Back-to-School Reminder for Parents and Students: College Tax Credits for 2014 and Years Ahead

Education costsWith another school year now in full swing, the Internal Revenue Service today reminded parents and students that now is a good time to see if they will qualify for either of two college tax credits or any of several other education-related tax benefits when they file their 2014 federal income tax returns.

In general, the American opportunity tax credit and lifetime learning credit are available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the taxpayer and his or her spouse and dependents. The American opportunity tax credit provides a credit for each eligible student, while the lifetime learning credit provides a maximum credit per tax return. Though a taxpayer often qualifies for both of these credits, he or she can only claim one of them for a particular student in a particular year. Claimed on Form 8863, these credits are available to all taxpayers — both those who itemize their deductions on Schedule A and those who claim a standard deduction.

For those eligible, including most undergraduate students, the American opportunity tax credit will generally yield the greater tax savings. Alternatively, the lifetime learning credit should be considered by part-time students and those attending graduate school.

Both credits are available for students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. Neither credit can be claimed by a nonresident alien, a married person filing a separate return or someone claimed as a dependent on another person’s return.

Normally, a student will receive a Form 1098-T from their institution by the end of January of the following year (Jan. 31, 2015 for calendar year 2014). This form will show information about tuition paid or billed along with other information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax credits. Taxpayers should see the instructions to Form 8863 and Publication 970 for details on properly figuring allowable tax benefits.

Many of those eligible for the American opportunity tax credit qualify for the maximum annual credit of $2,500 per student. Students can claim this credit for qualified educational expenses paid during the entire tax year for a certain number of years:

  • The credit is only available for 4 tax years per eligible student.
  • The credit is available only if the student has not completed the first 4 years of postsecondary education before 2014.

Here are some more key features of the credit:

  • Qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. Other expenses, such as room and board, are not qualified expenses.
  • The credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
  • The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.
  • Forty percent of the American opportunity tax credit is refundable. This means that even people who owe no tax can get an annual payment of up to $1,000 for each eligible student.

The lifetime learning credit of up to $2,000 per tax return is available for both graduate and undergraduate students. Unlike the American opportunity tax credit, the limit on the lifetime learning credit applies to each tax return, rather than to each student. Also, the lifetime learning credit does not provide a benefit to people who owe no tax.

Though the half-time student requirement does not apply to the lifetime learning credit, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other features of the credit include:

  • Tuition and fees required for enrollment or attendance qualify as do other fees required for the course. Additional expenses do not.
  • The credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
  • Income limits are lower than under the American opportunity tax credit. For 2014, the full credit can be claimed by taxpayers whose MAGI is $54,000 or less. For married couples filing a joint return, the limit is $108,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $128,000 or more and singles, heads of household and some widows and widowers whose MAGI is $64,000 or more.

You can use the IRS’s Interactive Tax Assistant tool to help determine if you are eligible for these benefits. The tool is available on IRS.gov. Eligible parents and students can get the benefit of these credits during the year by having less tax taken out of their paychecks. They can do this by filling out a new Form W-4, claiming additional withholding allowances, and giving it to their employer.

There are a variety of other education-related tax benefits that can help many taxpayers. They include:

  • Scholarship and fellowship grants — generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
  • Student loan interest deduction of up to $2,500 per year.
  • Savings bonds used to pay for college — though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
  • Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.

Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the earned income tax credit.

The general comparison table in Publication 970 can be a useful guide to taxpayers in determining eligibility for these benefits. Details can also be found in the Tax Benefits for Education Information Center on IRS.gov.

This blog brought to you by TaxLane, LLC, providing tax preparation and consulting services to individuals and small businesses.

Pittsburgh, Allison Park, Hampton, Shaler, Glenshaw.

IRS CIRCULAR 230 NOTICE: TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE INTERNAL REVENUE SERVICE, WE INFORM YOU THAT ANY U.S. TAX ADVICE CONTAINED IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF (I) AVOIDING PENALTIES UNDER THE INTERNAL REVENUE CODE OR (II) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER ADDRESSED IN THIS COMMUNICATION.

New IRS YouTube Video Provides Tips on Health Care, Tax Returns

doctorThe Internal Revenue Service announced the availability of several new YouTube videos to help taxpayers get important information about the Affordable Care Act and tax return filing.

