation in 2014. He is also working toward CPA certification. In addition to writing about tax accounting and business, Dana is a computer programmer, website developer and host, database guru, and graphic designer (Adobe Certified Expert). Favorite pastimes include disc golf, photography, chess, and ScrabbleTM.

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      Book preview

      Education Tax Credit Essentials - Dana Bell

      Education Tax Credit Essentials

      Education Tax Credit Essentials

      By Dana Bell, EA

      Copyright © 2015 Dana Bell

      Smashwords Edition

      Smashwords Edition, License Notes

      Thank you for downloading this eBook. You are welcome to share this Essentials edition with your friends. This edition may be reproduced, copied and distributed, provided the book remains in its complete original form and no fee is charged. Send book feedback to edcredit@tylerhosting.com.

      If you find this text useful and did not purchase it, please consider supporting the author by returning to Smashwords.com or your favorite eBook retailer and purchasing your own copy. 

      Contents at a Glance

      Preface

      In The Beginning

      Regulations

      Research

      Document Preparation

      Student Account Tabulation

      Tax Credit Calculation

      Tax Preparation Techniques

      Software Solutions

      Planning

      Amending

      Explaining the American Opportunity Tax Credit

      Special Issues

      Conclusion

      About the Author

      Table of Contents

      Preface

      Meeting the Challenge

      In The Beginning

      Overview

      American Opportunity Tax Credit

      Lifetime Learning Credit

      Deductions

      Benefit Comparison

      Business Deduction for Work-Related Education

      Employer-Provided Educational Assistance

      No Double Benefit

      General Scholarship Treatment

      Regulations

      Initial Regulations

      Coordinating Scholarships and Grants to Maximize Credits

      Exclusive Scholarships

      Taxable Scholarships

      Elective Scholarships

      Pell Grants

      Dual Requirements

      Research

      Federal Grants

      State Scholarships

      Local Research Examples

      Document Preparation

      1098-T

      UT Tyler

      Tyler Junior College

      Student Account Tabulation

      Spreadsheet for Expense Calculations

      Tax Credit Calculation

      Calculating Expenses and Scholarships

      Understanding Form 8863

      Phase-out Calculations

      Tax Preparation Techniques

      Simple

      Elective

      Excess Complications

      Family Coordination

      Tax Bracket Watch

      Software Solutions

      1098T Analysis and Inquiry

      TaxWise

      Pro Series (Intuit, 2012)

      Lacerte

      Drake (2013)

      ATX (2012)

      TaxSlayer (2013)

      Others

      Planning

      Timing Techniques

      Coordinating with other benefits

      Other tax benefits

      Amending

      Amending for Education Credits

      IRS transcript

      Explaining the American Opportunity Tax Credit

      Special Issues

      AGI

      AOTC Phase-out:

      Credit Offsets

      Earned Income

      Changes in EITC

      Support

      Education Credit Fraud

      Common Education Credit Errors

      1098-T

      Documentation

      Questions

      Alternate Treatments

      Conclusion

      About the Author

      Preface

      In 2014 the Department of Treasury released a 4-page document explaining in part, how taxpayers can coordinate their Pell grant with qualifying expenses to maximize their education credit. That document also has a section that explains how to help with the appeal to inform students that they have a choice in how to allocate Pell Grants for tax purposes.

      Not only do students need to be aware of the potential of Pell grants and educational expenses, so do their parents, educational institutions, financial planners, and tax professionals. While I am not responding to that particular appeal, I am using this text to try to encourage others, with a focus on tax professionals, to learn more about education tax credits.

      This text started as a series of articles on the blog Switched Keys describing how to claim education credits. The articles and other resources are also part of an AOTC toolkit that can be downloaded from www.tylerhosting.com/EdCredit/. Watch for the expanded version of this text, including updates and additional resources. Comments, questions, and corrections are welcome and can be submitted through the contact form on the blog, or directly to edcredit@tylerhosting.com. I have discovered a couple of issues during the writing and publishing process and I am sure I have omitted information that you might think useful and relevant. Let me know.

      Meeting the Challenge

      The tax code and regulations concerning education tax credits are relatively straightforward. In practice, however, education credits present a number of challenges. The first challenge in characterizing scholarships and grants is determining which scholarships are unrestricted, or elective. That requires understanding the differences between scholarships and doing some research. The second challenge is determining qualifying expenses as the document that contains that information may not be complete or accurate. The final challenge is educating clients about education credits. Educating clients may be the first step in the preparation, but professionals need to have a firm grip on education credits and the many ramifications of financing education.

      Education credits were first introduced in 1998 but they have been expanded or extended three times. They are now good until 2017 but they will likely be extended or expanded again before that expiration.

      The theory of education credits is really simple. Taxpayers can earn a credit for amounts paid for qualifying expenses. Even when you consider that those amounts are reduced by the amount of scholarships, it’s an easy concept. The complexities come in when you have to determine qualified expenses, when you can include some scholarships in income, when you must research the nature of scholarships, and when you coordinate with other benefits and other aspects of the tax return. The goal of this text is to help you plan the process of calculating education credits.

      Following are the basics you need to know to prepare returns with education credits

      Understanding the Education Credits

      Understanding the Regulations

      Researching Scholarships

      Document Preparation

      Student Account Tabulation

      Tax Credit Calculation

      Additionally there are some suggestions for more efficient processes, effective strategies, and tax planning

      Tax Preparation Techniques

      Software Solutions

      Special Issues

      Documentation

      Planning and Coordination

      Amending for Education Credits

      There are only two education credits under the current tax code and this book focuses primarily on the American Opportunity Tax Credit. Brief discussions of the Lifetime Learning Credit and various deductions are also included.

      In The Beginning

      In the beginning Congress created deductions for educational expenses but taxpayers could only enjoy those deductions if certain rules were followed. Deductions were decreases in taxable income. If there was no taxable income, there was no benefit. At that time scholarships were considered tax-free if used for qualified expenses.

      Then there were credits. In 1998 the Hope Scholarship Credit was established that allowed taxpayers to claim expenses that were paid for qualified educational expenses during the first two years of college. These credits reduced the actual tax that was due, rather than lower taxable income as deductions. Of course, if the taxpayer did not owe any tax then he could not reduce that tax. The related Lifetime Learning Credit was also available but none of it was refundable either.

      Over the years changes were made to the available credits. In 2009 the American Recovery and Reinvestment Act enhanced the Hope Credit, giving it a new name, the American Opportunity Tax Credit. It also made a portion of it refundable allowing taxpayers to consider the credit as a payment, which could be refunded even if he did not owe any tax. In 2011, the credit was extended through 2012 by the Tax Relief and Job Creation Act of 2010. In 2012 the AOTC was extended through 2017 by the American Taxpayer Relief Act of 2012.

      Overview

      The American Opportunity Tax Credit (AOTC or AOC) allows taxpayers to get a credit for $4,000 of qualified educational expenses. The total credit could amount to $2,500 in tax reduction. The first $2,000 is a 100% credit and the second $2,000 is a 25% credit. Only 40% of the AOTC is refundable so the maximum refund without tax reduction is $1,000. The Lifetime Learning Credit (LLC) is a 20% credit for up to $10,000 of educational expenses to gain or improve job skills. None of the LLC is refundable.

      Taxpayers must choose between the LLC and the AOTC however, as they cannot claim both credits for the same student. If either credit is used, the tuition deduction is not allowed for that student. You can, however, claim the AOTC for one student and the LLC for another. There are also phase-outs for both credits. Lower income taxpayers are likely to use the American Opportunity Credit since it does not require taxable income for the refundable part of

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