Archive for the ‘Modified Adjusted Gross Income’ 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 www.tlongcpa.com/blog .

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.

Back to Basics Part XXVII – Schedule 8812 – Child Tax Credit

Originally published in the Cedar Street Times

November 13, 2015

I believe the IRS was having an off-day when they created the “Schedule 8812 – Child Tax Credit.”  First, why did they call it a “Schedule?”  Anyone who grew up with Sesame Street during the past 40 years inevitably knew the song, “One of these things is not like the others…” and then you would have to pick out the one thing that was different on the TV screen.  Okay, it’s time for you to play: Form 1045, Form 2106, Form 3903, Form 6251, Schedule 8812, Form 8829, Form 9465.  Did you figure it out?  In my tax software there are well over 100 four-digit forms to choose from, and I believe the 8812 is the only one called a “Schedule.”   Schedules, on the other hand, all start with letters, such as Schedule A, Schedule B, Schedule C, etc.

The second reason I think the IRS was having an off-day, is that the name of the form – “Child Tax Credit,” is somewhat of a misnomer.  There are two related, but distinct credits, the “Child Tax Credit,” and the “Additional Child Tax Credit.”  For the vast majority of people the Child Tax Credit is determined on the Child Tax Credit worksheets in Publication 972.  The Additional Child Tax Credit is the one generally figured on the double poorly named, “Schedule 8812 – Child Tax Credit.”

So what are these credits and how can you get them?  The child tax credit is a nonrefundable tax credit up to $1,000 per child, and the Additional Child Tax Credit is a refundable tax credit that may be available if you qualified for the child tax credit but could not use some or any of the credit because you did not owe much or any tax.  Whenever you hear of a refundable tax credit, think fraudulent returns – because lots of them are filed whenever scammers figure they can get something for nothing.  Also remember, that tax credits are much more valuable than tax deductions.  Credits are a dollar-for dollar reduction of tax, whereas deductions just reduce the income upon which the tax is calculated.  So credits could be three to ten times more valuable than deductions depending on your tax bracket.

I know many of you are thinking, “What a deal! At an annual $1,000 a pop, where can I get more kids?”  Well, you can certainly birth them, adopt them, or foster them (through a court or qualified agency).  You could also get one or both of your parents to have another child and give it to you, or you could even have a step-parent give you his or her children to raise, or any of the decedents of these two categories.  The reverse is also true…parents, you can sweet talk your kids into having their own children to give to you, or if you are already a grandparent, just keep the grandkids the next time they are dropped off and don’t give them back!  There are so many wonderful options!  Please make sure the children are under 17; make sure they are U.S. citizens, U.S. nationals or U.S. resident aliens; and make sure that you meet all the tests to claim them as dependents as well.

You also cannot make too much money in order to qualify for the credit.  If you are Married Filing Joint you start to lose the $1,000 per child tax credit when your combined incomes hit $110,000.  By $130,000 it has been ratably phased-out.  If you are filing head of household, your phase-out range for the credit is $75,000 – $95,000 of modified adjusted gross income.

As mentioned earlier, if you qualify for the child tax credit, but you have more credit than tax owed to offset, you may be able to pick this difference up through the Additional Child Tax Credit and actually get a refund for money you never paid in to begin with.  In order to qualify for the Additional Tax Credit you do need to work.  The calculations are such that you need to have at least $3,000 of earned income (not investment or retirement income) to get anything.  You need to have about $10,000 of earned income to max out the credit if you have one child, and approximately an additional $7,000 for each additional child in order to max out the $1,000 per child credit.

There are lots of nuances to these rules depending on your circumstances, but they are fairly well addressed in the worksheets and the instructions when you actually go to fill them out.  Again, Publication 972 houses the Child Tax Credit worksheets (about 5-6 pages of worksheets) to see if you qualify for the Child Tax Credit.  Then, if you cannot utilize all of the credit for which you qualify due to income tax liability limitations, then you go to Schedule 8812 Child Tax Credit to see if you can qualify for the refundable Additional Child Tax Credit.

The Schedule 8812 is only 1-1/2 pages long.  Part I of the schedule is only used if your children do not have Social Security Numbers, and have ITINs instead.  Part II is the section where most people will go to calculate the Additional Child Tax Credit.  Part III is a special section for super humans that have three or more qualifying children.

In the meantime, I will be eagerly awaiting to see if a reader can enlighten me on some history that might explain the anomaly naming convention of Schedule 8812 – Child Tax Credit!

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 www.tlongcpa.com/blog .

Travis H. Long, CPA, Inc. 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.