Business Owners Beware — New IRS Matching Program
Form 1099-K IRS Matching 1099-K reported income to tax return reported income Letters from the IRS
Beginning in 2012, banks, credit card companies, and other third-party organizations that settle transactions were required to file informational returns with the IRS that reported a business’s credit and debit card transactions and other electronic types of reportable income. The form used to file that information with the IRS is the 1099-K. If your business has credit/debit card transactions, then you, along with the IRS, have received this form in the past.
The information provided on the Form 1099-K allows the IRS to determine the business’s gross income from credit and debit card sales and makes it easier to segregate credit/debit card sales from cash sales. With Form 1099-K, the IRS is in the position to see if the credit card dollar figure reported on the tax return matches the bank’s information return; the form will also allow them to see if a business’s other sales from cash and check payments makes sense in the context of the firm’s overall business.As expected, the IRS has developed a program to match reported income on the income tax returns filed by businesses to the income reported on the 1099-Ks. The IRS’ analysis includes comparing the percentage of income a specific business reported as coming from credit/debit cards and cash sales, for example, to what the typical percentage is for other businesses in the same industry. If you receive a letter from the IRS related to the 1099-K, then the IRS’s computer thinks you underreported your business income and the agency is requesting an explanation for the discrepancy. Don’t procrastinate or ignore the letter; it only makes matters worse.
If you receive one of these letters, it may be appropriate for you to seek professional assistance with preparing a response. Please give this office a call.
Child Care Credit Available to Student-Parents
Student Parents May Qualify for Child Care Credit Determining the Artificial Income for Credit Computation How the Credit Is Determined
If your family is among the many families that incur child care expenses so that a parent can attend school, you may be eligible for a child care tax credit. Generally, the child care credit is only available to couples where both parents work, but a special provision of the tax law permits married parents attending college to also get the credit, if they meet certain criteria, even if the student-parent has no income.
Normally, the child care credit is based on care expenses for children under the age of 13 (limited to $3,000 for one child and $6,000 for two or more) and further limited to the lesser of (1) the taxpayer’s earned income, (2) the spouse’s earned income, or (3) the actual child care expenses. If one of the spouses does not have an income, then no credit would be available, thus penalizing families where one parent is attending school full time with no earned income. To correct this inequity, the tax law includes a special provision for spouse-students. To qualify for this tax break, the student-parent must be a full-time student for some part of five months during the year (the months don’t have to be consecutive). For each month the student-parent qualifies as a full-time student, their earned income is considered to be the greater of $250 ($500 if the care is for two or more children) or their actual earned income for that month. If the student-parent is a full-time student for the entire year, the artificial income would be $3,000 for one child and $6,000 for two or more, permitting the student-parent the maximum allowable child care credit. This phantom income is used only for computing the child care credit and doesn’t become income that is taxed.
The actual credit is based upon the taxpayer’s income (AGI). For incomes between zero and $43,000, the credit ranges from 35% to 21%. For incomes above $43,000, the credit is 20%. The credit will reduce both income tax and the alternative minimum tax, but it is not refundable. For example, a couple has two children under the age of 13. One spouse works full time and earns $45,000 a year. The other spouse attended college full time for nine months during the year and was not employed. Their annual child care expenses for the two children are $5,000. The student-spouse’s artificial income (from the chart) is $4,500. The couple’s child care credit is computed based upon the artificial earned income $4,500, since it is less than the actual expenses of $5,000 and the expense limitation is $6,000 for two children. Assuming the couple met all the other care qualification criteria, their credit would be $900 (20% of $4,500).
This article focused on the special full-time student provisions of the child care credit. There are also special provisions that apply for the care of a disabled spouse. If you have questions regarding these special provisions or any provision of the child and dependent care credit, please call.
The Earned Income Tax Credit: the IRS’s Nemesis
EITC Fraud and Excess Claims IRS Programs to Detect Fraud and Excess Claims EITC Qualifications Special Military Combat Pay Election
Years ago, Congress created the earned income tax credit (EITC) as a refundable tax credit for people who work but have lower incomes. This credit has been a nemesis for the IRS to administer ever since because, on the one hand, it is the frequent target of fraud and excess credit claims and, on the other hand, 20% to 25% of those who qualify for the credit do not claim it.
A contributing factor to errors in claiming the credit or failure to take the credit when qualified is the complicated rules related to who qualifies for this credit. The rules are quite complex and best addressed by a tax professional.
