Education Credits Disallowed

[jklcpa]

58 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 misunderstood me also.

If a student starts with the Fall 2019 semester and completes the degree in 4 consecutive academic years, that student would complete the 4-yr degree in Spring 2023.  That would span 5 tax years. 

What I was answering, and I think what DaveT was asking, is that the Spring 2023 tuition may be prepaid in 2022 and used as part of the AOTC for the 2022 tax year, which would encompass both the 4th academic year AND the 4th and final tax year for the AOTC.  In this scenario, there is no 5th tax year involved.  I think that is DaveT's latest question.  Do you know why that would not work? 

[Dave T]

Another great point. I need to call her this evening.  She had originally said used for household expenses but will ask if that includes college .

[kathyc2]

7 minutes ago, jklcpa said:

What I was answering, and I think what DaveT was asking, is that the Spring 2023 tuition may be prepaid in 2022 and used as part of the AOTC for the 2022 tax year, which would encompass both the 4th academic year AND the 4th and final tax year for the AOTC.  In this scenario, there is no 5th tax year involved.  I think that is DaveT's latest question.  Do you know why that would not work? 

The AOC is only good for the first 4,000 of tuition/fees.  If they already have that much, I'd pay the Spring in 2023 to at least get some Lifetime Credit if the AOC has already been used 4 years. 

[TexTaxToo]

18 hours ago, Dave T said:

Another great point. I need to call her this evening.  She had originally said used for household expenses but will ask if that includes college .

Money is fungible.  It doesn't matter what she actually used the distribution for.  If she had qualified higher education expenses in the same year as the distribution, the penalty is waived for the amount of the distribution up to the amount of the expenses.

[kathyc2]

2 hours ago, TexTaxToo said:

Money is fungible.  It doesn't matter what she actually used the distribution for.  If she had qualified higher education expenses in the same year as the distribution, the penalty is waived for the amount of the distribution up to the amount of the expenses.

Wouldn't it only apply to money that was actually paid?  In other words, if student loans were taken out, I don't think that amount would qualify. 

[Dave T]

Another great point. I need to call her this evening.  She had originally said used for household expenses but will ask if that includes college .

[Dave T]

She did have education expenses paid on behalf of her sons. She said that was automatically deducted from her   checking and paid to the school.

She also used some of the distribution for home improvements (roof).  Assuming we can identify the education expenses, then 10% of the penalty could be mitigated by that amount?  If that is the case not sure how I would handle that in ATX.

Thanks

[Lee B]

Suggest that you review the very long list of exceptions to the 10 % penalty plus the additional exceptions available under a "Qualified Disaster".

[Sara EA]

Like TexTax says, you can take money from an IRA or 529 and if there were qualified education expenses the penalty is waived even if you used the cash for a new roof. 

[Dave T]

Yes, there were definitely education expenses but the distribution was much larger than the college expenses. The funds were also used for a roof and other home improvements.

I presume I can mitigate the 10% penalty on the education expenses which will entail an override of the penalty amount in ATX.  I believe this has been asked before but can the return be e-filed with over ridden fields?

[Sara EA]

Dave T, did you ever say what kind of retirement account?  If a 401k, no penalty waiver for education.  With an IRA, the amount used for education (including room and board) will be penalty free.  The rest faces the penalty.

If the parent doesn't claim the students, they can't claim themselves but can get up to $1k AOC credit or $2k Lifetime Learning.  They would have to have tax liabilities to reduce by these amounts (neither is refundable) to make it beneficial.

 

[Dave T]

Yes, I should have noted that it is a traditional IRA and thus the opportunity to abate the 10% on the educational expense component of the withdrawal.

I looked into the boys claiming the credit but their income was so small that it wouldn't have worked.

Thank you for your response.

[Gail in Virginia]

You should not have to over-ride to get rid of the penalty.  On form 5329, you will put in the exception to the penalty that you are claiming and the amount you are claiming the exception on.  Then your software should calculate the penalty on the remainder correctly.