Two Education Credits Explained for 2017

Students and graduates can save a significant amount of money at tax time by utilizing one of the following education credits.

American Opportunity Credit

You can claim up to $2,500 per student to account for tuition, activity fees, books, equipment and supplies, provided the student in within their first four years of college. Requirements state that the eligible student has to be enrolled at least half time, and can’t have any felony drug convictions. Parents are able to claim the credit for an eligible student, as long as they claim the student as a dependent on their tax return. The American Opportunity Credit is subject to an income phase-out, capping at $90,000 annually for single filers, and $180,000 for joint taxpayers.

Lifetime Learning Credit

This credit is worth up to $2,000 for the same expenses as the previous credit, however the credit extends to graduate and non-degreed courses at accredited learning institutions. That means you aren’t required to be an undergraduate, and can be at any point in your post-secondary education. Different from the American Opportunity Credit, this credit has no requirements for enrollment time, and is limited to one per return. The maximum credit amount is $2,000 no matter how many students are eligible on your return. The Lifetime Learning Credit also phases out at certain income levels: single filers limited to modified adjusted gross income of $65,000, $131,000 for joint filers.

You are only able to claim one of the credits, so if you opt for the Lifetime Learning Credit, you can’t claim the American Opportunity Credit, or the other way around.

Important Tax Credits For 2017 Families

The Child Tax Credit can save parents up to $1,000 per child based on income. Higher income families are entitled to a smaller credit, as the IRS reduces the credit at modified adjusted gross income of $110,000 for joint, married taxpayers.

The Child and Dependent Care Credit is an excellent way to recover some expenses incurred for qualified supervision of your dependents while you work an earn a living. This credit covers a certain percentage of a maximum of $3,000 in expenses such as daycare fees for a single qualified person’s care, and up to $6,000 for the care of two or more people. Qualified dependents include children under the age of 13, a spouse or parent who is unable to care for themselves, and certain other dependents. Determined by your income, the percentage ranges between 20% and 35%. Quick breakdown: Filers with AGI of $15,000 or less are entitled to a credit covering 35% of their expenses. Every additional $2,000 of AGI decreases the credit percentage by one, meaning those who have an AGI of over $43,000 are able to claim a 20% expense credit. If you paid the expenses with a specific flexible spending account or advantageous tax program through your work, your credit may be smaller.

The Earned Income Tax Credit can save you between $3,468 and $6,444 in 2017, and is related to the size of your family, including children and dependents, your income, and your marital status. Families with an AGI of less than $55,000 should seriously consider their eligibility for the credit. However, investment income and other factors affect qualifying for the credit – in 2017 you have to have less than $3,500 in investment income, dividends or capital gains. If you don’t have children, you may still be entitled to up to $520 from this credit if you file Single and have an income less than $15,310 in 2017 or jointly at $21,000.

2017’s Earned Income Tax Credit

Many people forget about claiming the Earned Income Tax Credit (EITC) if they qualify. In fact, one out of every five qualified workers fail to claim the credit. This credit does more than reduce the amount of taxes you owe. Depending on your situation, you could be eligible for a refund, and there’s a chance it may even be more than you actually paid in taxes. You don’t want to miss your chance to claim this important credit, as it could save you thousands of dollars!

The EITC Explained

The EITC reduces, or in some cases, even eliminates the tax you paid if you’re a low-to-moderate income earner. Reports indicate that 26 million eligible taxpayers saved $63 billion by claiming the EITC during last year’s tax season. That totals an average of $2,470 in savings per tax return. Imagine what you can do with that extra cash.

Be sure to check if you are eligible for the EITC, and claim your credit for 2017 when you file your tax return. If you realize you qualified for the credit but didn’t claim it for the previous tax years (up to three years) you’re encouraged to tell the IRS as you may be entitled to receive the money back still. Don’t forget about the EITC!

If you’ve claimed the EITC in the past, or you’re wondering if you’re eligible this year, you may have already researched the different income thresholds that determine whether you qualify. However, you might not know that there are other rules that affect eligibility in addition to the income limits. These include:

  • Having at least $1.00 of earned income. Pensions and unemployment compensation do not count as earned income.
  • Having less than $3,450 in investment income for 2017.
  • Filing a joint return if you are married. Married, filing separate taxpayers cannot claim the EITC.
  • Not filing Form 2555, Foreign Earned Income; or Form 2555-EZ, Foreign Earned Income Exclusion.

Certain special rules exist for military members and clergy, along with those who receive disability income or have dependent children with disabilities.

