Education Tax Provisions 2015 Maine Tax Practitioner Institute - - PowerPoint PPT Presentation

Education Tax Provisions

2015 Maine Tax Practitioner Institute presented by SCORE

Karla J. Brannen, CPA October 2015

Education Tax Credits

 American Opportunity Credit (AOC)  Lifetime Learning Credit

American Opportunity Credit

 Expanded and renamed the Hope Credit.  $2,500 per eligible student.  Available for the first four years of

postsecondary education.

 Expires December 31, 2017

Eligible Students

 Must meet ALL of the following:

 Student did not have expenses that were used to

calculate the AOC (or Hope Credit) in any four earlier tax years.

 Student has not completed the first four years of

postsecondary education.

 Student is enrolled at last half‐time.  Student is not convicted of controlled substance.

Qualified Higher Education Expenses (QHEE)

 Tuition and fees  Cost of course material  Need to be paid on behalf of the taxpayer,

spouse or dependents (claim an exemption).

 Room and board, insurance, medical fees and

transportation do not qualify.

Adjusted Qualified Education Expenses

 QHEE must be reduced by the following tax‐free

benefits

 Tax‐free scholarships and fellowships  Pell grants  Expenses used to compute tax‐free withdrawals from a

Coverdell educations savings account.

 Expenses used to compute tax‐free withdrawals from a

§529 plan.

Eligible Educational Institutions

 Any college, university, vocational school or

• ther postsecondary educational institution

eligible to participate in a student aid program administered by the U.S. Department of Education.

Income Limitations

 Phased out for taxpayers with MAGI of:

Married filing jointly: $160,000 to $180,000 Single/HOH/QW: $80,000 to $90,000 Married filing separately: Credit not available

Calculating the Credits

Start with Part III

Form 8863 (2014) Page 2 Name(s) shown on return Your social security number

▲

!

CAUTION

Complete Part III for each student for whom you are claiming either the American

• pportunity credit or lifetime learning credit. Use additional copies of Page 2 as needed for

each student.

Part III Student and Educational Institution Information See instructions.

20 Student name (as shown on page 1 of your tax return) 21 Student social security number (as shown on page 1 of your tax return) 22 Educational institution information (see instructions)

• a. Name of first educational institution

(1) Address. Number and street (or P.O. box). City, town or post office, state, and ZIP code. If a foreign address, see instructions. (2) Did the student receive Form 1098-T from this institution for 2014? Yes No (3) Did the student receive Form 1098-T from this institution for 2013 with Box 2 filled in and Box 7 checked? Yes No If you checked “No” in both (2) and (3), skip (4). (4) If you checked “Yes” in (2) or (3), enter the institution's federal identification number (from Form 1098-T). –

• b. Name of second educational institution (if any)

(1) Address. Number and street (or P.O. box). City, town or post office, state, and ZIP code. If a foreign address, see instructions. (2) Did the student receive Form 1098-T from this institution for 2014? Yes No (3) Did the student receive Form 1098-T from this institution for 2013 with Box 2 filled in and Box 7 checked? Yes No If you checked “No” in both (2) and (3), skip (4). (4) If you checked “Yes” in (2) or (3), enter the institution's federal identification number (from Form 1098-T). – 23 Has the Hope Scholarship Credit or American opportunity credit been claimed for this student for any 4 tax years before 2014? Yes — Stop! Go to line 31 for this student. No — Go to line 24. 24 Was the student enrolled at least half-time for at least one academic period that began or is treated as having begun in 2014 at an eligible educational institution in a program leading towards a postsecondary degree, certificate, or

• ther recognized postsecondary educational credential?

(see instructions) Yes — Go to line 25. No — Stop! Go to line 31 for this student. 25 Did the student complete the first 4 years of post-secondary education before 2014? Yes — Stop! Go to line 31 for this student. No — Go to line 26. 26 Was the student convicted, before the end of 2014, of a felony for possession or distribution of a controlled substance? Yes — Stop! Go to line 31 for this student. No — Complete lines 27 through 30 for this student.

▲

!

CAUTION

You cannot take the American opportunity credit and the lifetime learning credit for the same student in the same year. If you complete lines 27 through 30 for this student, do not complete line 31.

