Introduction
IRS Form 1098-T is probably one of the most misunderstood tax forms college students have to deal with. Do you know how the American opportunity tax credit or lifetime learning credit is actually calculated? Where does the 1098-T fit into all of this? In this video, we're making sense of education tax credits!
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▶ RESOURCES MENTIONED
- Tax Deductions for College Students 2018: www.youtube.com/watch
- IRS Publication 970: www.irs.gov/pub/irs-pdf/p970.pdf
- IRS Form 8863: www.irs.gov/pub/irs-pdf/f8863.pdf
- IRS Form 8863 Instructions: www.irs.gov/pub/irs-pdf/i8863.pdf
- Are you eligible to claim an education credit? Find out here: www.irs.gov/help/ita/am-i-eligible-to-claim-an-education-credit
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Video
So I have some bad news for you guys.
If.
You have been taking advantage of education tax credits, such as the American Opportunity, Tax Credit or the Lifetime Learning credit, chances are you (or? Your tax preparer) have been calculating it all wrong.
A few weeks.
Ago.
We posted a video on tax deductions for college students.
And in the comments, we got a lot of questions about the 1098-T and how you use the 1098-T to calculate your tax credit.
So.
This video is a follow-up to that video.
So.
If you haven’t seen that video, go watch that one first and come back to this one.
It’s time to clear the air and learn how this is supposed to go.
So.
Here’s how a lot of people think the credit works.
You, put in the information from your 1098-T, subtracting your reported scholarships and grants in box 5 from the amount listed in either box 1 or box.
2.
That should give you the net amount of qualified expenses for which you can claim either the American Opportunity Tax, Credit and/or Lifetime, Learning, Credit, right?, WRONG.
However.
This is what a lot of tax preparers do and likely what many individuals do when filing taxes for themselves.
So.
Here’s the correct way., Your, American, Opportunity, Tax, Credit and/or Lifetime, Learning Credit are calculated on the Form 8863.
And.
This is what it looks like.
Now, in the instructions for the 8863.
The IRS makes something very clear.
Generally, qualified.
Education, expenses are amounts paid in 2018 for tuition and fees required for the student's enrollment or attendance at an eligible, educational institution., It doesn't matter whether the expenses were paid in cash, by check, by credit or debit card, or with borrowed funds.
The amount of qualified tuition and related expenses reported on Form 1098-T may not reflect the total amount of the qualified tuition and related expenses paid during the year for which you may claim, an education tax credit., You may include qualified tuition and related expenses that are not reported on Form 1098-T.
When claiming one of these education benefits, if you can substantiate payment of these expenses.
You may not include expenses paid on the 1098-T that have been paid by qualified scholarships, including those that were not processed by the universities.
You may receive Form 1098-T from the institution.
Reporting payments received in 2018 (box, 1).
However.
The amount in box 1 of Form 1098-T may be different from the amount you paid (or are treated as having paid).
In, completing Form 8863, use only the amounts you actually paid (plus any amounts you're treated as having paid) in 2018 (reduced, as necessary, as described under Adjusted Qualified, Education, Expenses, later)., See chapters 2 and 3 of Pub.
970 for more information on Form 1098-T.
When doing your taxes.
Your tax preparation.
Software will often require you to replicate what is reported on Form 1098-T by filling in boxes 1 or 2 and 5 at a minimum.
Essentially, Box 1 reports, the amounts actually paid and Box 2 reports the amounts, billed.
Unfortunately, prior to 2018, the majority of schools used the amounts billed method and would fill out Box 2 instead of Box 1, which would not accurately reflect when qualified expenses were actually paid, which is what the education tax deductions and credits require to make sure the amounts used are appropriate for each respective tax year.
This was a big problem because many people who have received the Form 1098-T with Box 2.
Instead of Box 1 filled out have likely experienced something called “expense lumping” and not to their benefit.
(Combining fall semester tuition with spring semester tuition from the following tax year).
Let me, explain., For example.
If you look back to the financial aid, timeline, students, who are enrolled in undergraduate study for four academic years will be in college for five tax years and should therefore, receive five Form, 1098-Ts., However, institutions that use the billing method will often lump the spring and fall semester tuition and qualified expenses figures together, starting in the fall semester of freshman year.
While.
This will not produce any significant changes for the second and third years, the Form 1098-T form is received.
It is likely that the first year will overreport expenses that the student will not need to use all of since they only need $4,000 to get the maximum American, Opportunity, Tax Credit.
And the student may not receive a Form 1098-T in the fifth year or will receive one with an amount reported in box 5 for scholarships and nothing reported in Boxes 1 or 2, which is exactly what happened to me on my 1098-T.
