Planning With Education Tax Credits All audio is streamed through your computer speakers. There will be several attendance verification questions during the LIVE webinar that must be answered via the online quiz at the conclusion to qualify for CPE. For the archived/recorded version of this webinar, there are also 3 review questions per hour and the link to the attendance verification quiz is a final exam on the topics covered during the presentation. Please note: You will not hear any sound until the webinar begins. Planning With Education Tax Credits All audio is streamed through your computer speakers. There will be several attendance verification questions during the LIVE webinar that must be answered via the online quiz at the conclusion to qualify for CPE. Todays webinar will begin at 2:00pm EDT Please note: You will not hear any sound until the webinar begins. Planning With Education Tax Credits September 10, 2016 John O. Everett, Ph.D., CPA Cherie J. Hennig, Ph.D., CPA Learning Objectives Define and explain qualified tuition and related expenses Explain the key concepts of academic term and eligible academic institution. Describe eligibility requirements for claiming education tax credits Differentiate tax reporting for American Opportunity and Lifelong Learning Credits Discuss the key factors in deciding whether a deduction or tax credit should be claimed. Recognize when it may be advisable to NOT claim a child as a dependent for purposes of maximizing tax education incentives. Topic 1 Tax incentives for qualified post-secondary education The tax benefit depends upon the taxpayers marginal tax rate and the tax credit percentage. A tax credit may be partially refundable if the taxpayer has no tax liability. Tax deductions and tax credits are mutually exclusive, in that the taxpayer cannot claim both a deduction and a credit for the same expense. In some cases the tax benefit is limited to the education expenses of the taxpayer, while in other cases the taxpayer may receive a tax benefit for education expenses for the taxpayers spouse or dependents. Who Benefits? Over 13 million taxpayers claimed the American Opportunity Credit (AOC) reducing their tax expense by over $5 billion dollars and generating tax refunds of an additional $6 billion. Over 12 million taxpayers claimed the Lifetime Learning Credit (LLC) reducing their tax expense by over $12 billion. Over 2 million taxpayers claimed the Tuition and Fees Deduction (TFD) resulting in a tax deduction for AGI of over $3 billion with an estimated tax savings of over $500 million. http://www.irs.gov/uac/SOI-Tax-Stats-Individual- Income-Tax-Returns#prelim, Topic 2 Understanding the Terminology 8 In general, the expenses must be incurred in an Academic Period within the tax year the expenses were paid to an Eligible Educational Institution, for qualified tuition and related expenses (QT&R). Also, some deductions and credits are phased out when modified AGI exceeds certain limits. There are many other important terms which are defined on subsequent slides that determine who and what qualifies for the deductions/credits. In some cases a deduction may be preferable to a credit. In some cases only a credit is available. 9 Academic Period Any quarter, semester, trimester, or any other period of study as reasonably determined by an eligible educational institution. If an eligible educational institution uses credit hours and does not have academic terms, each payment period may be treated as an academic period. 10 Eligible Educational Institution Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the US Department of Education, including an accredited public, nonprofit and privately owned profit-making post- secondary institution. 11 Qualified Tuition and Related Expenses (QT&R) Tuition and fees required for enrollment or attendance at an eligible post-secondary educational institution, including student-activity fees and expenses for course- related books, supplies, and equipment if they are paid to the institution as a condition for the student's enrollment or attendance but not for personal, living or family expenses, such as travel, room and board, insurance, or medical expenses. Reg 1.25A-2(d)(2)(iii) 12 Modified AGI (MAGI) Adjusted Gross Income from line 38, Form 1040, or line 22, Form 1040A, increased by any income excluded on Form 2555 (Income Earned Abroad Exclusion). 13 Topic 3 Tax Deductions 14 Tax Deductions There are two deductions for qualifying education expenses: The Work-Related Education Deduction (WREED) The Tuition and Fees Deduction (TFD). Note: The TFD must be renewed each year by Congress. 