American Opportunity Credit

27 Adjusted qualified education expenses (see instructions). Do not enter more than $4,000 . . . . 27 28 Subtract $2,000 from line 27. If zero or less, enter -0-. . . . . . . . . . . . . . . . . 28 29 Multiply line 28 by 25% (.25) . . . . . . . . . . . . . . . . . . . . . . . . . 29 30 If line 28 is zero, enter the amount from line 27. Otherwise, add $2,000 to the amount on line 29 and enter the result. Skip line 31. Include the total of all amounts from all Parts III, line 30 on Part I, line 1 . 30

Lifetime Learning Credit

31 Adjusted qualified education expenses (see instructions). Include the total of all amounts from all Parts III, line 31, on Part II, line 10 . . . . . . . . . . . . . . . . . . . . . . . . . 31

Form 8863 (2014)

Barry Bickford 123 45 6789 Bailey Bickford 987 65 4321 Iowa State University 123 Blue St., Ames, IA 50011

✔ ✔

3 9 9 9 9 9 9 9

✔ ✔ ✔ ✔

4000 2000 500 2500

Form 8863

Department of the Treasury Internal Revenue Service (99)

Education Credits (American Opportunity and Lifetime Learning Credits)

▶ Attach to Form 1040 or Form 1040A.

▶ Information about Form 8863 and its separate instructions is at www.irs.gov/form8863.

OMB No. 1545-0074

2014

Attachment Sequence No. 50 Name(s) shown on return Your social security number

▲

!

CAUTION

Complete a separate Part III on page 2 for each student for whom you are claiming either credit before you complete Parts I and II.

Part I Refundable American Opportunity Credit

1 After completing Part III for each student, enter the total of all amounts from all Parts III, line 30 . 1 2 Enter: $180,000 if married filing jointly; $90,000 if single, head of household, or qualifying widow(er) . . . . . . . . . . . . . 2 3 Enter the amount from Form 1040, line 38, or Form 1040A, line 22. If you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from Puerto Rico, see Pub. 970 for the amount to enter . . . . . . . . 3 4 Subtract line 3 from line 2. If zero or less, stop; you cannot take any education credit . . . . . . . . . . . . . . . . . . . 4 5 Enter: $20,000 if married filing jointly; $10,000 if single, head of household,

• r qualifying widow(er)

. . . . . . . . . . . . . . . . . 5 6 If line 4 is:

• Equal to or more than line 5, enter 1.000 on line 6 .

. . . . . . . . . . .

• Less than line 5, divide line 4 by line 5. Enter the result as a decimal (rounded to

at least three places) . . . . . . . . . . . . . . . . . . . . .

}

. . . . 6 . 7 Multiply line 1 by line 6. Caution: If you were under age 24 at the end of the year and meet the conditions described in the instructions, you cannot take the refundable American opportunity credit; skip line 8, enter the amount from line 7 on line 9, and check this box . . . . ▶ 7 8 Refundable American opportunity credit. Multiply line 7 by 40% (.40). Enter the amount here and

• n Form 1040, line 68, or Form 1040A, line 44. Then go to line 9 below.

. . . . . . . . . 8

Part II Nonrefundable Education Credits

9 Subtract line 8 from line 7. Enter here and on line 2 of the Credit Limit Worksheet (see instructions) 9 10 After completing Part III for each student, enter the total of all amounts from all Parts III, line 31. If zero, skip lines 11 through 17, enter -0- on line 18, and go to line 19 . . . . . . . . . . 10 11 Enter the smaller of line 10 or $10,000 . . . . . . . . . . . . . . . . . . . . 11 12 Multiply line 11 by 20% (.20) . . . . . . . . . . . . . . . . . . . . . . . 12 13 Enter: $128,000 if married filing jointly; $64,000 if single, head of household, or qualifying widow(er) . . . . . . . . . . . . . 13 14 Enter the amount from Form 1040, line 38, or Form 1040A, line 22. If you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from Puerto Rico, see Pub. 970 for the amount to enter . . . . . . . . 14 15 Subtract line 14 from line 13. If zero or less, skip lines 16 and 17, enter -0-

• n line 18, and go to line 19

. . . . . . . . . . . . . . . 15 16 Enter: $20,000 if married filing jointly; $10,000 if single, head of household,

• r qualifying widow(er)

. . . . . . . . . . . . . . . . . 16 17 If line 15 is:

• Equal to or more than line 16, enter 1.000 on line 17 and go to line 18
• Less than line 16, divide line 15 by line 16. Enter the result as a decimal (rounded to at least three

places) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 . 18 Multiply line 12 by line 17. Enter here and on line 1 of the Credit Limit Worksheet (see instructions) ▶ 18 19 Nonrefundable education credits. Enter the amount from line 7 of the Credit Limit Worksheet (see instructions) here and on Form 1040, line 50, or Form 1040A, line 33 . . . . . . . . . . 19

For Paperwork Reduction Act Notice, see your tax return instructions.