The new videos, which are part of a series on the IRS YouTube channel, feature IRS Commissioner John Koskinen discussing the premium tax credit and the individual shared responsibility provision. These provisions of the Affordable Care Act will affect people’s tax returns next year when they file their 2014 returns.

In the video about the premium tax credit, the Commissioner talks about how it can help make purchasing health care through the Health Insurance Marketplace more affordable for people with moderate incomes.

“You can get advance payments of the premium tax credit paid directly to the insurance company to lower your monthly premium, or you can apply for the premium tax credit when you file your tax return for 2014,” Koskinen said.

In the video about the individual shared responsibility provision, Koskinen discusses important facts about coverage requirements, coverage exemptions and the individual shared responsibility payment. He covers who must make a payment, who is eligible for exemptions, and what people need to do when filing their tax return.

“For most people, filing their returns in the spring of 2015 is going to be fairly simple – with regard to this issue, and that is they’ll simply check a box indicating that they have qualifying insurance or they’ll indicate that they’re eligible for an exemption. Otherwise, they’ll calculate their shared responsibility payment and add it to their tax return,” Koskinen explained in one segment of the video.

IRS videos explaining the premium tax credit, the individual shared responsibility provision, and the small business health care tax credit are on the IRS Health Care video playlist. Additional videos about the Affordable Care Act will be available soon.

Health care videos are among those available on the IRS YouTube channel. Taxpayers have viewed IRS videos nearly 8 million times.

More information on the tax provisions of the Affordable Care Act is available at IRS.gov/aca, where you can also find Health Care Tax Tips. You can also subscribe to IRS Tax Tips to get these easy-to-read tips by e-mail from the IRS.

This blog brought to you by TaxLane, LLC, providing tax preparation and consulting services to individuals and small businesses.

Pittsburgh, Allison Park, Hampton, Shaler, Glenshaw.

IRS CIRCULAR 230 NOTICE: TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE INTERNAL REVENUE SERVICE, WE INFORM YOU THAT ANY U.S. TAX ADVICE CONTAINED IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF (I) AVOIDING PENALTIES UNDER THE INTERNAL REVENUE CODE OR (II) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER ADDRESSED IN THIS COMMUNICATION.

2012 Individual Income Tax Returns Complete Report Now Available

Legal books #7On August 22, 2014, the Internal Revenue Service announced the availability of their report, Statistics of Income – 2012 Individual Income Tax Returns Complete Report (Publication 1304).  This report contains complete individual income tax data.  The statistics are based on a sample of individual income tax returns, selected before audit, which represents a population of Forms 1040, 1040A, and 1040EZ, including electronic returns.

U.S. Taxpayers filed 144.9 million individual income tax returns for tax year 2012.  This number is down 0.3 percent from 2011.  The adjusted gross income less deficit reported on these returns totaled 9.1 trillion dollars.  This is an increase of 8.7 percent when compared to the prior year.

The report is based on a sample of 144.9 million individual income tax returns filed for tax year 2012, and provides estimates on sources of income, adjusted gross income, exemptions, deductions, taxable income, income tax, modified income tax, tax credits, self-employment tax, and tax payments.

Classifications include tax status, size of adjusted gross income, marital status, age, and type of tax computation.  A brief text reviews the requirements for filing tax returns, explains the changes in tax law, and describes the sample used to produce the report.  The report is available for review and download at the following location in the IRS’s official website:

http://www.irs.gov/uac/SOI-Tax-Stats-Individual-Income-Tax-Returns-Publication-1304-(Complete-Report)

For more information about these data, one may write to the Director, Statistics of Income Division, RAS:S, Internal Revenue Service, 1111 Constitution Avenue, K-Room 4122, Washington, D.C 20224

This blog brought to you by TaxLane, LLC, providing tax preparation and consulting services to individuals and small businesses.

Pittsburgh, Allison Park, Hampton, Shaler, Glenshaw.

IRS CIRCULAR 230 NOTICE: TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE INTERNAL REVENUE SERVICE, WE INFORM YOU THAT ANY U.S. TAX ADVICE CONTAINED IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF (I) AVOIDING PENALTIES UNDER THE INTERNAL REVENUE CODE OR (II) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER ADDRESSED IN THIS COMMUNICATION.