Module 8: TAX BENEFITS FOR EDUCATION Read slide. Special thanks to: Foundation Communities

Introduction to Tax Benefits for Education Read slide.

The main topics in this module are… Introduction to Tax Benefits for Education Definition of Terms The Credits Determining Eligible Expenses or Income Read slide

By the end of this module you will be able to… Determine who qualifies for an education credit Determine which credit the taxpayer can claim Determine if the taxpayer has scholarship/grant income or eligible expenses Read slide

Introduction to Tax Benefits for Education This lesson covers tax credits available to help the taxpayer offset the costs of higher education by reducing the amount of income tax. Education credits reduce the amount of tax due and are based on qualified education expenses that the taxpayer paid during the tax year. There are two different education credits: the American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC). There are general rules that apply to these credits, as well as specific rules for each credit. Welcome to the Tax Benefits for Education module. Read slide. If you need additional information on any of the topics covered in this module we recommend Publication 970 Tax Benefits for Education, Publication 4012 Volunteer Resource Guide and Publication 17 Federal Tax Guide.

Introduction to Tax Benefits for Education During the client intake interview, encountering any one of the following items will require further investigation: Form 1098-T, Tuition Statement Account statement from school Question about scholarship income in Part III of the Form 13614-C, Intake/Interview & Quality Review Sheet, answered, “Yes.” Question about education expenses in Part IV of the Form 13614-C, Intake/Interview & Quality Review Sheet, answered, “Yes.” There are 2 ways education expenses can affect a tax return. Taxable scholarship/grant income Scholarship/Grant/Fellowship is reported as income. Note: This income goes on the student’s return, regardless of who claims the credit. Tax credit American Opportunity Credit Lifetime Learning Credit Note: These credits are calculated on the return of the taxpayer who is qualified to claim the student as a dependent. If no taxpayer can claim the student as a dependent, the student claims the credit. Read slide

Definition of Terms In this next section we are going to introduce terms and documents you will need to understand in order to provide your client with their best option regarding education benefits.

Definition of Terms Eligible Institution An eligible institution is generally any accredited public, nonprofit, or private college, university, vocational school, or other postsecondary institution eligible to participate in a student aid program administered by the U.S. Department of Education. The school should be able to tell the student if it is an eligible education institution. A searchable database of all accredited schools is available at: http://ope.ed.gov/accreditation/ Read slide

Definition of Terms Eligible expense Qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Qualified education expenses include nonacademic fees, such as student activity fees or other expenses unrelated to the academic course that must be paid to the institution as a condition of enrollment or attendance. The following are qualified education expenses for the purposes of determining the tax-free portion of scholarships and fellowships: Tuition and fees required to enroll at or attend an eligible educational institution. Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in the course of instruction. Read slide

Definition of Terms Grants and scholarships A scholarship, grant or fellowship is tax free (excludable from gross income) only if: You are a candidate for a degree at an eligible educational institution. You are a candidate for a degree if you are pursuing a degree at a college or university, or attend an educational institution that offers a program of training to prepare students for gainful employment in a recognized occupation and is authorized under federal or state law to provide such a program and is accredited by a nationally recognized accreditation agency. A scholarship, grant or fellowship is tax free only to the extent that: It doesn’t exceed your qualified education expenses; It isn’t designated or earmarked for other purposes (such as room and board) and doesn’t require (by its terms) that it can’t be used for qualified education expenses; and It doesn’t represent payment for teaching, research, or other services required as a condition for receiving the scholarship. Read slide

Definition of Terms Eligible student Eligible student is you, your spouse or a dependent who is enrolled in one or more courses as an undergraduate or graduate student. Read slide

Definition of Terms Form 1098-T, Tuition Statement Eligible colleges or other post-secondary institutions must send Form 1098-T, Tuition Statement to any student who paid qualified educational expenses in the preceding tax year. Qualified expenses include tuition, any fees that are required for enrollment, and course materials the student was required to buy from the school. Read slide

Definition of Terms Student Account Statement Shows tuition, fees and other expense payments received by the school for that student. Reflects any payments made regardless of the payment’s origin. Available from the eligible institution. Used to determine which fees paid to the institution qualify as eligible. Read slide

The Credits This next section introduces the two education credits, the rules and requirements that apply to both, and the rules specific to each credit.