• Cat. No. 25379M

Form 8863 (2014)

Barry Bickford 123 45 6789 2500 90000 20000 70000 10000 1 000 2500 1000 1500

Lifetime Learning Credit

 A nonrefundable credit.  20% of the first $10,000 of qualified expenses.  Available for all years of postsecondary

education, including graduate and professional school.

Eligible Students

 The student is enrolled in one or more courses

at an eligible educational institution.

Eligible Students

 The following persons cannot claim the credit:

 Married filing separately taxpayers  Anyone listed as a dependent on another taxpayer’s

tax return.

 Taxpayers who are nonresident aliens and do not

elect to be treated as resident aliens.

Qualified Expenses (QHEE)

 Same as for AOC except includes:

 Courses taken to acquire or improve job skills.  Student activity fees, course related books,

supplies and equipment if they must be paid to the eligible institution for enrollment or attendance.

Income Limitations

 Phased out for taxpayers with MAGI of:

2015

Married filing jointly: $110,000 to $130,000 Single/HOH/QW: $55,000 to $65,000 Married filing separately: N/A

Form 8863

Department of the Treasury Internal Revenue Service (99)

Education Credits (American Opportunity and Lifetime Learning Credits)

▶ Attach to Form 1040 or Form 1040A.

▶ Information about Form 8863 and its separate instructions is at www.irs.gov/form8863.

OMB No. 1545-0074

2014

Attachment Sequence No. 50 Name(s) shown on return Your social security number

▲

!

CAUTION

Complete a separate Part III on page 2 for each student for whom you are claiming either credit before you complete Parts I and II.

Part I Refundable American Opportunity Credit

1 After completing Part III for each student, enter the total of all amounts from all Parts III, line 30 . 1 2 Enter: $180,000 if married filing jointly; $90,000 if single, head of household, or qualifying widow(er) . . . . . . . . . . . . . 2 3 Enter the amount from Form 1040, line 38, or Form 1040A, line 22. If you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from Puerto Rico, see Pub. 970 for the amount to enter . . . . . . . . 3 4 Subtract line 3 from line 2. If zero or less, stop; you cannot take any education credit . . . . . . . . . . . . . . . . . . . 4 5 Enter: $20,000 if married filing jointly; $10,000 if single, head of household,

• r qualifying widow(er)

. . . . . . . . . . . . . . . . . 5 6 If line 4 is:

• Equal to or more than line 5, enter 1.000 on line 6 .

. . . . . . . . . . .

• Less than line 5, divide line 4 by line 5. Enter the result as a decimal (rounded to

at least three places) . . . . . . . . . . . . . . . . . . . . .

}

. . . . 6 . 7 Multiply line 1 by line 6. Caution: If you were under age 24 at the end of the year and meet the conditions described in the instructions, you cannot take the refundable American opportunity credit; skip line 8, enter the amount from line 7 on line 9, and check this box . . . . ▶ 7 8 Refundable American opportunity credit. Multiply line 7 by 40% (.40). Enter the amount here and

• n Form 1040, line 68, or Form 1040A, line 44. Then go to line 9 below.

. . . . . . . . . 8

Part II Nonrefundable Education Credits

9 Subtract line 8 from line 7. Enter here and on line 2 of the Credit Limit Worksheet (see instructions) 9 10 After completing Part III for each student, enter the total of all amounts from all Parts III, line 31. If zero, skip lines 11 through 17, enter -0- on line 18, and go to line 19 . . . . . . . . . . 10 11 Enter the smaller of line 10 or $10,000 . . . . . . . . . . . . . . . . . . . . 11 12 Multiply line 11 by 20% (.20) . . . . . . . . . . . . . . . . . . . . . . . 12 13 Enter: $128,000 if married filing jointly; $64,000 if single, head of household, or qualifying widow(er) . . . . . . . . . . . . . 13 14 Enter the amount from Form 1040, line 38, or Form 1040A, line 22. If you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from Puerto Rico, see Pub. 970 for the amount to enter . . . . . . . . 14 15 Subtract line 14 from line 13. If zero or less, skip lines 16 and 17, enter -0-

• n line 18, and go to line 19

. . . . . . . . . . . . . . . 15 16 Enter: $20,000 if married filing jointly; $10,000 if single, head of household,

• r qualifying widow(er)

. . . . . . . . . . . . . . . . . 16 17 If line 15 is:

• Equal to or more than line 16, enter 1.000 on line 17 and go to line 18
• Less than line 16, divide line 15 by line 16. Enter the result as a decimal (rounded to at least three

places) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 . 18 Multiply line 12 by line 17. Enter here and on line 1 of the Credit Limit Worksheet (see instructions) ▶ 18 19 Nonrefundable education credits. Enter the amount from line 7 of the Credit Limit Worksheet (see instructions) here and on Form 1040, line 50, or Form 1040A, line 33 . . . . . . . . . . 19

For Paperwork Reduction Act Notice, see your tax return instructions.

