Education credits and scholarships

Start with:  the Form 1098-T, Tuition Statement  (Most always, eligible education institutions provide to the student ... in Nebraska OUT OF SCOPE if not provided.)

Determine any scholarship or grant that are taxable to the STUDENT (see Pub 4012, Tab J-1 or Pub 17 Chapter 12).
  • Fill in Worksheet 1-1 at the bottom of Pub 4012, Tab J-1.  (to calculate the "taxable" scholarship income)
    • Generally the amount of scholarships for tuition, books, and equipment cost reduce "taxable" scholarship income (again ... Worksheet 1-1 will help determine taxable vs. nontaxable income ... see Pub 4012, ... for guidance ...be careful, Pub 17 & 970 are additional guidance).
  • In TaxWise, go to "1040 Wkt 1" or link from line 7 of Form 1040 to input "taxable" scholarship income from the Worksheet 1-1 Line 9.

Use the guidance in Pub 4012, ... to determine education credit.  Generally on the parents return, not on student?
4. If there is scholarship income the tax payer will generally not qualify for  an education credit.



Education Credits vs. Tuition & Fee Deduction

Taxpayers may be able to deduct qualified tuition and related expenses that they pay for themselves, their spouse, or a dependent, as a tuition and fees deduction. To determine whether the taxpayer expenses are qualified, refer to Publication 970, Tax Benefits for Education. Taxpayers do not have to itemize to take this deduction.  Taxpayers can claim qualified tuition and fees as either:

(1) a tuition and fees deduction (Form 1040 line 34);

(2) an American Opportunity or Lifetime Learning credit (Form 1040 Line 49); or

(3) if applicable, a business expense (Schedule A).  t

A taxpayer does not have to itemize to claim qualified tuition and fees unless  taxpayer claim them as a business expense. If the taxpayer claims qualified tuition and fees as a tuition and fees deduction, the deduction is taken as an adjustment to income on Form 1040 line 34.

 

Click for full size: EdCreditChart.pdf






Tuition and Fee Deduction (Form 1040, line 34):

Taxpayers can take the tuition and fees deduction if:

·         Filing status cannot be married filing separately,

·         Taxpayer cannot be claimed as a dependent on someone else's return.

·         The deduction is reduced or eliminated if the taxpayer modified adjusted gross income exceeds certain limits, that depend on taxpayer filing status.  

 

If the educational expenses are also allowable as a business expense, the tuition and fees deduction may be claimed in conjunction with a business expense deduction, but the same expenses cannot be deducted twice.  The taxpayer cannot claim a deduction or credit based on expenses paid with tax-free scholarship, fellowship, grant, or education savings account funds such as a Coverdell education savings account, tax-free savings bond interest or employer-provided education assistance. The same rule applies to expenses the taxpayer pay with a tax-exempt distribution from a qualified tuition plan, except that the taxpayer can deduct qualified expenses the taxpayer pays only with that part of the distribution that is a return of taxpayer contribution to the plan.

Education credit (Form 1040, line 49)

A taxpayer can take education credits for the taxpayer, spouse, and/or dependents (claimed on the tax return) who were enrolled at or attended an eligible post-secondary educational institution during the tax year.

Taxpayer Requirements

The taxpayers:

  They cannot be claimed as a dependent on someone else’s tax return.

  They are not filing as Married Filing Separately.

  Their adjusted gross income (AGI) is below the limitations for their filing status.

  They were not nonresident aliens for any part of the tax year, or if they were, they elected to be treated as resident aliens.

 Dependent Requirements

The taxpayer must claim the dependent on the return to claim the credit for the student’s qualified expenses.

 Eligible institution

An eligible institution is any college, university, vocational school, or other post-secondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.  The school should be able to tell the student if it is an eligible education institution. A searchable database of all accredited schools is available at http://ope.ed.gov/accreditation/.

 Qualifying expenses

Qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. However, for the American opportunity credit, the definition for “certain related expenses” is different. Review the Form 1098-T, Tuition Statement, issued by the school to identify the expenses that qualify for education credits.

 Expenses that do not qualify

Do not include expenses such as:

  Room and board, insurance, medical expenses (including student health fees), transportation costs, or other similar personal, living, or family expenses

  Any course of instruction or other education involving sports, games, or hobbies, unless the course is part of the student’s degree program or (for the lifetime learning credit) helps the student to acquire or improve job skills

 Amounts excluded from qualified expenses

Certain tax-free funds used to pay tuition must offset the credit. Once you have identified each person claiming a credit and their qualified expenses, ask if the student received any of these untaxed educational benefits during the year:

  Pell grants

  Employer-provided educational assistance

  Veterans’ educational assistance

  Tax-free portions of scholarships and fellowships

  Any other nontaxable payments received as educational assistance (other than gifts or inheritances)

  Refunds of the year’s qualified expenses paid on behalf of a student (e.g., the student dropped a class and received a refund of tuition)

 Subtract the tax-free educational assistance, refunds, and benefits from the student’s qualified expenses.  View the Interview Tips in the Volunteer Resource Guide (Tab G).

 Form 1098-T from the educational institution

The form should show the amounts the student paid for tuition and related expenses, the amounts of scholarships and grants received, and whether the student was at least a half-time student or a graduate student. Verify with the taxpayer that the amount in Form 1098-T, box 1 or 2, is actually the amount paid in the current tax year for qualified expenses.

 There are several differences between the two credits:

The American opportunity credit:

  Is permitted for the first four years of post-secondary education.

  Qualified tuition and related expenses include expenses for course materials—books, supplies, and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance.

  Generally, 40% of the credit is a refundable credit, which means taxpayers can receive up to $1,000 even if they owe no taxes. 

Requirements for the American opportunity credit:

  The student was in the first four years of post-secondary study

  The student enrolled in 2010 in a program that leads to a degree, certificate, or other credential

  The student was taking at least one-half the normal full-time workload for the course of study, for at least one academic period beginning in 2010

  The student has not been convicted of a felony for possessing or distributing a controlled substance

Lifetime learning credit:

  There is no limit on the number of years for which the taxpayer can claim the credit based on the same

student’s expenses.

  Course-related books, supplies, fees, and equipment are included in qualified education expenses only if

the fees and expenses must be paid to the institution as a condition of enrollment or attendance

.

  Not refundable.

 

Lifetime he lifetime learning the student need not be enrolled half-time or in a degree program and a felony drug conviction does not disqualify the student.  The lifetime learning credit can be up to $2,000 per tax return, depending on the amount of eligible expenses and the amount of tax on the return. The credit is 20% of the first $10,000 of eligible expenses paid for all students, up to the amount of tax on the return.

 If the student does not meet all of the conditions for the American opportunity credit, the taxpayer may be able to take the lifetime learning credit for part or all of the student’s qualified expenses.