When you claim your children as dependents in relation to the EITC, they only qualify if they meet the following requirements:

  • The child is any of the following relationships to you: son, daughter, adopted child, stepchild, foster child, grandchild, brother, sister, half-sibling, step-sibling, niece or nephew.
  • The child is less than 19 years old at the end of the year, and younger than you and your spouse (for joint filers) OR under 24 years old if they were a full-time student for a minimum of five months during the year. Children who are permanently and totally disabled are exempt from the age requirements.
  • The child lived with you or your spouse in the U.S. for over 50% of the year.

When you claim a child, be prepared to submit the following information for each dependent:

  • A valid Social Security number representing the exact name of the child as printed on their respective SS card
  • The children’s full date of birth.

Errors on your tax return happen, and generally they delay your refund. When the mistake is made while claiming the Earned Income Tax Credit, you can expect to wait a little longer to receive that part of your tax refund, even extending into months-long delays. In some cases, errors on the EITC portion of your tax return could result in a denial of your entire credit.

Should the IRS deny your EITC claim, you’ll suffer some repercussions including:

Repayment of the EITC amount you’ve received plus interest.

Filing Form 8862, “Information to Claim Earned Income Credit After Disallowance” prior to attempting to claim the EITC on another tax return.

If the mistake is deemed reckless or intentional by the IRS, you won’t be able to claim the EITC for the following two years.

If the IRS determines your tax return was filed fraudulently, you’ll be banned from claiming the EITC for the next decade.

Student Loan Interest Deduction for 2017

Whether you’re in college currently, or have entered repayment of your student loans, every penny can matter. Maximize your tax refund by taking all the deductions you qualify for, including student loan interest. You may be eligible to deduct up to $2,500 from your taxable income if you’ve paid interest on your student loans. For example, those in the 15% tax bracket may receive a maximum of $375 as a deduction for student loan interest when you file your tax return.

Additional Education Costs

Paying back your student loans generally means you’ll pay more than your original principle, as you’re required to pay interest on the amount borrowed. The deduction is available to student loan payers who make less than $80,000 a year, and is relative to the amount of interest you paid. Graduates who earn between $65,000 and $80,000 annually can deduct a reduced interest amount.

Parents can deduct interest on student loans taken for their children’s education. However, if you are claimed as a dependent on your parents’ tax return and the student loan is in your name, the deduction is then forfeited.

The deduction isn’t limited just to graduates, either. If you’re making payments on your loan while you’re still in school, you are eligible to claim it as long as you are paying interest.

Students still in school may be able to claim additional education deductions, one being a deduction of up to $4,000 in tuition and fees. Or, you can opt to claim one of two straight tax credits: the American Opportunity Tax Credit for up to $2,500 or the Lifetime Learning Credit up to $2,000.

Depending on your income and additional qualifications, you can determine which of these credits will save you the most. In most situations, credits offer more savings than deductions, which lower your taxable income. Credits, however lower the amount you actually pay in taxes.

Education expense deductions can be beneficial to student taxpayers or their parents, however, knowing what qualifies as an appropriate expense is important. As the taxpayers in the next situation soon learned, even if you spend significant time educating yourself in various topics, if the expense is not deemed ordinary and necessary, it will be categorized as a non-deductible personal expense.

The Situation

Married taxpayers both worked at Seminole State College – the husband as an adjunct math and communications professor, the wife as the campus librarian. On their tax return, the couple deducted their home internet, television, books, DVDs, and CD expenses, claiming them to be unreimbursed employee expenses. With a doctorate degree in communication, the husband testified that the cost of maintaining a similar terminal degree falls on the individuals, who must spend their own time developing, gaining, and exploring information, to continue their knowledge and, in theory, self-educating.

IRC Section 162 allows a taxpayer to deduct the cost of internet service at home if it is a necessary and ordinary expense to the taxpayer’s job or business. Otherwise, the expense is considered personal, and therefore, non-deductible.

In his eyes, the taxpayer believed that access to the internet was crucial to developing his general knowledge. He argued that any incurred expenses should be considered deductible as unreimbursed employee expenses as they were used to increase his general knowledge. To him, this included the money spent on books, CDs and DVDs, as he claimed they were necessary to perform his job functions. Despite this, he did agree that he hadn’t been required to purchase the material by the university, nor was it expected of him to do so to continue at his job.

