Question

Brendan and Theresa are married and have three children in college. Their twin daughters, Christine and Katlyn, are freshmen and attend the same university. Their son, Kevin, is a graduate student. In 2019, Brendan and Theresa pay $12,040 in tuition and fees ($6,020 each) and $2,810 in textbooks ($1,480 and $1,330, respectively) for their daughters and $4,150 in tuition and fees for Kevin and $350 in textbooks. The twins' room and board is $2,660, while Kevin's room and board is $1,370. Brendan and Theresa have an adjusted gross income of $72,900.

a. Brendan and Theresa can claim $_________ as a tax credit for the higher education expenses.

Round intermediate computations and final answer to the nearest dollar.

b. Assume that their adjusted gross income is $123,200, then they can claim $__________ as a tax credit for the higher education expenses.

c. Assume the same facts as in part a, except that Kevin is a freshman and the twins are graduate students. Brendan and Theresa can claim $________ as a tax credit for the higher education expenses.

Answer 1

Solution

Brenden and Theresa can claim the AOTC or the LLC, but not both—at least not in the same year and not for the same student. They can claim one credit each for two separate students' expenses, however, and their dependents can claim their own credits—but not if Brenden and Theresa claim them as dependents on their own return.

The American Opportunity Credit

The American Opportunity Tax Credit (AOTC) is restricted to undergraduates who are enrolled for at least one academic period for at least half-time a year. Graduate students don't qualify—the credit is limited to the first four years of higher education—nor do students who have felony drug convictions. The credit is equal to the first $2,000 They spend per student plus 25% of the next $2,000 They spend, for a maximum credit of $2,500.

And here's the best part. If and when their AOTC erases their tax debt to the IRS, They can receive a refund of up to 40% of whatever remains, up to $1,000.

The AOTC begins phasing out at certain income levels, however. These thresholds begin at modified adjusted gross incomes (MAGIs) of $80,000 or less for single taxpayers in 2019, and at $160,000 for married taxpayers who file joint returns. They can claim the full credit if their MAGI is equal to or less than these income figures, but then their credit begins decreasing and They can't claim it at all if their MAGI exceeds $90,000 or $180,000 respectively

The Lifetime Learning Credit

The Lifetime Learning Credit is open to all students, even graduate students and those who are enrolled less than half-time, but it's not quite as generous as the AOTC. This credit is equal to 20% of up to $10,000 in eligible education expenses, or $2,000 total. They can include their total education expenses—this one isn't per student—but They can't claim the same expenses for the AOTC for that student in the same year.

The LLC is also subject to MAGI phase-outs: $58,000 and $68,000 for single taxpayers, and $116,000 and $136,000 for married taxpayers filing jointly as of the 2019 tax year, Again, it begins phasing out at the first number until it's unavailable entirely at the upper threshold.

Qualified Education Expenses for Education Credits

Qualified expenses are amounts paid for tuition, fees and other related expense for an eligible student that are required for enrolment or attendance at an eligible educational institution. They must pay the expenses for an academic period* that starts during the tax year or the first three months of the next tax year.

Eligible expenses also include student activity fees They are required to pay to enrol or attend the school. For example, an activity fee that all students are required to pay to fund all on-campus student organizations and activities.

For AOTC only, expenses for books, supplies and equipment the student needs for a course of study are included in qualified education expenses even if it is not paid to the school. For example, the cost of a required course book bought from an off-campus bookstore is a qualified education expense.

Expenses that Do Not Qualify

Even if they pay the following expenses to enrol or attend the school, the following are not qualified education expenses:

· Room and board

· Insurance

· Medical expenses (including student health fees)

· Transportation

· Similar personal, living or family expenses

A. Solution

Calculation of claim for the higher education expenses

Their Twin daughter are freshman and it is their first year of collage hence their education fee is eligible under AOTC. Because they are under graduate.

Qualified Expenses of Twin daughter are as follows

Tuition and fees $6020*2=$12040

Expenses for books=$1480+$1330=2810

Qualified Expenditure per student is ($12040+2810)/2=$14850

However as per AOTC credit is equal to 20% of up to $10,000 in eligible education expenses, or $2,000 total. Hence total AOTC shall be restricted to $ 2500 per student.

Therefore, under AOTC eligible credit is ($2500+$2500) = $5000

Kevin is graduate student hence AOTC is not available for his education expense however Brendan and Theresa can claim Life Line learning Credit (LLC). This credit is equal to 20% of up to $10,000 in eligible education expenses, or $2,000 total.

Hence under LLC qualified education expenses of Kelvin is as follows

tuition and fees =4150

Expenses for books=350 (this is not qualified education expenses under LLC)

Qualified Expenditure= $4150

Therefore, under LLC eligible credit is $4150*20% or $2000 whichever is higher. i.e.$2000.

Brendan and Theresa can claim $7000 as a tax credit for the higher education expenses. (AOTC=$5000, LLC=$2000)

B. Assume that their adjusted gross income is $123,200, then they can claim $7000 as a tax credit for the higher education expenses. Since their AGI is fall between MAGI limit and not crossed after credit lower or higher limit MAGI of AOTC and LLC respectively.

C. Assume the same facts as in part a, except that Kevin is a freshman and the twins are graduate students.

In that Case Qualified expense under AOTC are

Tuition and fee =$4150 & textbook expense =$ 350 Total= $ 4500

However Eligible under AOTC shall be restricted to $2500

Further under LLC for Twin daughter Eligible tax credit shall be $ 2000

Brendan and Theresa can claim $4500 as a tax credit for the higher education expenses.