The Credits Who can claim an education credit? Taxpayers who paid qualified educational expenses for higher education for an eligible student attending an eligible educational institution. To determine if institution is eligible, see http://ope.ed.gov/accreditation The eligible student is either the taxpayer, taxpayer’s spouse or a dependent on the tax return. Note: Qualified education expenses paid by a dependent, or by a third party for that dependent, are considered paid by the taxpayer who can claim that student as a dependent. If a student isn’t claimed as a dependent (even if eligible to be claimed), only the student can claim the education credit, no matter who paid the expenses. This doesn’t entitle the student to claim themselves on their tax return. Anyone paying the expenses (even directly to the institution) are considered to have given a gift to the student who in turn is treated as having paid the expenses. Read slide

The Credits What basic requirements must the taxpayer meet? To claim an education credit, verify that the following are true for the taxpayers: They cannot be claimed as a dependent on someone else’s tax return They are not filing as Married Filing Separately Their adjusted gross income (AGI) is below the limitations for their filing status They were not nonresident aliens for any part of the tax year, or if they were, they elected to be treated as resident aliens Read slide For taxpayers who qualify for the VITA program the AGI limitation will not be an issue.

The Credits: American Opportunity Credit (AOC) Must attend an eligible institution. Qualified expenses include tuition, fees, books and supplies.  Maximum credit of $2,500 per eligible student on $4,000 of qualified expenses. 40% of the credit is refundable. Per student – if there are multiple students attending a qualified institution on the return, AOC is calculated individually.  Can be claimed for only 4 tax years.  Must be enrolled at least half-time.  Any felony drug conviction by the student disqualifies them from claiming the credit. Married Filing Separately disqualifies you for the credit. Must attend an eligible institution. Qualified expenses include tuition, fees, books and supplies.  Maximum credit of $2,500 per eligible student on $4,000 of qualified expenses. The $2,500 credit is the sum of 100% of the first $2,000 in eligible expenses and 20% of the second $2,000 in eligible expenses 40% of the credit is refundable. A refundable tax credit not only reduces the federal tax owed, but could also result in a refund. So if a client qualifies for the maximum credit of $2,500, then $1,000 is refundable. Per student – if there are multiple students attending a qualified institution on the return AOC is calculated individually.  Can be claimed for only 4 tax years and the tax years do not have to be consecutive. Must be enrolled at least half-time which is determined by the institution and indicated on the 1098-T. No felony drug conviction. Married Filing Separately disqualifies you for the credit.

The Credits: American Opportunity Credit (AOC) If your client is a student under 24 and claiming the American Opportunity Credit None of the credit is refundable if (1) the taxpayer claiming the credit is: (a) under age 18 or (b) age 18 at the end of the year, and their earned income was less than one-half of their own support or (c) a full time student over 18 and under 24 and their earned income was less than one-half of their own support; and (2) the taxpayer has at least one living parent, and; (3) the taxpayer doesn’t file a joint return Read slide All three of those scenarios must apply. If any of them is not true for the student, then the credit is refundable. For example, Kate is a 20 year-old full-time student at State University. She is single, works and provides more than half her own support so her parents cannot claim her as a dependent. In this situation Kate files her return claiming herself and can qualify for the refundable portion of the American Opportunity Credit. Another example, Mike is 21 years old and a full-time student at State University. He works part-time and does not provide more than half his own support and can be claimed as a dependent on his mother’s return. Mike’s mother is not claiming him as a dependent on her return. Mike can claim the nonrefundable portion of the credit but does not qualify for the refundable portion.

The Credits: Lifetime Learning Credit (LLC) Must attend an eligible institution. Qualified expenses include tuition and fees Books only if bought from the educational institution as a condition of enrollment. Rarely do books qualify for LLC. Maximum credit of $2,000 per tax return on $10,000 of qualified expenses. Calculation is 20% of eligible expenses until limit is reached. Non-refundable tax credit. Per return – expenses from multiple students can be combined to increase qualified expenses toward the overall $10,000 maximum.   Covers undergrad, grad and courses to acquire or improve job skills.   Can be less than half-time student. Married Filing Separately disqualifies you for the credit. Must attend an eligible institution. Qualified expenses include tuition and fees. Books only if bought from the educational institution as a condition of enrollment. Maximum credit of $2,000 per tax return on $10,000 of qualified expenses. Calculation is 20% of eligible expenses until limit is reached. Non-refundable tax credit. A nonrefundable credit is subtracted from your income tax liability, up to the total amount you owe. A nonrefundable credit cannot reduce your tax balance beyond zero. Per return – expenses from multiple students can be combined to increase qualified expenses toward the overall $10,000 maximum.   Covers undergrad, grad and courses to acquire or improve job skills.   Can be less than half-time student. Married Filing Separately disqualifies you for the credit.

Determining Eligible Expenses or Income In this section we cover how to determine if the client has expenses available to claim a credit or if the student has income from the scholarship or grant.