This year.
If, the Form 1098-T information is reported with nothing in Boxes 1 or 2 and an amount in Box 5.
The tax preparation software is likely to consider this scholarship, taxable.
The.
Good news to this problem is that starting in 2018, colleges and universities will be required to report.
The amounts actually paid instead of billed.
So.
Here’s the bottom line.
When doing your taxes and seeking to claim any education credits.
It is best to not rely on only using Form 1098-T., Your tax preparer should also request transaction history from the college, copies of bank/credit card statements, and proof of loan disbursem*nts.
And to see what other expenses were incurred, because, remember, expenses related to other items, such as the purchasing of books and supplies will likely not be reported on the Form 1098-T.
So, now that we’ve hopefully cleared that up, what are some things that you can do if you realize you or your tax preparer have been doing this thing? Wrong? Well, if claiming the credits correctly would have put you (or your parents) in a more favorable tax position.
You always have the option of amending, your tax return up to three years from the date on which you filed.
You also have a very powerful option when claiming education credits that not many people know about, so pay attention! You may be able to increase an education credit and reduce your total tax or increase your tax refund.
If the student (you, your spouse, or your dependent) chooses to include all or part of certain scholarships or fellowship grants in income., The scholarship or fellowship grant must be one that may qualify as a tax-free scholarship under the rules discussed in chapter 1 of Pub., 970.
Also, the scholarship or fellowship grant must be one that may (by its terms) be used for expenses other than qualified education, expenses (such as room and board).
The IRS, even gives an example of this in the instructions for the 8863.
Let’s say, there’s a pretty typical scenario of a parent and child.
The student is in their first year of college.
And they have little to no income of their own.
They want to take advantage of the American Opportunity Tax Credit.
This year.
Assuming that the parent is eligible to take the credit based on income, here’s what they can do.
Example, 1., Last, year, your child, graduated from high school and enrolled in college for the fall, semester.
You and your child meet all other requirements to claim the American opportunity credit.
And you need to determine adjusted qualified education expenses to figure, the credit.
Let’s say, tuition and fees were $5,000 and room and board was $4,000.
Your child received a $5,000 Pell grant and took out a $2,750 student loan to pay.
These expenses.
You paid the remaining $1,250.
The Pell grant by its terms may be used for any of these expenses.
If you and your child choose to apply the Pell grant to the qualified education expenses.
It will qualify as a tax-free scholarship under the rules discussed in chapter 1 of Pub., 970., Your, child, won't include any part of the Pell grant in gross income.
After, reducing qualified education, expenses by the tax-free scholarship.
You will have $0 ($5,000, −, $5,000) of adjusted qualified education, expenses available to figure your credit.
Your credit will be $0.
Example.
2.
The.
Facts are the same as in Example 1, unlike in Example 1, you and your child choose to apply only $1,000 of the Pell grant to the qualified education expenses and to apply the remaining $4,000 to room and board, only $1,000 will qualify as a tax-free scholarship.
Your child will include the $4,000 applied to room and board in gross income.
And it will be treated as earned income for purposes of determining whether your child is required to file a tax return.
If.
The $4,000 is your child’s only income.
Your child won't be required to file a tax return., After, reducing qualified education expenses by the tax-free scholarship.
You will have $4,000 ($5,000, −, $1,000) of adjusted qualified education, expenses available to figure your credit.
Your.
Refundable, American opportunity credit will be $1,000.
Your nonrefundable credit may be as much as $1,500, but depends on your tax liability., If, you're, not otherwise required to file a tax return.
You should file to get a refund of your $1,000, refundable credit, but your tax liability and nonrefundable credit will be $0., For details and more examples.
Please, please.
Please go see Pub.
970, which will be linked once again in the description box, below., Before.
You go, make sure you subscribe and come join the squad –.
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FAQs
How do I calculate AOTC? A11. You calculate the AOTC based on 100 percent of the first $2,000 of qualifying expenses, plus 25 percent of the next $2,000, paid during the tax year.
How do I get the full $2500 American Opportunity credit? ›
To be eligible for AOTC, the student must:
- Be pursuing a degree or other recognized education credential.
- Be enrolled at least half time for at least one academic period* beginning in the tax year.
- Not have finished the first four years of higher education at the beginning of the tax year.
An education credit helps with the cost of higher education by reducing the amount of tax owed on your tax return. If the credit reduces your tax to less than zero, you may get a refund. There are two education credits available: the American opportunity tax credit (AOTC) and the lifetime learning credit (LLC).