In this circumstance, general knowledge expenses are not deemed ordinary and necessary to the profession of a college professor, and instead fall under the notion of a personal expense. The court acknowledged the amount of time and resources expended by the taxpayers to fuel their quest for knowledge, however eventually ruled that these expenses cannot qualify as unreimbursed employee expenses for either a professor or college librarian.

Business travel can add up to a costly expense for many individuals, which is why deductions are offered at tax time to help alleviate the sting. In the case of mileage deductions, maintaining adequate records is extremely important to validate the expense, as the taxpayer in the following situation soon learned.

The Situation

The taxpayer drove 8,687 miles while distributing advertising materials in hope of attracting new clientele for his CPA business. When filing his tax return, the CPA claimed those miles as a business deduction, however the IRS denied the claim because his records were not simultaneous.

When in court, the taxpayer couldn’t provide a simultaneous record of his mileage for the appropriate year, and instead offered a calendar and copies of directions from the website MapQuest, printed two years after the fact. It became obvious that the records were produced after the audit had begun, and while some significant dates were circled on the calendar, there was no other information scribed – no miles driven, locations, appointments, or purpose of travel. The only information he supplied was the distance between his home and the towns in which he claimed to have performed business functions, as per MapQuest. The corresponding dates of travel had been written on top of each printout of directions, similar to the dates highlighted on the calendar.

The court determined the records (the calendar and the printouts) to have been organized two years after the fact, breaking the requirement set forth by Regulation section 1.274-5T(c)(2)(ii) that records must be maintained at the time of travel.

Additionally, because of the gap in time and the lack of information provided, the court decided that the directions and the calendar weren’t adequate and didn’t provide enough corroborative evidence to document the amount of business mileage, the purpose of travel, and the dates the business traveled occurred.

Employees who are required to wear a specific uniform to work may qualify for a deduction at tax time as an unreimbursed employee expense. However, as the next situation proves, the required clothing must not be suitable for wear outside of the workplace.

The Situation

Ralph Lauren Corporation sells, markets, and designs a wide range of men’s clothing – from polo shirts and t-shirts to dress shirts and sport coats – both casual and formal. A salesman for the Ralph Lauren Corporation was required by the company to represent the brand by wearing Ralph Lauren apparel while at work.

Due to this requirement, the taxpayer bought a range of Ralph Lauren attire including shirts, pants, suits and ties, and considered this purchase to fit under the category of unreimbursed employee expenses. He deducted the amount spent on work clothes on a Schedule A of Form 1040, however the IRS did not accept the deduction. Their reason: the clothing is considered a nondeductible personal expense as per IRC section 262. Taxpayers are not able to deduct costs related to basic living, personal expenses, and family.

In section 162 (a) of the IRC, taxpayers generally can deduct ordinary and necessary costs paid or incurred in relation to employment, trade, or business activities. As an employee, any costs that are ordinary or necessary to work, which you were not reimbursed for, may be deductible under IRC section 162.

In most situations, clothing expenses can’t be deducted, which includes maintenance and cleaning of uniforms, even if the clothing is worn while working. There are three different qualifications clothing costs must meet to be considered ordinary and necessary, and therefore deductible:

  1. The clothing is required for the taxpayer to maintain employment
  2. The clothing can’t be worn as personal wear
  3. The clothing isn’t suitable to be worn as personal wear or general streetwear

Even though the taxpayer is required to wear the specific clothing to work, it is still considered suitable for general streetwear. Because of this, the taxpayer was not able to deduct his expenses for the clothing he purchased.

Educational tax credits can help taxpayers save when they file their return if they incurred any education-related expenses during the year. However, as the student in the following situation discovered, educational tax credits are based on what you actually paid, not what was billed.

The Situation

In 2010, the full-time Hampton University student registered for classes occurring in the Spring ’11 semester. When she registered for classes, the school billed her $2,460 for tuition in relation to the courses she chose. Once the schedule was finalized and her classes were set, the university added an additional $1,230 to her balanced based on the final schedule on January 10, 2011.

This student primarily paid her educational expenses with student loans, which were not disbursed until ten days after the schedule was set. On January 20, 2011, the university directly received the funds from the loans, which prompted the school to generate a Form 1098-T, Tuition Statement for 2011.

This form, which is sent to both the student and the IRS, recorded no tuition payments received (Box 1), but stated $1,180 in billed qualified tuition and expenses (Box 2). The amount billed as represented in Box 2 referred to the $1,230 of tuition billed in January, along with a $50 mandatory fee. A $100 tuition credit was subtracted from the amount billed, leaving a total of $1,180 as stated on the Form 1098-T. (more…)