Determining Eligible Expenses or Income What does the client need to present? For tax years beginning with 2017, the law requires that the student must generally receive a Form 1098-T in order for the taxpayers to claim the education credit. Copy of their student account statement from an eligible institution. Read slide. Let’s go through some of the boxes on Form 1098-T. Box 1 – payments received - Shows the total payments received by an eligible educational institution in 2018 from any source for qualified tuition and related expenses less any reimbursements or refunds made during 2018 that relate to those payments received during 2018. Box 5 – scholarships or grants - Shows the total of all scholarships or grants administered and processed by the eligible educational institution. Always ask your client if there are other scholarships and grants not administered through the school. Box 7 – next calendar year academic period - Shows whether the amount in box 1 includes amounts for an academic period beginning January–March 2019. Qualified education expenses paid in 2018 for an academic period that begins in the first 3 months of 2019 can only be used in figuring an education credit for 2018. Box 8 – half-time student - Shows whether you are considered to be carrying at least one-half the normal full-time workload for your course of study at the reporting institution. Box 9 – grad student - Shows whether you are considered to be enrolled in a program leading to a graduate degree, graduate-level certificate, or other recognized graduate-level educational credential. For example, this 1098-T shows $9995 in payments received and $5360 in scholarships or grants which indicates a potential of $4635 in eligible expenses.

Determining Eligible Expenses or Income What to do when a 1098-T has entries in boxes 4 or 6: Not all 1098-Ts with an adjustment are out-of-scope for VITA. We cannot prepare the return for the person who claimed the credit in the previous tax year. If the student claimed the credit in the previous tax year, the student’s return is out of scope this year. If someone claimed the student and the credit in the previous tax year, that person’s return is out of scope this year. If preparing an in-scope return for this year, we disregard the amounts in boxes 4 and 6. The person who claimed the credit last year (and is out of scope this year) will need a copy of the 1098-T and account statement when preparing this year’s return. If there is information in box 4 or 6 of Form 1098-T, the return may be out of scope for VITA. Box 4 – adjusted tuition and fees - Shows any adjustment made by institution for a prior year for qualified tuition and related expenses that were reported on a prior year Form 1098-T. This amount may reduce any allowable education credit that you claimed for the prior year (may result in an increase in tax liability for the year of the refund). Box 6 – adjusted scholarships and grants - Shows adjustments to scholarships or grants for a prior year. This amount may affect the amount of any allowable tuition and fees deduction or education credit that you claimed for the prior year. Read slide.

Determining Eligible Expenses or Income Analyzing Student Account Statements Qualified education expenses don't include amounts paid for: Insurance Medical expenses (including student health fees) Room and board Transportation Similar personal, living, or family expenses. This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Sports, games, hobbies, and noncredit courses. Qualified education expenses generally don't include expenses that relate to any course of instruction or other education that involves sports, games, or hobbies, or any noncredit course. However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify. Comprehensive or bundled fees. Some eligible educational institutions combine all of their fees for an academic period into one amount. If you don't receive or don't have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed earlier, contact the institution. The institution is generally required to make this allocation and provide you with the amount you paid for qualified education expenses on Form 1098-T, Tuition Statement. The 4012 states if a client with a 1098-T does not have a copy of their account statement from the school then have them retrieve a copy. Review of the student’s account statement is necessary because not all fees required by the institution are eligible expenses for claiming education credits. Each school sets up their account statements differently so you will need to be methodical in your analysis of the statement. Generally, if a fee is required for enrollment and is not specifically excluded by IRS, then allow the expense. The list provided here is from Publication 970.

This is an example of a student account statement available from the school. Each school’s statement will be set up differently but will contain the same basic information. The first four lines show charges to the student’s account indicating they registered for the 2018 spring semester in December of 2017. The next three lines demonstrate what dropping a class will look like. Notice that these entries are negative numbers indicating these charges were removed from the student’s account. The last three lines are payments of one kind or another. In this example we have a student loan, Pell Grant and a payment made by the student. You’ll notice the term balance is zero. This is important because only those expenses paid in 2018 are eligible for the credit.

The primary reason for reviewing the account statement is to determine if all tuition and fees paid were qualifying expenses. Unless the expense is specifically excluded by IRS allow the expense. The best resource for this is Publication 970. In this example the tuition and general use fee are qualifying expenses. The accident insurance and parking permit are excluded and would not be included in qualifying expenses.

This example demonstrates what dropping a class looks like on an account statement. The account is credited with all tuition and fees associated with the class. In this case it includes, tuition, general use fee and accident insurance. To determine qualifying expenses: Start with tuition of $12,624 Add general use fee of $576 Do not add the student accident insurance or parking permit fees to your total since they are not qualified expenses. Subtract $3,156 in tuition for dropped class Also subtract $144 general use fee associated with dropped class. Don’t subtract the fee for accident insurance related to the dropped class because we did not include it to begin with. The remaining amount of $9,900 are qualifying expenses To get the amount of expenses available to claim the credit, you reduce qualifying expenses by the amount of the Pell grant, which is $5,360 Expenses available for calculating the credit are $4,540 This example only has a Pell Grant; keep in mind that you must reduce qualified expenses by any tax favored monies or distributions.