How to calculate 8863? ›
To compute the amount of your Lifetime Learning Tax Credit, enter the name, Social Security number, and qualified expenses of each applicable student on IRS Form 8863. Enter $10,000 or your actual expenses, whichever is smaller, then multiply this number by 20 percent. This is your tentative LLTC.
How do you calculate credits earned? ›
It is awarded per subject to measure a student's academic competence and how much work the student has put into a single semester course. The calculation of one credit is as follows: (1 hour's classroom work + 2 hours homework) per week x (15 weeks/semester) = 1 credit for that semester.
How are non refundable education credits calculated? ›
When you claim this credit for education expenses, Form 8863 separately calculates the refundable and nonrefundable portions. For example, if you calculate a $2,000 American Opportunity credit, a maximum of $800 may be reported as a refundable tax credit with the remaining $1,200 reported as a nonrefundable credit.
How do you calculate total qualified education expenses? ›
1. How to Calculate Total Qualified Education Expenses? To calculate your total qualified education expenses, you need to add up all qualifying expenses incurred during the tax year. If you have received a Form 1098-T, you can use the information on it to determine the total expenses.
Does the American Opportunity Tax Credit have a cap of $2500 per student? ›
The American Opportunity Tax Credit (AOTC) is a tax credit for qualified education expenses associated with the first four years of a student's postsecondary education. The maximum annual credit is $2,500 per eligible student.
Why do I not get the full American Opportunity credit? ›
If your MAGI is $80,000-$90,000 (single filers) or $160,000-$180,000 (married filers), your credit amount will be reduced. You cannot claim the AOTC or Lifetime Learning Credit if your income is more than these amounts. The following additional requirements apply for the American Opportunity Tax Credit.
How much education credit can I claim? ›
Lifetime learning credit
How it works: You can claim 20% of the first $10,000 you paid toward 2022 tuition and fees, for a maximum of $2,000. The lifetime learning credit doesn't count living expenses or transportation as eligible expenses.
If you paid qualified educational expenses during a specific tax year to an eligible intuition, then you will receive Form 1098-T. Colleges are required to send the form by January 31 each year, so you should receive it shortly after that. Some colleges may make it available to you electronically.
How many years can you claim education credit on taxes? ›
This credit can help pay for undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit.
What is the income limit for 8863 credit? ›
Limits on modified adjusted gross income (MAGI).
The lifetime learning credit and the American opportunity credit MAGI limits are $180,000 if you're married filing jointly ($90,000 if you're filing single, head of household, or qualifying surviving spouse). See Table 1 and the instructions for line 3 or line 14.
How do you calculate American Opportunity Credit? ›
How much is tax credit under American Opportunity Tax Credit? The tax credit under AOTC is $2,500 per eligible student. The tax credit is allowed for qualified expenses incurred during the first four years of undergraduate and graduate studies.
What qualified education expenses are used to calculate the American Opportunity Credit? ›
What expenses are eligible for the American Opportunity credit? Qualified education expenses include amounts spent tuition and required fees and materials for course enrollment. This includes books, supplies, and equipment needed for a course of study.
How are credits measured? ›
One credit hour is equal to 15 to 16 hours of instruction. Your credit hours are calculated over the full semester, which is generally 16 weeks. Most lecture and seminar courses are worth 3 credit hours. You must complete at least 45 – 48 hours of class time in one semester.
How do you calculate credits from percentages? ›
How to calculate your credit utilization ratio
- Add up all of your revolving credit balances.
- Add up all of your credit limits.
- Divide your total revolving credit balance (from Step 1) by your total credit limit (from Step 2).
- Multiply that number (from Step 3) by 100 to see your credit utilization as a percentage.
If you attend college on a traditional campus, it will take two years to complete 60 college credits. However, you may have the option to test out of at least 30 credit hours, speeding the time to completion by one year.
Which education tax credit is best? ›
As a result, although the American Opportunity Tax Credit yields a higher tax credit of up to $2,500 per student and is the best bet for most undergraduates, the Lifetime Learning Credit may be particularly helpful in reducing costs for graduate students or students who are taking post-secondary courses but not ...
Can you claim both education credits? ›
You can claim these two benefits on the same return but not for the same student or the same qualified expenses. See "No Double Benefits Allowed" for more information on claiming one or more education benefits.
Nonrefundable Tax Credits. Both refundable and nonrefundable tax credits lower your tax bill dollar for dollar. Nonrefundable credits only apply to your tax liability, while refundable tax credits can wipe out your tax bill and provide a refund for the remaining credit.
What are examples of qualified education expenses? ›
Key Takeaways
- A qualified higher education expense is any money paid by an individual for expenses required to attend a college, university, or other post-secondary institution.