The government wants those who are entitled to the credit to claim it, and so the IRS widely promotes the credit. On the flip side, the IRS has numerous programs in place to detect fraud and excessive credit claims. The IRS estimates that the dollar value of improper EITC payments for fiscal 2013 was between $13.3 and $15.6 billion.
As an example, the largest credits are paid to individuals with a child. A conflict is created when the parents are divorced or separated. Both may attempt to claim the same child in an effort to qualify for the EITC. In fiscal year 2013, the IRS sent letters to over 110,000 taxpayers alerting them to the fact that another taxpayer also claimed the same qualifying child as they had claimed for EITC purposes.
The IRS is authorized to ban taxpayers from claiming the EITC for two years if it determines during an audit that they claimed the credit improperly due to reckless or intentional disregard of the rules. Last year, there were more than 67,000 two-year bans in effect. For those entitled to the credit, it could be worth up to $6,143 for 2014. So a taxpayer claiming the credit will pay less federal tax or get a larger refund.
If you are employed for at least part of 2014, you may be eligible for the EITC based on these general requirements:
You earned less than $14,590 ($20,020 if married filing jointly) and did not have any qualifying children.
You earned less than $38,511 ($43,941 if married filing jointly) and have one qualifying child.
You earned less than $43,756 ($49,186 if married filing jointly) and have two qualifying children.
You earned less than $46,997 ($52,427 if married filing jointly) and have three or more qualifying children.
In addition, you must meet a few basic rules: You must have a valid Social Security Number, as must any child in order to qualify for the credit. You must have earned income from employment or from self-employment. Your filing status cannot be married, filing separately. You must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen, or a resident alien and filing a joint return.
You cannot be a qualifying child of another person.
If you do not have a qualifying child, you must:
o be age 25 but under 65 at the end of the year,
o live in the United States for more than half the year, and
o not qualify as a dependent of another person.
You cannot file Form 2555 or 2555-EZ (related to foreign earn income). Members of the military can elect to treat all or none of their nontaxable combat pay as earned income for the purposes of computing the EITC. The one providing the larger EITC benefit can be used.
If you have questions about how the EITC might apply to you, a family member, or a friend, please call this office for additional information. Please understand that a taxpayer who might not normally be required to file a return might still benefit from filing to claim the EITC.
Will the Affordable Care Act Impact Your Tax Return for 2014?
Beginning in 2014, the Affordable Care Act will impose the new requirement that all people in the United States, with certain exceptions, have minimum essential health care insurance or they will be subject to a penalty. How this will affect your family will depend upon a number of issues.
If you have insurance through Medicare, Medicaid, or the Veterans Administration, then you will not be subject to the penalty. You will also avoid the penalty if you are insured through an employer plan or a private insurance plan that provides minimum essential care. US individuals and those claimed as their dependents who reside outside the US are deemed to have adequate coverage and are not subject to the penalty.
Some Are Exempt from the Penalty
Certain individuals are exempt from the health insurance mandate and are therefore not subject to the penalty. Included are:
Those unlawfully present in the US
Those whose income is below the federal tax filing requirement (the sum of the standard deduction and exemption amounts for the filer and spouse, if any)
Those who cannot afford coverage based on formulas contained in the law (generally when the cost of the insurance coverage exceeds 8% of the individual’s household income)
Members of American Indian tribes
Incarcerated individuals, certain religious objectors, and those meeting hardship requirements
The term “household income” is used as a measure of who qualifies for a premium assistance subsidy or tax credit and is used extensively in calculations related to the mandatory insurance requirements.
Household income includes the modified adjusted gross incomes (MAGIs) of an individual, the individual’s joint filing spouse, if any, and all of the individual’s dependents that are required to file a tax return(1).
MAGI is an individual’s regular adjusted gross income plus non-taxable social security and railroad retirement benefits, excluded foreign earned income, and non-taxable interest and dividends.
(1) An individual is required to file a tax return if their income exceeds the sum of their standard deduction and allowable exemptions. Thus, for example, a single person who only made $1,000 for the year would not be required to file a return and their income would not be included in the household income even if they did file to claim a refund.
Can’t Afford Coverage?
Families with household incomes below 400% of the federal poverty guideline may receive help to pay all, or a portion of, the cost of the premiums for health insurance.
Where the household income is below 100% of the federal poverty level, the family qualifies for Medicaid. There are no premiums for Medicaid.