• Cat. No. 25379M

Form 8863 (2014)

Kyle and Megan Potter 444 00 1122 10000 10000 2000 128000 110000 18000 20000 900 1800 1800

Form 8863 (2014) Page 2 Name(s) shown on return Your social security number

▲

!

CAUTION

Complete Part III for each student for whom you are claiming either the American

• pportunity credit or lifetime learning credit. Use additional copies of Page 2 as needed for

each student.

Part III Student and Educational Institution Information See instructions.

20 Student name (as shown on page 1 of your tax return) 21 Student social security number (as shown on page 1 of your tax return) 22 Educational institution information (see instructions)

• a. Name of first educational institution

(1) Address. Number and street (or P.O. box). City, town or post office, state, and ZIP code. If a foreign address, see instructions. (2) Did the student receive Form 1098-T from this institution for 2014? Yes No (3) Did the student receive Form 1098-T from this institution for 2013 with Box 2 filled in and Box 7 checked? Yes No If you checked “No” in both (2) and (3), skip (4). (4) If you checked “Yes” in (2) or (3), enter the institution's federal identification number (from Form 1098-T). –

• b. Name of second educational institution (if any)

(1) Address. Number and street (or P.O. box). City, town or post office, state, and ZIP code. If a foreign address, see instructions. (2) Did the student receive Form 1098-T from this institution for 2014? Yes No (3) Did the student receive Form 1098-T from this institution for 2013 with Box 2 filled in and Box 7 checked? Yes No If you checked “No” in both (2) and (3), skip (4). (4) If you checked “Yes” in (2) or (3), enter the institution's federal identification number (from Form 1098-T). – 23 Has the Hope Scholarship Credit or American opportunity credit been claimed for this student for any 4 tax years before 2014? Yes — Stop! Go to line 31 for this student. No — Go to line 24. 24 Was the student enrolled at least half-time for at least one academic period that began or is treated as having begun in 2014 at an eligible educational institution in a program leading towards a postsecondary degree, certificate, or

• ther recognized postsecondary educational credential?

(see instructions) Yes — Go to line 25. No — Stop! Go to line 31 for this student. 25 Did the student complete the first 4 years of post-secondary education before 2014? Yes — Stop! Go to line 31 for this student. No — Go to line 26. 26 Was the student convicted, before the end of 2014, of a felony for possession or distribution of a controlled substance? Yes — Stop! Go to line 31 for this student. No — Complete lines 27 through 30 for this student.

▲

!

CAUTION

You cannot take the American opportunity credit and the lifetime learning credit for the same student in the same year. If you complete lines 27 through 30 for this student, do not complete line 31.

American Opportunity Credit

27 Adjusted qualified education expenses (see instructions). Do not enter more than $4,000 . . . . 27 28 Subtract $2,000 from line 27. If zero or less, enter -0-. . . . . . . . . . . . . . . . . 28 29 Multiply line 28 by 25% (.25) . . . . . . . . . . . . . . . . . . . . . . . . . 29 30 If line 28 is zero, enter the amount from line 27. Otherwise, add $2,000 to the amount on line 29 and enter the result. Skip line 31. Include the total of all amounts from all Parts III, line 30 on Part I, line 1 . 30

Lifetime Learning Credit

31 Adjusted qualified education expenses (see instructions). Include the total of all amounts from all Parts III, line 31, on Part II, line 10 . . . . . . . . . . . . . . . . . . . . . . . . . 31

Form 8863 (2014)

Kyle and Megan Potter 444 00 1122 Clayton Potter 555 11 2233 University of Illinois 999 Green St., Urbana, IL 61801

✔ ✔

3 6 1 2 3 4 5 6 7

✔

10000

Coordination of Credits

 The AOC and the Lifetime Learning credits

cannot be claimed simultaneously for the same student or for the same expenses.

 However, planning when the credits will be

claimed can result in increased tax savings

• ver time.

Planning Tip

 Usually, the academic school year begins in

the fall.

 Therefore, it is possible to obtain five years of

tax credits for only four years for school.

 Most colleges give students the option of

paying for the spring semester in either December or January. Pay in January!

Tuition and Fees Deduction

 Can reduce AGI up to $4,000.

