Education Credits

Education Credits: There are two (2) types of education credits: American Opportunity and the Lifetime Learning Credit. Both are wonderful credits. Most of you probably know you take the total allowable (qualified) expenses and subtract any scholarships and grants received and the difference can be used, claimed as expenses for calculating the education credit.

Many of you may not realize, that if the scholarship/grants are more than the qualified (allowed) expenses, this excess scholarship/grant income has to be reported as income and might be subject to income tax--depending on the total income of the student.

And still, many of you probably don't know that in 2014, the IRS began allowing for Pell grants & some scholarships to be claimed as income in order to get more education credits. This is called, Maximizing the Education Credit. Learn how to do this--and you could possibly increase your client's refund by up to $2,500. Learn what to watch for & rules that need to be followed-- not everyone qualifies, not everyone will benefit, but many will--it is AWESOME! See training below

A little about Lifetime Learning Credit-- See PUB 4491 page 22-6

You will receive a credit of 20% of what was spent on allowable (qualified) expenses ---- up to a maximum credit of $2,000

Client has to spend $10,000 to get the $2,000 credit.
$10,000 x 20% =$2,000

Client spent $1,400 in 2022. What will their credit be? 1,400 x 0.20= $280 The taxpayer can only get up to $280.
Remember, Lifetime Learning credit is a NON-refundable credit that can only pay tax liability. If the student's tax liability is less than $280, the credit will be less (or zero if their is no tax liability).
The system does all the work-- this is just to demonstrate how it is calculated.

Click here for PDF of slides
Click here for PowerPoint of Slides
Click Image for Recording

I created a worksheet I think is helpful for working through if they can allocate scholarships to income, and how much--all while keeping it in scope for VITA (avoiding Kiddie Tax situations)

Download my Education Worksheet-- Hopefully, you find this useful. Start on page 1!

Practice scenario packet-- (8 scenarios) to see if benefitting from allocating would be beneficial. Great for practice using the worksheet. For these scenarios-- assume all students qualify for AOTC, all are dependents EXCEPT Scenario #7 Pamela.
Try using the Worksheet and see what can be claimed and if any scholarships need to be reported as income.

Scenario #7 Taxpayer is the student--qualifies for EITC. Will allocating scholarship help? Please actually enter in Taxslayer and see what happens.

After you try the scenarios in the packet link above, just click on the links below to see my worksheets/notes:
#1 Johnny Depp #2 Sean Connery #3 Annie Woodruff #4 Vanessa Rabbit
#5 Gregory Moore #6 Cathy Abraham #7 Pamela Anderson--this scenario the Taxpayer is the student #8 Donald Duck

Explanation video to me and my worksheet: (I hope I make sense--sorry if I dont)
#1 Johnny Depp
#5 Gregory Moore
#6 Cathy Abraham
#7 Pamela Anderson
#8 Donald Duck

Great Handout created by Tim Tucker!

IRS' Fact Sheet introducing Maximizing Educations Credits

FORM 1099-Q DITRIBUTIONS FROM QUALIFIED TUITION PLAN

Training shared by Morris County VITA--Click on image to view power point slides

A great quiz on Education Credit to get your mind thinking and applying tax law-- Thanks for sharing Bill in Pasco County!

For answers to the above quiz--click here-- Thanks Bill!

More Resources shared by others below:

Shared by Patti, thank you! (Click image to open)

Is the school accredited? Find out on this website: https://ope.ed.gov/dapip/#/home

Education Credits:
How to Maximize the AOTC (American Opportunity Tax Credit) and Kiddie Tax--

Let's say books & tuition totaled $5000, and scholarships & Pell Grants totaled $5,000.
You would say the client didn't pay for the courses and therefore aren't entitled to an education credit.

But, the IRS says in PUB 970, IF the client will claim some of the scholarship/Pell Grant as income THEN you are entitled to claim an education credit.

Go through THIS PRESENTATION made by the IRS for more information ***PLEASE NOTE, THIS PRESENTATION WAS MADE THE YEAR KIDDIE TAX WAS BROUGHT INTO SCOPE--BUT IT HAS SINCE FELL OUT OF SOPE--AGAIN. KIDDIE TAX --OUT OF SCOPE.

Below you can view part of the PUB 4012, section J-Education
Or click here to download the PUB4012 and here for the PUB 970 pages 16-17 (coordinating scholarship benefits w/education credit)

From Prosperity Now's TON's VITA Train come the following great resources

For Answers Click Here

Click Here for Answers

Helpful Document-- If the IRS disputes the American Opportunity Credit-- here is a list of supporting documents they may request. Click image to get most up to date Form from IRS.gov