Question

Income Tax Credits (LO. 6)

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 2020, Brendan and Theresa pay $12,100 in tuition and fees ($6,050 each) and $2,920 in textbooks ($1,430 and $1,490, respectively) for their daughters and $4,230 in tuition and fees for Kevin and $350 in textbooks. The twins' room and board is $2,590, while Kevin's room and board is $1,310. Brendan and Theresa have an adjusted gross income of $72,100.

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 $124,400, 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

a. Brendan and Theresa can claim an American Opportunity Tax Credit (AOTC) for each of their daughters. Only tution and fees and textbooks are eligible for AOTC. As each of their qualifying expenses are exceeding $4,000 [($6,050 + $1,430 = $7,480) and ($6,050 + $1,490 = $7,540)], Brendan and Theresa can claim a maximum AOTC of $ 2500 [($2000 x 100%) + ($2000 x 25%)] for each daughter.

Their son Kevin, being a graduate student, is not eligible for the AOTC but is eligible for LIfetime Learning Tax Credit (LLTC). Only tution and fees are qualifying expenses, therefore an LLTC of $ 846 ($ 4230 x 20%) can be claimed.

Therefore Brendan and Theresa can claim $ 5846 ($2500 + $2500 + $846) as tax credit for higher education expenses.

b. As Brendan and Theresa’s adjusted gross income is less than $ 160,000, they need not reduce their AOTC. However as the adjusted gross income exceeds $ 118,000 they LLTC claim phases out.

Tax credit percentage = (Adjusted gross income - $118,000)/ $18,000 = $
Tax credit allowed = Calculated tax credit x (1 - tax credit percentage)

35.56% =( $124,400 - $118,000)/ $18,000

$545.2 = $846 x (1 - 35.56%)

Therefore Brendan and Theresa can claim only $ 5000 of AOTC ($2500+$2500) as tax credit for the higher education expenses and $545.2 LLTC.

c. If Kevin is a freshman, they can claim an AOTC of $ 2500 as kevin’s qualifying expenses exceeds $4000 ($4230 + $350 = $4580).

If the twins are graduate students, then Brendan and Theresa can’t claim AOTC but they can claim LLTC. However LLTC is only a per taxpayer tax credit and not a per person tax credit. As the tution and fees exceed $10,000 (actual being $12,100), the maximum LLTC available will be $2,000 ($10,000 x 20%).

The total amount claimable as tax credit for higher education expenses is $ 4500 ($2500+$2000).