Not allowed with AOC or Lifetime Learning Credit on same student.

Eligible Students

 The student is enrolled in one or more courses

at an eligible educational institution.

 The student does not have to be enrolled at

least half‐time (AOC Requirement).

Qualified Expenses

 Tuition and fees  Student activity fees, books, supplies and

equipment qualify only if paid as condition of enrollment or attendance.

 Must be paid to the educational institution.

Adjusted Qualified Education Expenses (AQEE)

 QHEE must be reduced by the following tax‐free

benefits:

 Tax‐free scholarships and fellowships  Pell grants  Expenses used to compute tax‐free withdrawals from a

Coverdell ESA’s.

 The excludable income portion of a distribution from a

§529 plan.

Adjusted Qualified Education Expenses, Cont’d.

 Expenses used to compute tax‐free interest form US

savings bonds.

 Veterans’ educational assistance.  Employer provided educational assistance.

Eligibility to Claim the Deduction

 Tuition and fees deduction is not allowed if any

• f the following apply:

 Tuition and fees paid by dependent  Married filing separately  Non‐resident alien and did not elect to be treated as

resident alien.

 Tuition and fees deducted under another Code provision.  Taxpayer claiming AOC/Lifetime Learning credit for same

student.

Eligibility to Claim the Deduction, Cont’d.

 When the taxpayer claims an exemption for an eligible

student, the tuition and fees deduction is calculated using only the educational expenses paid by the taxpayer and their spouse.

 If the taxpayer claims an exemption for an eligible student but the

student paid the tuition and fees, then NO ONE is allowed the deduction.

 If the taxpayer does not claim an exemption for the eligible

student, but is eligible to do so, then NO ONE is allowed to claim the tuition and fees deduction.

Third‐Party Payments

 Any educational expenses paid by a third‐party (such

as grandparent or other relative) are treated as paid by the student.

Form 8917 Department of the Treasury Internal Revenue Service

Tuition and Fees Deduction

▶ Attach to Form 1040 or Form 1040A. ▶ Information about Form 8917 and its instructions is at www.irs.gov/form8917.

OMB No. 1545-0074

2014

Attachment Sequence No. 60 Name(s) shown on return Your social security number

▲

!

CAUTION

You cannot take both an education credit from Form 8863 and the tuition and fees deduction from this form for the same student for the same tax year.

Before you begin: ✔ To see if you qualify for this deduction, see Who Can Take the Deduction in the instructions below. ✔ If you file Form 1040, figure any write-in adjustments to be entered on the dotted line next to Form

1040, line 36. See the 2014 Form 1040 instructions for line 36. 1

(a) Student’s name (as shown on page 1 of your tax return) First name Last name (b) Student’s social security number (as shown on page 1 of your tax return) (c) Adjusted qualified expenses (see instructions)

2 Add the amounts on line 1, column (c), and enter the total . . . . . . . . . . . . . 2 3 Enter the amount from Form 1040, line 22, or Form 1040A, line 15 3 4 Enter the total from either:

• Form 1040, lines 23 through 33, plus any write-in adjustments

entered on the dotted line next to Form 1040, line 36, or

• Form 1040A, lines 16 through 18.

. . . . . . . . . . 4 5 Subtract line 4 from line 3.* If the result is more than $80,000 ($160,000 if married filing jointly), stop; you cannot take the deduction for tuition and fees . . . . . . . . . . . . . 5 *If you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from Puerto Rico, see Effect of the Amount of Your Income on the Amount of Your Deduction in Pub. 970, chapter 6, to figure the amount to enter on line 5. 6 Tuition and fees deduction. Is the amount on line 5 more than $65,000 ($130,000 if married filing jointly)?

• Yes. Enter the smaller of line 2, or $2,000.

No. Enter the smaller of line 2, or $4,000. Also enter this amount on Form 1040, line 34, or Form 1040A, line 19.

}

. . . . . . . . . . . . . . 6

For Paperwork Reduction Act Notice, see your tax return instructions.

