Gregory Ford | Dec Internal Revenue Service 2013 FSA Training Conference for Financial Aid Professionals What You Need to Know About Education Tax Credits and Deductions Session 34

Partnership is Key IRS and DOED are working together FAFSA DRT Reaching and serving low income and underserved Communication and Outreach You are a trusted resource for the students and parents you serve Together we can reach and help more of them 2

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The Tax Law is Complex Because of complexity, it is difficult for students to self- identify Result: each year money is left on the table You can help ensure all those who qualify receive the federal tax credits and deductions they deserve and need to pay for higher education 4

IRS Education Credits & Deductions A tax credit reduces the amount of income tax someone may have to pay on a dollar-for-dollar basis for qualified education expenses. – The American Opportunity Tax Credit – The Lifetime Learning Credit A deduction reduces the amount of income that is subject to tax, which generally reduces the amount of tax someone may have to pay. – The tuition and fees deduction There are criteria common to all three benefits 5

6 Who Qualifies? Individuals must meet all three of the following: Pay qualified expenses of higher education Pay the education expenses for a qualified student Must pay the expenses for themselves, their spouse, or for a dependent 6 6

7 Who Does Not Qualify? Individuals cannot claim the credit if any of the following are true: Files married filing separately Is listed as a dependent on another person’s return They or their spouse were a nonresident alien for any part of the year and did not choose to be treated as a resident alien 7 7

8 Funds that Qualify Individuals do not have to reduce the amount of expenses paid by the following: Payments for services, such as wages A loan A gift An Inheritance, or A withdrawal from student’s personal savings Taxable scholarships or fellowships 8 8

9 Expenses that Do Not Qualify Insurance Medical expenses (including student health fees) Room and Board Transportation Personal, Living, or Family Expenses Sports, games, hobbies, and noncredit courses unless included in course of instruction 9 9

10 No Double Credits One expense – One Student – One Education Credit If the funding for the expense is tax free – You can’t claim the credit 10

AOTC Enhances the “Hope Credit” Added expenses for books, supplies and equipment need for a course of study to the list of qualifying expenses Allows the credit to be claimed for four post-secondary education years, instead of two The credit is available to individuals with a higher adjusted gross income Starts to phase out at $80,000 for individuals or $160,000 for married couples filing a joint return Completely phases out at $90,000 for individuals or $180,000 for married couples filing a joint return 40% of the credit is refundable, up to $1,000 11

AOTC – Who Qualifies? In addition to basic requirements, student must: Be pursuing an undergraduate degree or other recognized education credential Attend at least half time for one academic period starting during 2012 Not have felony drug conviction on record 12

Overview of Lifetime Learning Credit Up to $2,000 per return Non-refundable Limit on MAGI $62,000 single, head of household, or qualifying widow or widower $124,000 married filing jointly Available for all years of postsecondary education and for courses taken to acquire or improve job skills Available for one or more courses No restriction for felony drug conviction 13

Overview of Tuition and Fees Deduction Maximum benefit—reduce your taxable income by up to $4,000 Limit on MAGI $80,000 single, head of household, or qualifying widow or widower $160,000 married filing jointly Student must: Be enrolled in postsecondary education Have high school diploma or GED Take one or more courses No restriction for felony drug conviction No restriction on number of years 14

Which Credit or Benefit Is More Advantageous? 15

Compare the Benefits – Maximum AOTC Lifetime Learning Credit Tuition and Fee Deduction Up to $2,500 credit per student 40% of credit up to $1,000 may be refundable Up to $2,000 credit per tax return – Not Refundable Deduct up to $4,000 from taxable income – Not Refundable 16

Compare Qualifying Expense Besides Tuition and Fees AOTC Lifetime Learning Credit Tuition and Fee Deduction Course-related books, supplies, and equipment None 17

Compare Who Must Pay the Qualified Expenses? AOTC Lifetime Learning Credit Tuition and Fee Deduction  You or your spouse  Student Third partyˆ  You or your spouse  Student Third partyˆ  You or your spouse 18

Compare the Education that Qualifies AOTC Lifetime Learning Credit Tuition and Fee Deduction Four years of postsecondary education Undergraduate Graduate Courses to acquire or improve job skills Undergraduate Graduate 19

Compare Income Range and Phase out AOTC Lifetime Learning Credit Tuition and Fee Deduction $80,000 to $90,000 for Single or Head Of Household $160,000 to $180,000 for Married Filing Jointly $52,000 to $62,000 for Single or Head Of Household $104,000 to $124,000 for Married Filing Jointly $65,000 to $80,000 for Single or Head Of Household $130,000 to $160,000 for Married Filing Jointly 20

Claiming the Tax Benefit AOTC Lifetime Learning Credit Tuition and Fee Deduction Complete Form 8863 Parts I, III, and IV Complete Form 8863 Parts II and IV Complete Form

Did You Get All That? Not to worry – we have tools for you and the students and parents you help 22

Tools to Help Promote Education Benefits 23

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Interactive Tax Assistant 25

Flyer and YouTube 26

Students Can Find Education Benefit Information at One Convenient Location on IRS.gov 27

You Can Help Use the tools on the Refundable Credit Toolkit Subscribe to the IRS Outreach Corner and place articles in your newsletters or LISTSERV Use our Social Media products Link to products and tools from your websites 28

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Questions? 30