Question

4. Hugh and Caroline are married, both are 51, live in Arcata, California, and have two dependent children Chris , age 20, and Clem, age 23, both of whom are enrolled at CSU Humboldt. Hugh’s wages are $60,000 and Caroline’s wages are $ 65,000 and those are their only sources of income for 2019. Hugh and Caroline paid tuition for Chris and Clem in August 2019 for classes for fall of 2019, with Chris starting full time as an undergraduate seeking a bachelors degree in biochem, and Clem starting full time in a masters program (Clem has used the AOTC four times during undergraduate work). Both Chris and Clem started in August and went through December 2019. Tuition for Chris was $ 4,600 and for Clem it was $4,900. Required textbook costs for Chris were $ 489, and for Clem $560. Hugh, Caroline, Chris and Clem have no education IRAs nor Series EE bonds.

What education tax credits can Hugh and Caroline claim on their 2019 tax return (how much of a total education tax credit)?

Answer 1

There are basically two types of Educational Tax credit which are:-

i. American Opportunity Tax Credit (AOTC)

ii. Lifetime Learning Tax credit (LLTC)

First let's calculate the AOTC as follows:-

As per the Question, Clem has used AOTC for the four times during his undergraduate work so he won't be eligible for AOTC now & also nor his parents would be eligible to claim AOTC for Clem.

To claim the full credit for American Opportunity Tax For their second child i.e Chris following conditions to be satisfied:-

• To claim the Full tax credit your Modified adjusted income should be $80,000 or less ($1,60,000 or less When Married filing jointly).
• Be pursuing a degree or other recognized educational credential.
• Be enrolled at least half time for at least one academic period." beginning in the tax year
• Not have finished the first four years of higher education at the beginning of tax year
• Not have claimed AOTC for more than four Tax years.

All the above conditions are satisfied in the case of Chris therefore eligible for Ameican Opportunity Tax Credit.

Here Huge & her wife caroline are married filing jointly and their modified adjusted income is:-

($60,000 + $ 65,000)= $ 1,25,000, therefore, they are eligible for full American opportunity tax credit for Chris which is calculated as:-

(i) 100% of the first $2000 of the qualified expense.

(ii) 25% of the qualified expense in excess of $2,000 of the qualified expense.

(iii) The Maximum AOTC is $2,500 per student. However if this credit brings the amount of tax you owe to zero, you can have 40% of any remaining amount of credit (up to Max $1000) refunded to you.

Total Qualified expense for Chris (4600 +489)= $5089.

100% of first $2000 = $2,000

25% of (5089-2000)=$ 772 (But Max. $ 500)

Total AOTC for Chris = $ 2500

2. Lifetime Learning Credit for Clem as he is not eligible for American Opportunity Tax Credit.

(i) The lifetime learning credit is a provision of the US Federal Income tax code that lets parents lower their Tax Liability by up to $2,000.i.e maximum of 20% of $10,000 of qualified expenses.

(ii) qualified expenses here include tuition fees & Mandatory course material or books purchased directly from college.

(iii) To claim the Full tax credit your Modified adjusted income should be $,68000 or less ($1,36,000 or less When Married filing jointly)

Here Income of Huge & Caroline ($60,000 +$65000) i.e 1,25,000 is within the limit & hence they are eligible for Lifetime learning credit i.e $2,000 for Clem.

Note:- We cannot take both the educational tax credit for same student but we can take a different tax credit for two different students.

Therefore Total Educational tax Credit Huge & Caroline can claim in their 2019 Tax return = AOTC for Chris + LLC for Clem

i.e = ($ 2500 + $2000) = $4500 Answer.