• Cat. No. 37728P

Form 8917 (2014)

Michael Jones 444-55-6666 Michael Jones 444-55-6666 5000 5000 27000 27000

✔

4000

HIGHER EDUCATION TAX BENEFITS American Opportunity Lifetime Learning Higher Education as of 2015 Tax Credit Tax Credit (above-the-line) Deduction 40% of the credit is refundable Nonrefundable tax credit Above-the-line Tax Benefit (except if a child subject to deduction (non-itemizers the kiddie tax claims the credit) qualify) Expires when? After 12/31/2017 No expiration date After 12/31/2014 $2,500 per student $2,000 per return $4,000 or $2,000 Maximum Benefit (100% of first $2,000, (20% of first $10,000) per return 25% of second $2,000) Income Limitations: Phase out begins at modified AGI of $80,000 $55,000 up to $65,000 = $4,000 Fully phased out at modified AGI of $90,000 $65,000 $65,000 to $80,000 = $2,000 Phase out begins for joint filers at $160,000 $110,000 up to $130,000 = $4,000 Fully phased out for joint filers at $180,000 $130,000 $130,001 to $160,000 = $2,000 Postsecondary Qualifying Expenses Tuition, fees & Tuition & fees Tuition & fees course materials First 4 years of undergrad Any year of undergrad Any year of undergrad when enrolled on at least

• r graduate enrollment
• r graduate enrollment

Type of Postsecondary Education a half-time basis in a program with no restriction on the with no restriction on the leading to a degree, credential type of program type of program

• r certificate

Qualified Tuition Programs (QTP)

 Also known as §529 Plans.

 Grants special tax status to qualified educational

savings programs that allow taxpayers to prepay

• r contribute to an account for paying a student’s

education expenses to a postsecondary institution.

 Established and maintained by a state

government or eligible educational institution.

Qualified Tuition Programs (QTP)

 A taxpayer cannot deduct payments or

contributions to a QTP.

 No federally imposed annual limit on

contributions.

 Qualified expenses include room and board.

Qualified Tuition Programs (QTP)

 Earnings in the account will be tax‐free if used

to qualified education expenses.

 Distributions of earnings not used for

education are subject to a 10% penalty.

 Assets can be rolled from one §529 plan to

another.

Qualified Tuition Programs (QTP)

 Designated beneficiary can be changed to a

member of the beneficiary’s family.

 In the year the §529 plan is terminated, if

there is a loss in the account (unrecovered basis) = 2% miscellaneous itemized deduction.

U.S. Savings Bonds

 Interest Income Exclusion:

 Interest income from Series EE and Series I bonds

issued after 1989 is excludable from gross income to the extent that the bond proceeds are used to pay QHEE or are contributed to a QTP or Coverdell ESA for the benefit of the student.

 This exclusion is claimed on Form 8815.

Qualified Expenses

 Tuition and fees required to enroll at or

attend an eligible institution.

 Contributions to a Coverdell ESA.  Contributions to a §529 plan.

Adjusted Qualified Education Expenses

 QHEE must be reduced by the following tax‐free

benefits

 Tax‐free scholarships and fellowships  Expenses used to compute tax‐free withdrawals from a

Coverdell ESA’s.

 Expenses used to compute tax‐free withdrawals from

§529 plans.

 Expenses used to compute the AOC or Lifetime Learning

Credit.

Adjusted Qualified Education Expenses, Cont’d.

 Any other nontaxable payments received for

educational benefits

 Veterans’ educational assistance.  Qualified tuition reductions.  Employer provided educational assistance.

Income Limitations

 Phased out for taxpayers with MAGI of:

2015

Married filing jointly/QW: $115,750 to $145,750 Single/HOH: $77,200 to $92,200 Married filing separately: N/A

Coverdell Education Savings Account

 A trust created exclusively for the purpose of

paying qualified education expenses for the designated beneficiary of the account.

 Account must be designated as a Coverdell

ESA when created.

Contributions to Coverdell ESA’s

 Contributions are not deductible.  Annual contributions may not exceed $2,000

per beneficiary.

 Contributions may not be made after the

beneficiary reaches age 18.

 Contributions must be made by unextended

due date of tax return.

Income Limitations

 Phased out for taxpayers with MAGI of:

2015

Married filing jointly: $190,000 to $220,000 All others: $95,000 to $110,000

Excess Contributions Definition

 Amounts contributed to a beneficiary’s

account(s) in excess of $2,000 or amounts contributed in excess of the maximum contribution limit based on MAGI, if less.

 Excess contributions remaining in the account

from preceding years.

Excess Contributions

 6% excise tax on excess contributions.

 Applies to each year excess remains in account.

 Contributions and earnings need to be

distributed before the beginning of the sixth month following year end to avoid excise tax.

 Distributed earnings are included in gross income

• f beneficiary.

Distributions

 Beneficiary can take at any time.  To be tax‐free, distributions must not exceed

the amount of AQEE.

 Any amount remaining in account must be

distributed within 30 days of:

 Beneficiary turning age 30.  Beneficiary dies before turning age 30.

Taxable Distributions

 The taxable portion is the earnings portion of

any distribution not spent on qualified education expenses.