- QHEEs include tuition, books, fees, and supplies such as laptops and computers, but expenses like insurance and health fees are not eligible.
Total Expenses = Net Revenue - Net Income.
How to calculate 1098-T refund? ›
The amount of the credit is figured by calculating 20% of the first $10,000 of qualified education expenses – up to that maximum of $2,000 per taxpayer.
What is the income limit for American Opportunity Tax Credit 2023? ›
American Opportunity Credit
To claim a $2,500 tax credit in 2023, single filers must have a MAGI of $80,000 or less, and joint filers must have a MAGI of $160,000 or less. A partial credit is available for single filers with a MAGI between $80,000 and $90,000, and joint filers with a MAGI between $160,000 and $180,000.
Why did I only get $1,000 for the American Opportunity credit? ›
The 1000 came from the 8863. While the total amount of the AOC is worth up to $2,500, only $1,000 of the AOC is actually refundable. This means you can use the other portion to reduce your tax liability if you have any. But, only $1,000 can be directly added to your refund without any tax liability.
What happens if I claim the American Opportunity credit too many times? ›
Taxpayers who are found to have erroneously claimed the credit could face an audit and have to pay interest and penalties, Lemons said, adding that they may file an amended tax return.
Can I claim the American Opportunity Credit if my parents paid my tuition? ›
If your parents paid your tuition, you may still be able to claim the American Opportunity Credit. However, you must meet the eligibility requirements for the AOTC and your parents cannot have claimed you as a dependent. If they claimed you as a dependent and paid your tuition, the tax credit could go to them.
When should I stop claiming my college student as a dependent? ›
Normally, the IRS only allows parents to claim a child as financially dependent until he or she reaches age 19. The age limit increases to 24 if you attend college full-time at least five months out of the year.
Can I claim the American Opportunity Tax Credit if I get financial aid? ›
Most Pell Grant recipients who are eligible for the AOTC would benefit from allocating a portion their Pell Grant to living expenses so as to be able to claim at least $2,000 of QTRE for the AOTC.
The Lifetime Learning Tax Credit is not available when: The taxpayer claimed the AOTC during the same tax year. The taxpayer pays for college expenses for someone who is not a dependent. The taxpayer files federal income tax returns as married filing separately.
What is the difference between the American Opportunity Tax Credit and the Lifetime Learning Credit? ›
What Are the Major Differences Between the AOTC and the Lifetime Learning Credit? The AOTC has a maximum of $2,500, and the Lifetime Learning Credit maximum is $2,000. Both credits cannot be claimed in the same tax year for the same student.
Is the American Opportunity Credit phase out for 2023? ›
The maximum credit is $2,500 as of the 2022 tax year (the return you'll file in 2023) and a portion of it is refundable. . This is a phase-out tax credit so you won't qualify for it if you earn too much.
What is the phase out for education credits? ›
Tax credit can be received for 20% of the first $10,000 in eligible expenses. Income Limits (for 2022 and 2023): the credit starts phasing out at an increased MAGI of $80,000 ($160,000 for joint filers) and 100% phaseout occurs at a MAGI of $90,000 ($180,000 for married filing jointly) in 2022 and 2023.
Who gets the Lifetime Learning Credit? ›
In order to qualify for the Lifetime Learning credit, you must have made tuition and fee payments to a post-secondary school (after high school) during the year. You can claim the credit for any post-secondary classes you take; you don't have to be working towards a degree.
What is the income limit for the Lifetime Learning Credit in 2023? ›
The Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint returns).
How do I maximize my Lifetime Learning Credit? ›
To maximize the Lifetime Learning Credit, one should see if they are eligible for the credit, then take the maximum qualifying education expenses and claim the full credit amount for each eligible student. One may also consider combining this credit with other education-related tax credits.
What would disqualify a taxpayer from claiming the American Opportunity Credit? ›
You may not claim the AOTC unless you, your spouse (if you are filing a joint return) and the qualifying student have a valid taxpayer identification number (TIN) issued or applied for on or before the due date of the return (including extensions).
What prevents a taxpayer from taking the American Opportunity Tax Credit on form 8863? ›
Form 8863 - May Not Qualify for Refundable Portion of American Opportunity Credit. If the taxpayer was under age 24 at the end of the year and certain conditions apply, they may not qualify to receive the refundable portion of the American Opportunity Credit.
Is room and board a qualified education expense? ›
Expenses that Do Not Qualify
Even if you pay the following expenses to enroll or attend the school, the following are not qualified education expenses: Room and board. Insurance. Medical expenses (including student health fees)
You can use a 529 plan to pay for qualified room and board expenses like rent, other housing costs, and meal plans. This applies to on-campus and off-campus room and board as long as you incurred the costs while the beneficiary was enrolled at school.