If the household income is between 100% and 400% of the federal poverty level (FPL), the family qualifies for an insurance premium subsidy, also known as a premium assistance credit, provided the insurance is purchased through a government marketplace (exchange). The actual credit is based upon the current year’s household income but can be estimated and allowed in advance as a subsidy. When it is used in advance as a subsidy and the subsidy turns out to be greater than the allowable credit, the excess subsidy may have to be paid back. On the other hand, if the subsidy was not used or the subsidy was less than the credit, the difference becomes a refundable credit on the tax return.
The maximum credit is available at 100% of the poverty level and becomes less as the percentage increases and is totally phased out at 400% of the poverty level.
For family sizes larger than 4, increase the 100% rate by $4,020 for each additional child. Dollar amounts for Alaska and Hawaii are larger. Note that the table is condensed for this brochure and the actual percentage of poverty level will need to be extrapolated for income not shown in the table.
To qualify for the credit, an individual must:
Have household income for the year of at least 100% but not more than 400% of the federal poverty level
Purchase the insurance through a government marketplace (exchange)
Not be claimed as a dependent of another
Not be eligible for minimum essential care through Medicaid
If married, file a joint tax return
Not be offered minimum essential insurance under an employer-sponsored plan
How Much Will the Subsidy Be?
The amount of the subsidy is based on need and therefore those in the lowest percentage of the poverty level will receive the greatest subsidy. The government has predetermined how much each family must pay toward their own insurance in the form of a percentage of the family’s household income. To determine how much a family must pay toward their own insurance, first determine where their income falls within the poverty table above and then determine their percentage from the table below. That percentage represents the portion of their household income that they should pay toward their own insurance.
Note: the table is condensed for this brochure and the actual percentage of household income that must be paid toward one’s own insurance will need to be extrapolated for poverty levels between those shown.
Once the percentage in the right-hand column is determined, multiply that by the family’s household income to determine what the family’s annual responsibility is and divide it by 12 to determine their monthly responsibility.
Then, to determine the subsidy, go to the government marketplace and determine the cost of the Silver(2) level of insurance for the family and subtract the amount they are required to pay themselves; the difference, if any, is the subsidy.
Example: Family of two with a household income of $31,020. From the Federal Poverty Level Chart it is determined that a family of 2 with that income is at 200% of the federal poverty level. Using the 200% of poverty level it is determined from the second table that their responsibility toward their own insurance should be 6.3% of their household income or $1,954 (.063 x $31,020) or $162.83 per month. If the cost of the Silver level of insurance is $350 per month, then the premium subsidy would be $187.17 ($350 - $162.83).
(2) Insurance acquired through the marketplace (exchange) is available in four levels of cost (premium), designated by the names of metals. The least expensive is the Bronze coverage, which is also the insurance that provides the “minimum essential coverage” needed to avoid a penalty. Next is the Silver level, which is referred to as the “benchmark premium.” The Silver or benchmark premium is the one used when determining the subsidy. The Gold and Platinum designations complete the four levels of coverage. The Bronze coverage, on an overall average, is supposed to cover 60% of the insured’s medical cost. Silver plans cover 70%, the Gold 80%, and the Platinum 90%.
Paying Back Excess Subsidies
When an insured individual receives a subsidy in excess of the allowable credit based upon the current year’s actual household income, some portion, but not necessarily all, of the excess must be paid back on the tax return for the year. If the household income is above 400% of the poverty level then the entire amount of the excess must be repaid. If the insured’s household income is between 100% and 400% of the poverty level, then payback is capped at the following amounts:
To help ensure that the proper subsidy is being received, the insured should report changes to income or family size (births, deaths, divorce, marriage) that occur during the year to the exchange from which the policy was purchased.
Penalty for Not Being Insured
Beginning in 2014, there is a penalty for not being insured unless one of the exemptions mentioned earlier is met. The penalty is being phased in over three years. The monthly penalty for 2014 is the greater of $7.92 per uninsured adult plus $3.96 for each uninsured child(3), but not to exceed $23.75 per month for a family, OR, 1% of household income in excess of the individual’s income tax filing threshold(4) divided by 12.
In 2016, when the penalty is fully phased in, the monthly penalty will be $57.92 per uninsured adult and $28.96 per uninsured child(3), not to exceed $173.75 per family OR 2.5% of household income over the income tax filing threshold(4) divided by 12.
The penalty can never be greater than the national average premium for a minimum essential coverage plan purchased through a government marketplace (exchange).
(3) The child rate will apply to family members under the age of 18.