 This is also subject to a 10% penalty.

Qualified Expenses

 Higher education expenses:

 Tuition fees, books, supplies and equipment  Expenses for special‐needs services  Room and board (enrolled at least half time)  Also includes amounts contributed to §529 plan

for the benefit of account beneficiary.

 Earnings portion are not considered basis in §529 plan.

Qualified Expenses

 Qualified elementary and secondary

education expenses:

 Tuition, fees, academic tutoring, special‐needs

services, books, supplies and equipment

 Room and board, uniforms, transportation  Expenses for purchase of technology, computer

equipment or internet access.

Rollover and Beneficiary Changes

 Non‐taxable events:

 Assets can be rolled over from one account to

another for the same beneficiary.

 Designated beneficiary can be changed to another

qualifying member of the family.

 Qualifying rollovers do not get reported on

Form 1040.

Form 1098‐T Tuition Statement

 Educational institution must provide form to each

student by January 31.

 The taxpayer claiming the student as a dependent

needs this information to calculate any tax credit.

 Taxpayers should determine what was actually

paid from detailed account statements from the school.

Form 1098‐T

Qualified Student Loans

 Must be:

 For taxpayer, taxpayer’s spouse or taxpayer’s

dependent.

 For QHEE paid or incurred.  Student enrolled at least half‐time.

Student Loan Interest Deduction

 Taxpayer can claim the student loan interest

deduction if all of the following:

 Filing status is NOT MFS.  No one else claims exemption for taxpayer.  Legally obligated to pay the interest.  Actually paid the interest.

Student Loan Interest Deduction

 Interest paid by a third‐party = interest paid

by the taxpayer.

Income Limitations

 Phased out for taxpayers with MAGI of:

Married filing jointly: $130,000 to $160,000 Single/HOH/QW: $65,000 to $80,000 Married filing separately: N/A

Scholarships, Fellowships & Grants

 Exempt from taxable income if:

 Student is candidate for degree at eligible

educational institution.

 Used to pay for qualified educational expenses.  Is not a payment for services required as

condition for receiving the award.

Employer‐Provided Educational Assistance

 Tax‐free education opportunities:

 Educational assistance programs

 Exclude up to $5250 of educational assistance from

employees wages.

 Working condition fringe benefit

Business‐Related Education Expense Deductions

 May be allowed a tax deduction.

 Must be required by employer or law.  Maintains or improves skills needed for present

work.

 Expenses that don’t qualify:

 Expenses qualifying taxpayer for new trade  Expenses necessary to meet min. requirements.

Business‐Related Education Expense Deductions

 Depending on the facts, claimed on either:

 Schedule A or Form 2106 as unreimbursed

employee business expense, or

 Schedule C or Schedule F, if self‐employed.

Early Traditional IRA Withdrawals

 Withdrawals after age 59 ½ are generally

subject to income tax.

 Pre‐59 ½ withdrawals are subject to income

tax and a 10% penalty (Sec. 72(t) penalty)

 Pre‐59 ½ withdrawals used for higher

education are still subject to income tax, but not the 10% penalty.

Early Roth IRA Withdrawals

 Normally, Roth IRA earnings escape income tax

completely, if withdrawn after age 59 ½.

 Pre‐59 ½ withdrawals may be subject to income

tax and a 10% penalty (Sec. 72(t) penalty).

 Pre‐59 ½ withdrawals used for higher education

may be subject to income tax, but will not be subject to the 10% penalty.

American Lifetime IRC Sec. 222 IRC Sec. 529 Opportunity Learning Student Loan Tuition and Fees Qualified Tuition Credit Credit Interest Deduction Deduction Coverdell ESA * Program (QTP) * What is the benefit? Tax Credit Tax Credit Deduction to Deduction to Income Exclusion Income Exclusion (40% may be (Non-refundable) compute AGI compute AGI (earnings not taxed) (earnings not taxed) refundable) What is the annual $2,500 credit $2,000 credit per $2,500 deduction $4,000 deduction $2,000 contribution None limit? per student return per beneficiary What expenses Course-related Only if paid to Books, supplies, Only if paid to Books Books qualify besides tuition books, supplies educational equipment, educational Supplies Supplies and required and equipment institution: room & board, institution: Equipment Equipment enrollment fees? Books, transportation and Books, supplies and

• ther necessary

supplies and Expenses for special Expenses for special equipment expenses. equipment needs services needs services Payments to 529 Considered student loan interest: Higher education: Loan origination fee; Room & Board if at Room & board if capitalized interest; least a half-time at least a half-time interest on line of student student credit used only for higher education; K-12 education: Computer technology and refinanced Tutoring

• r equipment only if

interest. Room & Board required for Uniforms enrollment. Transportation Computers What education Only 1st 4 years Undergraduate Undergraduate Undergraduate Undergraduate Undergraduate qualifies?

