Question

Matt and Carrie are married, have two children, and file a joint return. Their daughter Katie is 19 years old and is a full-time student at State University. During 2017, she completed her freshman year and one semester as a sophomore. Katie’s expenses while she was away at school during the year were as follows: Use Tax Rate Schedule for reference.

   

Tuition	$	5,000
Class fees		300
Books		500
Room and board		4,500

Katie received a half-tuition scholarship that paid for $2,500 of her tuition costs. Katie’s parents paid the rest of these expenses. Matt and Carrie are able to claim Katie as a dependent on their tax return.  

Matt and Carrie's 23-year-old son Todd also attended graduate school (fifth year of college) full time at a nearby college. Todd’s expenses while away at school were as follows:

   

Tuition	$	3,000
Class fees		0
Books		250
Room and board		4,000

Matt and Carrie paid for Todd's tuition, books, and room and board.   

Since Matt and Carrie still benefit from claiming Todd as a dependent on their tax return, they decided to provide Todd with additional financial assistance by making the payments on Todd’s outstanding student loans. Besides paying off some of the loan principal, Matt and Carrie paid a total of $900 of interest on the loan.

This year Carrie decided to take some classes at the local community college to help improve her skills as a school teacher. The community college is considered to be a qualifying post secondary institution of higher education. Carrie spent a total of $1,300 on tuition for the classes, and she was not reimbursed by her employer. Matt and Carrie's AGI for 2017 before any education related tax deductions is $121,000 and their taxable income before considering any education-related tax benefits is $80,000. Matt and Carrie incurred $500 of miscellaneous itemized deductions subject to the 2 percent floor not counting any education-related expenses.

Their options for credits for each student are as follows:

They may claim either a credit or a qualified education deduction for Katie’s expenses.

They may claim either a credit or a qualified education deduction for Todd.

They may claim (1) a credit or (2) a qualified education deduction for Carrie. They may deduct any amount not included in (1) or (2) as a miscellaneous itemized deduction subject to the 2 percent of AGI floor.

Answer 1

Answer:

Let’s consider two alternatives:

Alternative 1:

Claim all $3,000 of Todd’s expense as a for AGI deduction and $1,000 of Katie’s expenses as a for AGI deduction. Finally, deduct Carrie’s expenses as a from AGI deduction. Note that Todd’s expenses are not eligible for the American opportunity credit because he is in his fifth year of post secondary education. Also, the lifetime learning credit for Todd’s expenses is $240 [$3,000 × 20% × 40% (due to 60% phase out)] so the for AGI deduction provides more tax savings than the lifetime learning credit.

Description	Tax Saving	Computation
(1) $3,000 for AGI deduction for Todd’s expenses	$750	$3,000 × 25% marginal tax rate
(2) $1,000 for AGI deduction for Katie’s expenses	$250	$1,000 ×25% marginal tax rate. Note that Matt and Carrie may not claim anymore tax benefits for Katie’s expenses in excess of $1,000 (the $4,800 excess can’t be used for anything else).
(3) $1,300 from AGI deduction for Carrie’s expenses	$325	$1,300 × 25% marginal tax rate. Entire amount is in excess of 2% of AGI floor for miscellaneous itemized deductions (AGI before deducting the for AGI deductions for education expense is $112,000. $112,000 × 2% = $2,240 which is below the $2,300 of non educational miscellaneous itemizeddeductions. Consequently, the 2% threshold does not limit the education miscellaneous itemized deduction.
Total Tax Saving	$1325

This alternative provides $1,325 of tax savings for Matt and Carrie.

Alternative 2:

Claim $3,000 for AGI deduction for Todd’s expense, claim $1,000 of Carrie’s expense as a for AGI deduction, claim the remaining $300 of Carrie’s expenses as a from AGI deduction, and claim the American opportunity credit (AOC) for Katie’s expenses.

Description	Tax Saving	Computation
(1) $3,000 for AGI deduction for Todd’s expenses	$750	$3,000 × 25% marginal tax rate
(2) $1,000 for AGI deduction for Katie’s expenses	$250	$1,000 ×25% marginal tax rate. Note that Matt and Carrie may not claim anymore tax benefits for Katie’s expenses in excess of $1,000 (the $4,800 excess can’t be used for anything else).
(3) $300 from AGI deduction for Carrie’s expenses	$75	$3,00 × 25% marginal tax rate
Or Katie’s Expenses	$2500	Note 1
Total Tax Saving	$3575

Note 1

Description	Tax Saving	Computation
(1) Katie’s AOC before phase-out	$2500
(2) AGI after education interest deduction	$121000	$112,000 AGI minus $0education interest expensefor AGI deduction (Matt and Carrie did not borrowthe money so they can’tdeduct the interest).
(3) For AGI deduction for qualified educational expenses	$4000	For Todd and Carrie’sexpenses
(4) AGI	$117000
(5) Phase-out threshold	$160000
(6) Excess AGI	0	(4) – (5)
(7) Phase-out range for taxpayer filing as Head of Household	$20000	180000 – 160000
(8) Phase out Percentage	0%	(6) / (7)
(9) Phase out amount	0	* (8)
AOC after Phase out	$2500	+(9)

This alternative provides $3575 of tax savings for Matt and Carrie.

Conclusion: Hence, Alternative 2 provides mose tax saving option.