(4) Filing threshold is the sum of the standard deduction and personal exemption amounts for the tax filer and spouse, if any.
Example: A married couple without insurance in 2014 has one dependent child and a household income of $50,000. The couple’s standard deduction is $12,400 and with two exemptions at $3,950 each, their filing threshold for 2014 is $20,300. Their monthly penalty is the greater of $19.80 (2 x $7.92 plus $3.96) or $24.75 (.01 x ($50,000 - $20,300)/12). Thus their monthly penalty would be $24.75.
There is no penalty when the first lapse in coverage during a year is less than three months.
Residents of states that did not set up their own exchanges must use the federal marketplace.
All policies sold through a marketplace have standardized applications, no pre-existing exclusions, and pre-set copays and deductibles. Where an insured family’s household income is between 100% and 200% of the federal poverty level, copays and deductibles are reduced by two-thirds. They are reduced by 1/2 where the insured’s income is between 200% and 300% , and 1/3 for those between 300% and 400%. Individuals who need to purchase health insurance are not required to use the government marketplaces – they can purchase plans privately. However, privately purchased plans will not be eligible for the premium assistance credit or subsidy, but if they meet the minimum essential coverage requirements, they will qualify the individual to avoid the mandatory coverage penalty. Those shopping for health insurance should check both the private and government marketplaces to compare their net out-of-pocket premium costs.
The filer, or filers if filing jointly, is subject to the penalty for every dependent who can be claimed on their tax return. That includes children, parents, and other related individuals. This is true even if they do not claim the dependent, but were qualified to do so.
Did You Overlook Something on a Prior Tax Return?
It is not uncommon to discover that an item of income was overlooked, a deduction was not claimed, or that an amended tax document was received after the tax return was already filed. Regardless of whether the oversight will result in more tax due or a refund, it should not be dismissed.
Failing to report an item of income will most certainly generate an IRS inquiry, which typically happens a year or more after the original return was filed and after the interest and penalties have built up. On the other hand, if you have a refund coming, you certainly don’t want that to go by the wayside.
The solution is to file an amended return as soon as the error or omission is discovered. Amended returns can also be used to claim overlooked credit, correct filing status or number of dependents, report an omitted investment transaction, include items from delayed or unexpected K-1s and corrected or late filed 1099s, and account for an overlooked deduction or anything else that should have been reported on the original return.
If the overlooked item will result in a tax increase, penalties and interest can be mitigated by filing an amended return as soon as possible. Procrastination leads to further complication once the IRS determines something is missing, so it is best to take care of the issues right away.
Generally, to claim a refund, an amended return must be filed within three years from the date the original return was filed or within two years from the date the tax was paid, whichever is later.
If you are concerned that an amended return might trigger an audit, be advised that the fact that you amend a return does not, in itself, increase your chances of being selected for an audit. In fact, it might actually reduce your chances, especially if you are fixing something the IRS will find later anyway, such as through their program that matches the information forms (W-2s, 1099s, etc.) that they receive from employers and other payers with the income reported on your return. What concerns many taxpayers about amending returns is that an IRS employee must manually compare the amended return changes with the original. That is why the amended return must include a clear explanation and justification for the amendment and back-up documentation to support the changes, even if these were not required on an original return. If back-up documentation cannot be provided, the IRS may want to dig deeper.
That is why it is so important to provide proof or back-up documents to justify the changes being made. Let’s say you forgot to claim a $2,000 church donation. In this scenario, you definitely want to include documentation, such as copies of the acknowledgment letter from the church and your canceled check, supporting the increased deduction.
If any of the above applies to your situation, please give this office a call so we can prepare an amended tax return for you.
Haven’t Filed an Income Tax Return?
If you have been procrastinating on filing your 2013 tax return or have other prior year returns that have not been filed, you should consider the consequences. The April 15 due date for the 2013 returns is just around the corner. That is also the last day to file a 2010 return and be able to claim a refund. Taxpayers should file all tax returns that are due, regardless of whether or not full payment can be made with the return. Depending on an individual’s circumstances, a taxpayer filing late may qualify for a payment plan. All payment plans require continued compliance with all filing and payment responsibilities after the plan is approved.
Facts about Filing Tax Returns. These rules apply to federal returns. Your state rules may be different.
Failing to file a return or filing late can be costly. If taxes are owed, a delay in filing may result in penalty and interest charges that could substantially increase your tax bill. The late filing and payment penalties are a combined 5% per month (25% maximum) of the balance due.