• f postsecondary

Graduate Graduate Graduate Graduate Graduate education. Vocational Vocational Vocational Vocational Vocational Vocational Courses to acquire K-12

• r improve job skills.

What are some of the Only claim for No need to be Must have been at Cannot claim both Assets must be Distributions of

• ther conditions that

4 tax years in a degree or least half-time deduction & education distributed at age 30 earnings not used apply? (count Hope Credit) credential student in degree credit for same student unless special needs for education are program. program. in same year beneficiary. subject to 10% Must be enrolled penalty. at least half-time Loan must be only Contributions must in degree program. for qualified stop at age 18 higher education unless special needs No felony drug expenses. beneficiary. conviction. Available if married No No No No Yes Yes filing separate? In what adjusted $80,000-$90,000 $55,000 - $65,000 $65,000 - $80,000 $65,000 - $80,000 $95,000 - $110,000 ** No phase-out gross income (AGI) range do benefits $160,000-$180,000 $110,000-$130,000 $130,000-$160,000 $130,000-$160,000 $190,000-$220,000 ** phase out? for joint returns for joint returns for joint returns for joint returns for joint returns Maine tax treatment Not allowed Not allowed Follows federal Not allowed Follows federal Contribution = $250 treatment. treatment. deduction per beny. Distribution = Follows federal treatment. * Income exclusion or penalty forgiveness is limited to the amount that does not exceed qualifying educational expenses. ** Loophole: Contribution can be made by child who likely will have income lower than the limits. Corporations and trusts can also make contribution without income limitations. 130 Middle Street 3rd Floor, P.O. Box 445 Portland, ME 04112 Phone: 207-772-1981 www.arbcpa.com

IRS PUBLICATION 970, APPENDIX B, ENHANCED

Education Employer Business Scholarships, Exception - Provided Deduction for IRC Sec 2503(e) Fellowships, Early IRA Education Savings Education Work-Related Gift Tax & Grants Withdrawals * Bond Program * Assistance * Education Tuition Exclusion What is the benefit? Income No IRC Sec 72(t) Interest Income Income Sch A, C or F Payments not Exclusion 10% penalty Exclusion Exclusion Form 2106 considered a Deduction taxable gift What is the annual None Amount of qualified Amount of qualified $5,250 exclusion Amount of qualified None limit? expenses expenses work-related expense What expenses Course-related Books Payments to Books Transporation None qualify besides tuition fees, books, Supplies Coverdell ESA Supplies Travel and required supplies and Equipment Equipment Other necessary enrollment fees? equipment Payments to 529 expenses Expenses for special needs services Room & board if at least a half-time student What education Undergraduate Undergraduate Undergraduate Undergraduate Required by law or Undergrad qualifies? Graduate Graduate Graduate Graduate employer to keep job. Graduate Vocational Vocational Vocational Vocational Maintain or improve Vocational K-12 job skills. K-12 What are some of the Must be in degree IRA Distribution Applies only to Employer must Can't qualify for new Payment must be

• ther conditions that
• r vocational

may be subject qualified series EE have a separate trade or business. made directly to apply? program to income tax. bonds issued after written plan. educational 1989 or series I bond. Cannot be to meet institution. minimum educational Owner must be at requirements of Exclusion for least 24 before bond current trade/business Generation issue date. Skipping purposes too. Available if married Yes Yes No Yes Yes Yes filing separate? In what adjusted No phase-out No phase-out $77,200 - $92,200 No phase-out No phase-out No phase-out gross income (AGI) range do benefits $115,750 - 145,750 phase out? for joint returns Maine tax treatment Follows federal Follows federal US government Follows federal Follows federal N/A - No Maine treatment treatment. interest not taxable treatment. treatment. gift tax applies anyway. * Income exclusion or penalty forgiveness is limited to the amount that does not exceed qualifying educational expenses. ** Loophole: Contribution can be made by child who likely will have income lower than the limits. Corporations and trusts can also make contribution without income limitations. 130 Middle Street 3rd Floor, P.O. Box 445 Portland, ME 04112 Phone: 207-772-1981www.arbcpa.com

IRS PUBLICATION 970, APPENDIX B, ENHANCED

Questions

KARLA J. BRANNEN, CPA kbrannen@arbcpa.com 207‐772‐1981