Archive for the ‘dependent’ Tag

Back to Basics Part XXXI – Form 8863 Education Credits

Originally published in the Cedar Street Times

January 29, 2016

There are two main tax credits for qualified spending on degree seeking higher education: 1) the American Opportunity Credit (AOC), and 2) the Lifetime Learning Credit (LLC).  The AOC is generally the more valuable of the two.  It is a tax credit of up to $2,500 with $1,000 of that refundable to you even if you paid no tax and have no tax liability.  You get 100 percent of the first $2,000 spent, and 25 percent of the next $2,000 spent.  Whenever your hear “refundable credit,” think potential fraud.  So it is not only an opportunity for college kids, but an opportunity for criminals to make up false returns and claim fake credits.  Naturally increased scrutiny follows on behalf of the IRS.  But I digress.

The AOC is available to you only during your first four years of college as defined by the educational institution – so a 5th or 6th year senior would still qualify, except that you are only allowed to take the credit for a total of four times no matter how long it takes you to get through school!  With that in mind you may even choose to forgo claiming the credit in a particular year if for instance you were attending a community college and had less than the $4,000 of expenses to max out the credit, but knew you would be transferring to a more expensive school, and would still have the opportunity to claim the credit four times before graduating.

The AOC allows you to include tuition and required fees of the school, like athletic fees, and student activity fees (but not health fees or room and board) for the tax year at hand plus the first three months of the next year if paid in the current year, plus the cost of any books or school supplies whether or not bought from the school or any other seller.  You have to be enrolled half time in at least one academic period such as a semester or quarter in the tax year, or during the first three months of the next year if the payment was made in the current year for the following year school.

If your modified adjusted gross income (for most people this is the same as their AGI) is between $160,000 and $180,000 for married filing jointly ($80,000 – $90,000 for other statuses), the credit phases out.  If a parent is claiming you as a dependent, then you are not allowed to deduct it on your tax returns – only the parent would.  Even if a third party paid the fees for a student’s benefit (such as a relative, or an institution), as long as the parent is still claiming the child as a dependent, then the parent is eligible to claim the credit as well.  You would need a copy of the 1098-T to claim the credit (this is a new requirement signed into law by Obama in 2015 – all filers must have in their possession a 1098-T when filing their taxes to claim education credits).  Another interesting tenant is that you cannot claim the credit if you have been convicted of a felony possession or distribution of a controlled substance.

The Lifetime Learning Credit (LLC) is a nonrefundable credit of 20 percent of the first $10,000 spent – capping out the credit at $2,000.  The LLC is available to anyone in their life for an unlimited number of years for post secondary education – even if you just take one course at a time – so you don’t even have to be seeking a degree.  You just can’t claim the LLC and AOC in the same year for the same person.

The LLC is eligible for the same expenses as the AOC, except that books and supplies that are not absolutely required to be bought from the school, do not count.  The modified adjusted income phaseout is between $110,000 – $130,000 for married filing jointly and $55,000 – $65,000 for other statuses.  Also, it is nice to know that you can still smoke crack and deal heroin and be eligible for the credit, as there are no denials of the credit for felony possession or distribution of controlled substances with the LLC!

The form used to claim the expenses, Form 8863 – Education Credits (American Opportunity and Lifetime Learning Credits), is a two page form.  You start with the second page, which is basically a flow chart questionnaire determining what you are eligible for, and it also has you transfer some numbers to the first page.  The AOC is handled in Part I of page one and the LLC is handled in part II of page one, and these walk you through the credit calculation and limitations.

If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at .

Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041.

Unmarried with Children – Head of Household

Originally published in the Cedar Street Times

March 8, 2013

Article on Unmarried People Living Together with Children

I cannot write the title of this article without thinking about the 80s and 90s sitcom, Married with Children, about a dysfunctional American family starring Ed O’Neill, Katey Sagal, David Faustino, and Christina Applegate.  With all the problems the Bundy family had in its 11 years on television, one thing they did not have to deal with were tax determinations when you are unmarried with children!

When I speak of unmarried people, I am not referring to divorced individuals, but people who have never been married.  Different rules apply to divorced and legally separated individuals, and I am not speaking from that perspective.

Many questions arise about who gets to claim dependency exemptions, child tax credits, head of household filing status, dependent care expenses, etc. in situations where unmarried people are living together with children.  This article could not begin to scratch the surface of the issues that exist as there are so many situations that could yield different tax results. In this issue I am going to focus on the head of household filing status.

For an unmarried individual to claim head of household, he or she has to maintain a household for more than half the year that is the principal residence of an unmarried qualifying child (or qualifying relative) for dependency exemption purposes.

A qualifying child is someone who must generally be under 19 (24 if full-time student).  The person must also be your child, step-child, sibling, step-sibling, or a descendant of any of these, or an adopted or foster child.  The child cannot provide over half of his or her own support, and the child cannot file a joint return.

Unmarried parents often both meet the criteria to consider a shared biological child a qualifying child, and then they can decide who will claim the qualifying child for the dependency exemption.  (If they cannot decide, tie-breaker rules exist.)  Whoever claims the child as a dependent gets the child tax credits, credit for child and dependent care expenses, exclusion for dependent benefits, earned income credit, and the possibility of filing as head of household.  You cannot split up the benefits between parents.

If there is more than one shared biological child, one parent may be able to claim one child as a dependent and the other may be able to claim a different child as a dependent.  Or maybe one or both have children from prior partners that live with them and could qualify them as well.  (Side note: if unmarried person A earned less than $3,800 (2012) and lived for the entire year with unmarried person B in the household maintained by B, then A could be a dependent of B as a “qualifying relative,” as well as any of A’s children that lived with A and B and are supported by B.  This also qualifies B for head of household.)

Let us assume both unmarried people living together each have a qualifying child.  Can they both claim head of household?  If their households are maintained in separate dwellings, the answer is almost always yes.  But what if they live under the same roof?  Can you maintain separate households in the same house?

The answer to this depends on whether they are acting as a family unit or not.  IRS Chief Counsel Memorandum SCA (Service Center Advice) 1998-041 addresses this issue and basically says that all facts  and circumstances are considered, and if you are conducting your lives like a single family, then only one individual can file with the head-of-household status, and the other must file single.   But if you are basically like roommates sharing dwelling costs (but not bedrooms!), and lead separate lives with your own respective children, then you could be considered as each maintaining your own household, and then both people can file as head of household.  If you share a biological child as well, it will be nearly impossible for you to make this argument.  But never say never!

Prior articles are republished on my website at

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.