15 Work-Related Education Deduction (WREED) Education required by your employer or the law to keep your present salary, status, or job or to maintain or improves skills needed in your present work. Education required to meet the minimum educational requirements of your present trade or business, or education that is part of a program of study that qualifies you for a new trade or business do not qualify. Once the minimum educational requirements for a trade or profession are met, additional education qualifies as long as it is a requirement for keeping the taxpayers present job and has a bona fide business purpose, such as maintaining or improving current skills. 16 WREED Deduct Expenses on: Form 2106, line 4, Employee Business Expenses, subject to the 2% of AGI floor applicable to Miscellaneous Itemized Deductions. If the taxpayer does not itemize, there is no tax benefit. On Schedule C, if Self-employed. Will also reduce SE tax. On Form 1040, page 1, as a Tuition and Fees Deduction (TFD) for AGI. Subject to TFD Limits. 17 Qualifying WREED Expenses Tuition, books, supplies, lab fees, transportation and travel costs (may use standard mileage rate), costs of research and typing when writing a paper as part of an educational program Does not include room and board or the dollar value of vacation time or annual leave taken to attend classes. Expenses must be reduced by reimbursements that you are entitled to receive or actually receive from your employer. 18 Example #1 Mark is an auto mechanic. He took a course to learn how to service hybrid and flex-fuel auto engines. These expenses qualify since he is maintaining and improving his skills as an auto mechanic. 19 Example #2 Mandy is employed as a biology researcher for a pharmaceutical company. She took a one-year leave of absence to obtain a masters degree in bio-medical research which enhances her current professional credentials. The expenses related obtaining the masters degree qualify since the education is related to her present profession even if she goes to work for a different employer after obtaining her degree. 20 WREED Work-Related Education can be offered by an organization that is not an Eligible Educational Institution, such as a professional organization or a state regulatory agency. Many professional organizations require their members to obtain annual continuing professional education (CPE) as a condition for renewing membership in that organization. These organizations sponsor CPE programs and charge a fee for attending. Enrollment fees and costs of professional materials, plus travel and transportation costs qualify as WREED, but not as TFD. 21 Example Nancy is a self-employed lawyer who has an office in Buffalo, NY. She attended a 3-day CPE seminar on new developments in trust taxation in New York City. The enrollment fee and costs of professional materials to attend the seminar were $2,500. In addition she incurred deductible travel expenses of $3,000. Her WREED of $5,500 ($2,500 + $3,000) is deductible on her Schedule C. She does not qualify for the Tuition and Fees Deduction (TFD) since the expenses were not paid to an Eligible Educational Institution. 22 Tuition and Fees Deduction (TFD) The TFD is reported on Form 8917 and is a deduction FOR AGI by the taxpayer who claims the student as an exemption. If the taxpayer pays the expenses and is eligible to claim an exemption for the student, but doesn't do so, no one is allowed to deduct the expenses. If no one else is eligible to claim the student as a dependent, the student can claim the deduction even if the expenses were paid by another. 23 Tuition and Fees Deduction (TFD) The deduction is limited to: $4,000 if MAGI < $65,000 (S, HH) or $130,000 (MFJ) $2,000 if MAGI is between $65,000-$80,000 (S, HH) or $130,000-$160,000 (MFJ) $0 if MAGI >$80,000 (S, HH) or $160,000 (MFJ), or if married filing separately. 24 Tuition and Fees Expenses Qualified tuition and related expenses (QT&R) paid during the year for yourself, your spouse or your dependents to an eligible educational institution. Work-Related Education Expenses (WREED) must meet the QT&R definition to be deductible as TFD. 25 Tuition and Fees Expenses Qualifying expenses must be reduced by any reimbursements received from your employer. If you are entitled to be reimbursed by your employer but do not claim the reimbursement that you are entitled to receive, the expenses are not deductible. 26 TFD Example John is a science teacher at Enka Middle School in Asheville, NC. He is single and his Modified AGI before the Tuition and Fees Deduction is $55,000. The school district requires John to take additional college courses to keep his teaching job. He is not eligible for reimbursement from the school district. Even if the courses would eventually lead to a masters degree and an increase in his salary, the tuition, fees, and related travel and transportation expenses can be deducted as Work-Related Education Expenses on Form Or John could deduct up to $4,000 of the Tuition and Fees on Form 8917 as a deduction FOR AGI if his MAGI