Education Credits Disallowed

[Dave T]

Perhaps a silly question but will ask anyway.

New client, HOH, has two children in college and has $20K in education expenses.  Unfortunately for her she had taken out a large amount from a retirement account which put her AGI above $90K and thus no education credits allowed.

When running the error report it is looking for data from form 8867.   I presume the form can be discarded due to no credit but thought it odd that it would be asking for info. despite the disallowance.

[Lee B]

Any chance of not claiming one of the dependents and having the dependent take the Lifetime Learning Credit.

[Dave T]

Good thought ! 

Due to no credit and large retirement withdrawal t/p owes over $6k. Always hate to have to tell clients bad news like that.

You mentioned Lifetime learning but wouldn't AOTC still work?

Thanks for your help with this. I've never had credit be disallowed before.

 

 

[Lee B]

You should check but don't think a dependent under the age of 24 can take AOTC.

[Dave T]

Yes, correct. He is 22 so no AOTC but will check Lifetime Learning.

Thanks very much !!

 

[FDNY]

2 hours ago, Dave T said:

 

When running the error report it is looking for data from form 8867.   I presume the form can be discarded due to no credit but thought it odd that it would be asking for info. despite the disallowance.

You will still need 8867 for HOH

[Dave T]

Yes, thanks FDNY. Realized that after the fact.

[TexTaxToo]

23 hours ago, cbslee said:

You should check but don't think a dependent under the age of 24 can take AOTC.

Someone claimed as a dependent cannot get AOTC.  Someone who qualifies as a dependent but is not claimed CAN get AOTC.  They always get the non-refundable portion, but would have to have taxable income to benefit (the same as for Lifetime Learning).

They probably do not qualify for the refundable portion, but the rules are NOT exactly the same as the dependency rules.  For example, a student with no living parents would qualify, as would a 19-23 year old who is only a half-time student.

[Lee B]

I stand corrected.

[Dave T]

OK, so just to be clear, the two boys who are in college are both under 24 years old and if we choose not to claim them as dependents they would be eligible for the AOTC?

Thanks to all for your insights and help with this.

 

[Lee B]

I believe there are several qualifiers that you have to clear

[TexTaxToo]

For the non-refundable portion, see https://www.irs.gov/publications/p970#en_US_2021_publink1000204381

For the refundable portion, there are additional requirements - see https://www.irs.gov/publications/p970#en_US_2021_publink1000211799

[Dave T]

Thank you. Very helpful !!

[Lion EA]

They might be eligible for the non-refundable portion of AOC if they meet all the other requirements. Or, the LLC.

If they can get the same amount from the LLC (it'll come down to tax liability of the student, which might be small) save the AOC for another year, because it expires after four uses per student. You know the family's situation, so do the best for the family as a whole.

[Dave T]

good point as well Lion !

[jklcpa]

1 hour ago, Lion EA said:

save the AOC for another year, because it expires after four uses per student.

This is a good point, but also remember that, not only is it available for only 4 tax years, the AOTC is also only available for the first 4 years of postsecondary curriculum, as determined by the educational institution, generally the freshman through senior years.

 

[Dave T]

Another good point

 

[Dave T]

One more related question and then I hope I can let this go.

Normal 4 year degree encompasses 5 calendar years, fall semester of freshman year and spring  semester of senior year.  if AOTC only good for first four years, then no AOTC for spring semester senior year.  So either LLC for final semester or pay in previous year to maximize credit.  Am I thinking correctly?

Sorry to be obtuse on this but disallowance for a new client has also got me thinking if this then becomes a lost year of eligibility? This large early withdrawal of retirement funds sure had a very large negative impact all the way around.

Again, thanks for all the input.

[jklcpa]

Yes, that would work as long as the next year's course that is being prepaid begins within the first 3 months of the year.

[kathyc2]

1 hour ago, jklcpa said:

This is a good point, but also remember that, not only is it available for only 4 tax years, the AOTC is also only available for the first 4 years of postsecondary curriculum, as determined by the educational institution, generally the freshman through senior years.

 

That will be over 5 calendar years though, as the student almost always starts in fall.  In actuality, it can run over several calendar years as the requirement is "at least 1/2 time". 

[Margaret CPA in OH]

19 minutes ago, kathyc2 said:

That will be over 5 calendar years though, as the student almost always starts in fall.  In actuality, it can run over several calendar years as the requirement is "at least 1/2 time". 

I think you may be mistaken.  This from IRS.gov:

Who is an eligible student for AOTC?

To be eligible for AOTC, the student must:

Be pursuing a degree or other recognized education credential

Be enrolled at least half time for at least one academic period* beginning in the tax year

Not have finished the first four years of higher education at the beginning of the tax year

Not have claimed the AOTC or the former Hope credit for more than four tax years

Not have a felony drug conviction at the end of the tax year

 

My bold above.  This is why I have alerted clients with college bound children to carefully consider when to pay what.  At times, it has been beneficial to not take AOTC for the first fall semester, at other times it was better to prepay the last spring semester to be within the four tax years. 

[Lion EA]

The IRS words it on their online "assistant" as...Has the student received four years academic credit for postsecondary education before the beginning of 2021? Of course, you still can take it only four times, so the five years or longer (part-time, stop and restart college, for example) you still have to count/keep track of how often a student used it.

I've amended a student who took it her first year/fall at a community college and then transferred to a much more expensive college to use all four years of eligibility at the more expensive college.

[Lion EA]

I agree with Margaret. It doesn't have to be the FIRST four years. And, it doesn't have to be four CONSECUTIVE years.

[kathyc2]

14 minutes ago, Margaret CPA in OH said:

Not have claimed the AOTC or the former Hope credit for more than four tax years

I think you misunderstood me.  I was pointing out that while it can only be used on 4 tax returns, there may be multiple years available to choose which are the "best" 4 years. 

[kathyc2]

If the student files on their own for the non-refundable portion, their income would need to be over 17,550 to see any net tax benefit.  After standard deduction, 17550 earned income would have $500 tax offset by the non-refundable AOC.  Mom loses the $500 other dependent credit, so break even.

Also, it money Mom took from retirement was an IRA, see if it can be exempt from 10% penalty for higher education expenses.