Education options

Out of Scope by [line number]:
  • Distributions from an Educational Savings Account not used for qualified expenses
  • Education credits from a previous year that have to be repayed prior to the current calendar year,
  • Form 8615 – Tax for Certain Children Who Have Unearned Income for tax years prior to 2018.
Useful web sites:

Tax Slayer entry:

Federal section > Deductions > Credits Menu > Education Credits (Form 1098-T)

Federal section > Income > Other Compensation > Scholarships and Grants


There are five ways to claim education credits:

 Self-employment expense  – a dollar-by-dollar reduction in self-employment income (and thus self-employment tax). Note: cannot be in pursuit of a new career; must pertain to the current self-employment area.
 Tuition and Fees deduction  – a dollar-by-dollar reduction in income up to $4,000 total for all students on the return. Not available in 2018 unless extended.
 Unreimbursed business expense  – a Schedule A deduction subject to the 2% of AGI threshold. Not available in 2018.
 Lifetime Learning tax credit  – a non-refundable reduction in taxes up to $10,000 in expenses which can result in up to $2,000 as a tax credit per student.
 American opportunity tax credit  – a reduction in taxes of which up to $1,000 is refundable and up to $1,500 is non-refundable, per student.

Education Credits

Education Expenses Decision Table

Step 1 Enter all return data through Healthcare section Go to Step 2
Step 2 Does TP qualify for American Opportunity Credit?(2) If Y, calculate AOC and go to Step 4.

If N, go to Step 3.

Step 3 Does TP qualify for Lifetime Learning Credit?(3) If Y, calculate LLC and go to Step 4.

If N, go to Step 7.

Step 4 Is there scholarship/grant money left over after netting against qualified education expenses (i.e, scholarships/grants exceed education expenses). If Y, add scholarship money to student’s tax return as scholarship income.

If N, go to Step 5.

Step 5 Has TP claimed the maximum qualified expenses allowed per student for AOC ($4,000) or LCC ($10,000)? If Y, go to Step 6.

If N, go to Step 9.

Step 6 Are there expenses remaining after taking the AOC or LCC? If Y, go to Step 7.

If N, STOP.

Step 7 Are expenses qualified work-related expenses? If Y, go to Step 8.

If N, STOP.

Step 8 Is TP self-employed?(4) If Y, put excess expenses on SCH C,

If N, STOP.

Step 9 Try the Blenderman/Rudeseal loophole by making some of scholarship taxable on the student’s return thereby increasing net qualified expenses for a higher AOC/LLC. See your LC before meandering down this road.

Notes:

  1. AOC ($2500 max partially refundable) will always be higher than LLC ($2000 max all non-refundable) if TP qualifies for both.
  2. AOC qualifiers: Must be enrolled in degree program and at least half time; can only take for 1st four years of college; student cannot be a convicted drug felon.
  3. Can be used for part-time vocational training or post-graduate studies
  4. You might test to see if putting all net expenses on the SCH C to see if that exceeds the credit. However, that is unusual – most likely scenario is if they are a part time student.

Allowed expenses:

Allowed Expense Description American
Opportunity
Credit
Lifetime
Learning
Credit
Tuition
and Fees
Deduction
Tuition Yes Yes Yes
Required books purchased directly from institution Yes Yes Yes
Required books purchased from a bookstore or second hand Yes No No
Required supplies and equipment fees paid to institution Yes Yes Yes
Required supplies and equipment not paid to institution Yes No No
Student activity fees if required for enrollment Yes No No
Sports, games, hobbies, non-credit course No No No
Room and board No No No
Insurance, student health fees, transportation, research No No No
  • Complete the return, including ACA calculations, before applying tests for education benefits.
  • A 1098-T is required to claim this credit,  however the amount in the 1098-T box 1 (amount received) or box 2 (amount billed) may not be what the TP actually paid and the amount in box 5 (scholarship) may not be what was actually received or applied.
  • Qualified education expenses paid by a taxpayer’s dependent for which an exemption is clamed, or a third party for the dependent, are considered paid by the taxpayer.
  • Education benefits phase out differently based on AGI for the 3 options in the above table.
  • A felony drug conviction disqualifies the student from the American Opportunity Credit.
  • A “what if” calculation is relatively simple. Go to the Education Credits TS page and select the options one at a time; click CONTINUE and observe the Federal and State refund amounts. (HINT: Do the Tuition and Fees first – otherwise, it deletes the school information required for the others)
  • The Education Calculator may also be helpful in determining the best option, especially if you wish to make part of a scholarship taxable.

Scholarships

  • Check to be sure all scholarship money was used for qualified expenses for the terms of the scholarship. Most scholarships allow for tuition, fees, books and supplies no matter where purchased (but must be required for the course). Pell grants and “unrestricted” scholarships also allow for living expenses (room & board). Interview carefully to establish the terms of the scholarship and what expenses were paid. Enter any scholarship funds spent on other expenses as a taxable scholarship amount on THE STUDENT’S tax return.
  • if the student is living at home, a reasonable amount of living expenses may be derived from the cost of maintaining that student in the home and some commuting expenses (gas, bus fare. No, not a new BMW!).
  • Scholarships are generally non-taxable however, it may be advantageous to allow some or all to be taxed. See this local explanation or an IRS Pell grant example. If the student is a dependent, be careful or the student may have to file a tax return, may no longer qualify as a dependent, or may be subject to a “kiddie tax”.

Colorado CollegeInvest

⚠ CAUTION : The definition of what is covered by 529 plans was changed by the Tax Cut and Jobs Act of 2017. 529 plans are no longer just for college but also can be used for public, private, and religious elementary and secondary schools.  However, Colorado tax law remains unchanged and the Colorado CollegeInvest 529 plans can only be used for qualified higher education expenses. Any other use, including K-12 tuition expenses, are considered non-qualified withdrawals and subject to penalties.

Kiddie tax implication: (Now IN SCOPE for 2018!)

If the dependent student must file a tax return,

(taxable scholarships are “earned income” for this test and to determine the dependent’s standard deduction)

and if the unearned income is more than $2,100.

(taxable scholarships are “unearned income” for this test and to compute the tax using form 8615.)

Prior to 2018,

  • Form 8615 is OUT OF SCOPE prior to 2018. (The form required knowledge of and complex analysis of the parent’s and other dependents’  returns to determine the tax.)

Beginning in 2018,

  • Earned income plus the first $2,100 of unearned income is taxed at the normal tax rate for the student. Much of that amount (possibly all) will be untaxed due to the student’s standard deduction.
  • Remaining taxable unearned income, including taxable scholarships, will then be taxed at the trust tax rates.
  • See more details on the Kiddie tax resource page.