If you are due a refund, there is no penalty for failing to file a tax return. However, you can lose your refund by waiting too long to file. In order to receive a refund, the return must be filed within three years of the due date. If you file a return and later realize you made an error on the return, the deadline for claiming any refund due is three years after the return was filed, or two years after the tax was paid, whichever expires later.
Taxpayers who are entitled to the refundable Earned Income Tax Credit must file a return to claim the credit, even if they are not otherwise required to file. The return must be filed within three years of the due date in order to receive the credit.
If you are self-employed, you must file returns reporting self-employment income within three years of the due date in order to receive Social Security credits toward your retirement.
Taxpayers who continue to not file a required return and fail to respond to IRS requests to do so may be subject to a variety of enforcement actions, all of which can be unpleasant. Thus, if you have returns that need to be filed, please call this office so we can help you bring your tax returns up-to-date, and - if necessary - advise you on a payment plan.
Don’t Overlook the Earned Income Tax Credit
The Earned Income Tax Credit (EITC) is a refundable credit primarily for lower-income individuals and couples with qualifying children. The credit first offsets any tax liability of the taxpayer(s), and any credit left over is fully refundable. For 2013, the credit can be as much as $6,044 for a taxpayer with three children. The IRS reports that in the past, 1 in 5 individuals who qualified for the credit failed to claim it.
The credit is based on an individual’s financial, marital, and parental status for the year. The credit increases with earned income until the maximum credit is reached and phases out for higher-income taxpayers. For 2013, the following is the maximum credit, based on the number of children, and the income level at which the credit is fully phased out.
Number of Qualifying Children: None One Two Three
Maximum Credit ……… $487 $3,250 $5,372 $6,044
Totally Phased Out when AGI or Earned Income Exceeds:
Joint Filers $19,680 $43,210 $48,378 $51,567
Others $14,340 $37,870 $43,038 $46,227
The following are the general requirements to claim the credit:
A federal income tax return must be filed to claim the credit even if the taxpayer is not otherwise required to file.
A qualifying child must live with the taxpayer in the U.S. for more than half the year. Temporary absence from home (such as to attend school) can still qualify as time spent at home.
Requirements for a qualifying child:
- The child must be under age 19 at the end of the tax year or be a full-time student under age 24 at the end of the tax year. A child who is permanently and totally disabled is a qualified child regardless of age.
- The child will not be a qualifying child if he or she files a joint return, unless the return is filed solely to claim a refund.
- The child must be younger than the taxpayer who is claiming the EIC. This means, for example, that a taxpayer cannot claim the credit for an older brother or sister.
The credit is NOT available to individuals whose filing status is Married Filing Separately.
The credit is NOT available to individuals whose “disqualified income” (i.e., investment income) is more than $3,300.
The filer, spouse (if filing a joint return), and any qualifying child included in the computation must have a valid SSN issued by the Social Security Administration.
The filer or spouse must have earned income. Earned income is income from working, such as wages, profits from self-employment, income from farming, and, in some cases, disability income. If a taxpayer retired on disability, benefits received under an employer's disability retirement plan are considered earned income until the taxpayer reaches minimum retirement age.
Special rules apply to members of the U.S. Armed Forces in combat zones. Members of the military can elect to include their nontaxable combat pay in earned income for the EITC. If you make this election, the combat pay remains nontaxable.
If you have questions related to the EITC and how it might apply to you, a friend, or a family member, please call.
Child Tax Credit
Taxpayers who have a qualified child may qualify for the child tax credit. The maximum credit amount is $1,000.
Taxpayers with “earned” (not investment) income whose child credit exceeds their regular and alternative minimum taxes are eligible for a refundable credit. This credit is 15% of the taxpayer’s earned income in excess of a threshold amount, which is $3,000 through 2017.
A qualifying child for purposes of this credit is a child who
(1) is the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example, a grandchild);
(2) is the taxpayer’s dependent;
(3) was under age 17 at the end of the tax year;
(4) did not provide over half of his or her own support for the tax year;
(5) lived with the taxpayer for more than half of the tax year; and
(6) was a U.S. citizen, a U.S. national, or a resident of the United States.
As with most tax benefits, the child tax credit begins to phase out when a taxpayer’s income reaches a specified threshold amount. The threshold amounts are $110,000 for married taxpayers, $55,000 for married taxpayers filing separately, and $75,000 for all others. The phase-out amount is $50 for each $1,000 (or fraction) of income in excess of the phase-out threshold.