What is the maximum qualifying expenses for American Opportunity Credit? ›
The American Opportunity Tax Credit (AOTC) is a tax credit for qualified education expenses associated with the first four years of a student's postsecondary education. The maximum annual credit is $2,500 per eligible student.
Which of the following is true regarding education credits? ›
The correct option is Option E. Explanation: The government provides education tax credits to the taxpayers to help them reduce their tax liabilities. The expenses related to education are allowed to be deducted in the tax return.
Does room and board count for American Opportunity credit? ›
American Opportunity Tax Credit Qualifying Expenses
Qualifying expenses for the AOTC include tuition, fees, and course materials. Course materials include textbooks, supplies, and equipment. Amounts spent on living expenses (room and board, transportation, and health care) are not eligible.
Can I deduct a computer or laptop that I bought for school? ›
The cost of a personal computer is generally a personal expense that's not deductible. However, you may be able to claim an American opportunity tax credit for the amount paid to buy a computer if you need a computer to attend your university.
What is the 4000 education tax credit? ›
The tax credit is based on up to $4,000 in eligible higher education expenses, equal to 100% of the first $2,000 in eligible expenses and 25% of the second $2,000. This tax credit can be taken for up to four years of higher education expenses.
How to calculate 1098 T? ›
The amount of the credit is figured by calculating 20% of the first $10,000 of qualified education expenses – up to that maximum of $2,000 per taxpayer.
What is the 1500 education tax credit? ›
The nonrefundable $1,500 portion of the credit is used first to reduce your tax bill to $400. Then the first $400 of the refundable credit is used to lower your tax bill to zero. Finally, the last $600 of the refundable credit is paid to you as a tax refund.
What is the $2500 education credit? ›
The American Opportunity Tax Credit is a tax credit to help pay for education expenses paid for the first four years of education completed after high school. You can get a maximum annual credit of $2,500 per eligible student and 40% or $1,000 could be refunded if you owe no tax.
What is the max tax credit for tuition? ›
All about the AOTC
The first is the American Opportunity Tax Credit (AOTC), a tax credit of up to $2,500 of the cost of tuition, fees and course materials paid during the tax year.
If the company you currently work for has provided funds for educational assistance such as tuition reimbursem*nt or employer student loan repayment, you may exclude an amount from your taxable income. This amount goes up to $5,250.
What is 1098-T for dummies? ›
The IRS Form 1098-T is an information form filed with the Internal Revenue Service. You, or the person who may claim you as a dependent, may be able to claim an education tax credit on IRS Form 1040 for the qualified tuition and related expenses that were actually paid during the calendar year.
How do I calculate the amount of qualified education expenses? ›
1. How to Calculate Total Qualified Education Expenses? To calculate your total qualified education expenses, you need to add up all qualifying expenses incurred during the tax year. If you have received a Form 1098-T, you can use the information on it to determine the total expenses.
What is the income limit for the 1098-T tax credit? ›
You can get the full education tax credit if your modified adjusted gross income, or MAGI, was $80,000 or less in 2022 ($160,000 or less if you file your taxes jointly with a spouse). If your MAGI was between $80,000 and $90,000 ($160,000 and $180,000 for joint filers), you'll receive a reduced credit.
Can I claim education tax credit without 1098-T? ›
You generally do have to receive a Form 1098-T to claim a continuing education tax credit or deduct your tuition expenses. However, you may claim the credit without Form 1098-T if you have some kind of documentation to prove the expense and you requested a 1098-T.
Is college room and board tax deductible? ›
Qualifying expenses include what you pay in tuition and mandatory enrollment fees to attend any accredited public or private institution above the high school level. You cannot take a deduction for: Room and board, optional fees (such as for student health insurance), transportation, or other similar personal expenses.
What is the phase out for education credit? ›
For 2022, the amount of your education savings bond interest exclusion is gradually reduced (phased out) if your MAGI is between $85,800 and $100,800 ($128,650 and $158,650 if you file a joint return). You can't exclude any of the interest if your MAGI is $100,800 or more ($158,650 or more if you file a joint return).
Does everyone get the American Opportunity Credit? ›
What Are the Income Limits for the AOTC?
| Income Limits for the American Opportunity Tax Credit |
|---|
| Single | Married Filing Jointly |
|---|
| Full Credit | $80,000 or less | $160,000 or less |
| Partial Credit | More than $80,000 but less than $90,000 | More than $160,000 but less than $180,000 |
| No Credit | More than $90,000 | More than $180,000 |