Determining Eligible Expenses or Income Calculating expenses available for credit The expense must be paid during the calendar year. Expenses paid in December 2018 for Spring 2019 semester qualify for 2018. Reduce expenses by any scholarships or grants received. The amount of expenses that exceed scholarships and grants can be used to calculate the credit. The amount of scholarships and grants that exceed expenses is reported on the student’s return as income. Read slide

Determining Eligible Expenses or Income In this example the 1098-T indicates the client has eligible expenses. You would review the student account statement to verify that all the fees were eligible expenses. If claiming the American Opportunity credit, add any books and supplies that were paid for in 2018. Reduce the expenses by the amount of scholarships and grants to get the amount of eligible expenses available to calculate the credit.

Determining Eligible Expenses or Income In this example the 1098-T indicates the student has scholarship or grant income. Review the student account statement to verify all the fees paid were included in box 1 of the 1098-T. Add any books and supplies that were paid for in 2018. Reduce the scholarships and grants by the amount of expenses paid to get the amount of scholarship and/or grant income for the student’s return. Remember, the tax credit goes on the return of whoever claims the student, and taxable scholarship or grant income goes on the student’s return.

Transferring Grants and Scholarships to Income Transferring grants and/or scholarships to income This option uses all or part of scholarships and grants toward living expenses (reported as income on the student’s return, since scholarships and grants are taxable when used toward living expenses) and allows the remaining total of education expenses paid to be available for tax credits on the return where the student is claimed. Students can choose how they want to allocate grant or scholarship money. Verify the grant or scholarship can be used for living expenses. This option should only be considered when the available expenses are below $4,000.00 for American Opportunity Credit and below $10,000.00 for Lifetime Learning Credit. Whenever possible the best option is to have the parent’s and student come in together to get their return’s prepared. Read slide For example, if after accounting for scholarships and grants to cover expenses the student still has $4,000 or more in eligible expenses for purposes of the American Opportunity Credit, it is not beneficial to allocate any amount of scholarship and grants toward living expenses. Another example: if after accounting for scholarships and grants to cover expenses the student has $3,500 in eligible expenses for purposes of the American Opportunity Credit, you would only allocate up to $500 of scholarship and grants toward living expenses in order to maximize the amount of qualified expenses for the credit. For more examples refer to Publication 970

Transferring Grants and Scholarships to Income Tax for Children Who Have Unearned Income Form 8615 (AKA the Kiddie Tax) When moving scholarship/grant monies to the student’s return as income, keep in mind… Form 8615, Tax for Certain Children Who Have Unearned Income, may be required if scholarship income exceeds $2100 and student’s income meets filing requirements. This provision applies only when the student is clamed as a dependent by another taxpayer. When determining filing requirements, taxable scholarship is considered earned income. Once income meets filing requirements, the taxable scholarship is considered unearned income when calculating tax. If the student meets filing requirements or intends to file a return to claim federal tax withholding, then Form 8615 is required. Beginning with tax year 2018, Form 8615 is in scope for VITA. Read slide

And a few more items… Read slide.

And a few more items Tuition and Fees Deduction (EXPIRED for TAX YEAR 2018) Tuition and Fees deduction is an adjustment to income that can be taken as an alternative to an education credit. Taking an education credit is generally more beneficial than taking the tuition and fees deduction. Qualified expenses included for the adjustment are tuition and fees which are reduced by scholarships and grants. A maximum adjustment of $4,000 per tax return on $4,000+ of qualified expenses. This is a per return adjustment. Expenses from multiple students can be combined to increase qualified expenses toward the overall maximum of $4,000 limit. When deciding whether to take the tuition and fees deduction or an education credit, consider the effects on both federal and state income tax returns. At the time this training was developed, the tax law for the tuition and fees deduction had expired for tax year 2018. This law may be reinstated. Watch www.irs.gov for the most up-to-date information. Read slide. Our clients who qualify for the American Opportunity or Lifetime Learning credits will, generally speaking, benefit more from taking one of those credits than from the Tuition & Fees Deduction. Always figure the credits first, then compare them to the Tuition & Fees Deduction.

Summary Read slide.

Summary Taxpayer must have a Form 1098-T and copy of Student Account Statement to claim an education credit. Taxable scholarship/grant income is reported on the student’s return when the amount exceeds qualifying education expenses. Tax credits are reported on the tax return of the taxpayer who can claim the student as a dependent. The student claims the credit if no taxpayer claims him as a dependent. American Opportunity Credit Lifetime Learning Credit In some cases, you can report scholarships as income taxable to the student to maximize education credits. Read slide. This concludes the module on Education Benefits. If you need additional information on anything covered in this module refer to Publication 970, Publication 4012 and Publication 17.