In addition to being limited due to the AGI phase out, the child tax credit is also limited for most taxpayers by the taxpayer’s total tax liability (both regular and AMT). However, when the credit is limited by the amount of tax liability, a portion of the credit may be refundable for certain taxpayers (see below). The child tax credit can be used to offset AMT.
Taxpayers who are unable to claim the full amount of the child tax credit because their income tax liability is less than the credit amount may qualify to take a portion of the tax credit as a refundable credit. This refundable “additional” credit is limited to lower-income taxpayers and involves a rather complicated computation to determine the amount that is refundable.
Special Benefit–Military - Excluded combat zone pay of military taxpayers is treated as earned income for purposes of the computation of the refundable portion of the credit.
Explore Education Tax Incentives
Congress, through the years, has provided a variety of tax incentives to help defray the cost of education. Some require long-term planning to become beneficial, while others provide current tax deductions or credits.
Section 529 Plans - Section 529 Plans (named after the section of the IRS Code that created them) are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member’s college education while maintaining control of the funds. The earnings from these accounts grow tax-deferred and are tax-free, if used to pay for qualified higher education expenses. They can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 Plans are an excellent vehicle for college funding. Section 529 Plans come in two types, allowing you to either save funds in a tax-free account to be used later for higher education costs, or to prepay tuition for qualified universities. For 2014, you can contribute $14,000 ($28,000 for married couples who agree to split their gift) a year without gift tax implications. The annual amount is subject to inflation-adjustment, so call for the limit for other years. There is also a special gift provision allowing the donor to prepay five years of gifts up front without gift tax. No income tax deduction is allowed for the amount contributed.
Coverdell Education Savings Account - These accounts are actually education trusts that allow nondeductible contributions to be invested for a child’s education. Tax on earnings from these accounts is deferred until the funds are withdrawn, and if used for qualified education purposes, the entire withdrawal can be tax-free. Qualified use of these funds includes elementary and secondary education expenses in addition to post-secondary schools (colleges). A total of $2,000 per year can be contributed for each beneficiary under the age of 18. The ability to contribute to these plans phases out when modified adjusted gross income is between $190,000 and $220,000 for married taxpayers filing jointly and between $95,000 and $110,000 for all others.
Education Tax Credits - Two tax credits, the American Opportunity Credit (partially refundable) and the Lifetime Learning Credit (nonrefundable), are available for qualified post-secondary education expenses for a taxpayer, spouse and eligible dependents. Both credits will reduce one’s tax liability dollar for dollar until the tax reaches zero. The credit is not allowed for taxpayers who file Married Separate returns.
The American Opportunity Credit is a credit of up to $2,500 per student per year, covering the first four years of qualified post-secondary education. The credit is 100% of the first $2,000 of qualifying expenses plus 25% of the next $2,000 for a student attending college on at least a half-time basis. 40% of the American Opportunity credit is refundable (if the tax liability is reduced to zero). The Lifetime Learning Credit is a credit of up to 20% of the first $10,000 of qualifying higher education expenses. Unlike the American Opportunity Credit, which is on a per-student basis, this credit is per taxpayer. In addition to post-secondary education, the Lifetime Credit applies to any course of instruction at an eligible institution taken to acquire or improve job skills. Qualifying expenses for these credits is generally limited to tuition. However, student activity fees and fees for course-related books, supplies and equipment qualify if they must be paid directly to the educational institution for the enrollment or attendance of the student.
You may qualify for this credit even if you did not pay the tuition. If a third party (someone other than the taxpayer or a claimed dependent) makes a payment directly to an eligible educational institution for a student’s qualified tuition and related expenses, the student would be treated as receiving the payment from the third party, and, in turn, paying the qualified tuition and related expenses. Furthermore, qualified tuition and related expenses paid by a student would be treated as paid by the taxpayer if the student is a claimed dependent of the taxpayer.
Education Loan Interest - You can deduct qualified interest of $2,500 per year in computing AGI. This is not limited to government student loans and could be home equity loans, credit card debt, etc., provided the debt was incurred solely to pay qualified higher education expenses. For 2014, this deduction phases out for married taxpayers with an AGI between $130,000 and $160,000 and for unmarried taxpayers between $65,000 and $80,000. The phase out range is inflation adjusted annually, so please call for limits other than those shown for 2014. This deduction is not allowed for taxpayers who file married separate returns.