Education Benefits

Tax Year 2025

NTTC 4012 - Tab J

Pub 970 - Education Benefits

Optimizing AOC benefits for the family

Degree Program Education Benefits

• Education Expenses may be eligible for a Tax Credit
• American Opportunity Credit (up to $2500 per student)
• Lifetime Learning Credit (up to $2000 per return)
• Education Grants** are generally Tax Free if used to pay for education. Otherwise, Grants are taxable income
• Can’t exceed education expenses
• Isn’t earmarked for non-Education expense (e.g. Room and Board)
• Isn’t “payment” for teaching, research assistant, etc.
• However, Taxpayer maybe eligible for bigger benefit by optimizing Grants and Education expenses

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** “Grants” for this presentation includes Scholarships, Fellowships and Tuition Reductions

Tax Credit Comparison - AOC better if eligible

Reminder: Key elements on 1098-T

“Simple” Method (70% of cases?)

1. Calculate total Education Expenses
2. Subtract Grant
3. Apply to either AOC or LLC, as appropriate

Tuition $1500

Books $ 250

Total $1750

(minus)

Grant $1000

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$750 to either American Opportunity Credit or Lifetime Learning Credit

• Student not eligible for AOC
• Students not a dependent on Parent’s tax return
• Grant must be used for Education Expenses (not a Pell grant)

“Optimized” Method. Why is it complicated?

• It requires doing Parent and Child’s returns together (or co-ordinated)

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• You must be aware of Kiddie Tax law

(my trigger: Grant + Income < $15,750 and ~$0 for unearned income)

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• Confusing tax law

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• May need to “manually” optimize or use Bogart Education tool

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• Key Principal – In a family unit, “who pays for the Education” will be the Parent or the Student, depending on maximum benefit for the family. The student may “write the check”, but the parent may get the credit.

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5 Conditions to check for “Optimized” AOC

5 Conditions to check for “Family Optimized” AOC

1. Student is dependent on parents’ tax return (23 or younger, live at home, parents pay > 1/2 support)
2. Student is at least half time at accredited college (e.g., San Jac, UH, HCC, ACC, etc.)
3. Student still an undergrad*
4. Student received a Pell Grant or other flexible grant or scholarship
• “Flexible” Any grant/scholarship that does NOT have to be used exclusively for tuition and fees
• Ask - Could you have used for other items – not did you use for tuition and fees
5. Child isn’t subject to Kiddie Tax (next page)

“AOC Simplified” Kiddie Tax

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1. Grant + Unearned Income <$2,700

Unearned: interest + dividends + Cap Gains, + unemployment + etc.

- or -

2. Child is not required to file: Unearned income is less than $1,350 or $450 plus earned income limited to $15,750 (standard deduction for single under 65)

Earned income : wages + tips taxable scholarship/grants + etc.

Unearned: taxable interest + ordinary dividends + Cap Gain Dist + Unemployment + taxable SS + etc.

• Weird IRS Rule: When determining Kiddie Tax (Rule #1) Taxable Scholarships/Grants are considered Unearned Income. When determining filing requirement (Rule #2) and standard deduction, Taxable Scholarships/Grants are considered Earned Income. Documentation must be read very closely.

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• Rule #2 is simplified. If Unearned Income is < $450, then + Earned < $15,300. e.g., if child has no Unearned income (interest, dividends, etc.), then Earned income can actually be $15,750 before Kiddie Tax is an issue.

Child is not subject to Kiddie Tax if either:

Two steps for “Family Optimized” AOC

THEN:

1. On Parent’s return: claim Education Expenses to max of $4000 as AOC
2. On Child’s return:
• enter earned income (e.g., W2) as normal.
• Include Taxable Grant as “Other Income”

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If Education Expenses > $4,000 then reduce Child’s Grant by expenses in excess of $4,000.

Student:

1. is dependent on parents’ tax return (23 or younger, live at home, parents pay > 1/2 support)
2. is at least half time at accredited college (e.g., San Jac, UH, HCC, ACC, etc.)
3. is still an undergrad *
4. received a Pell Grant or other flexible grant or scholarship
• “Flexible” Any grant/scholarship that does NOT have to be used exclusively for tuition and fees
• Ask - Could you have used for other items – not did you use for tuition and fees
5. not subject to Kiddie Tax

THEN:

1. On Parent’s return: claim Education Expenses to max of $4000 as AOC
2. On Child’s return: enter Taxable Grant as “Other Income”

Final Thoughts

1. This can be complicated - get help (or pass it off) if you are not comfortable
2. Using Bogart would help if parent income is low and child income is high
3. Bogart will not warn you if it violates Kiddie Tax
4. Please, please document your logic so the QR knows what you did!

Exercise

John and Mary Smith are filing a married filing joint return. Their daughter, Anne, is attending Any University and received a Form 1098-T showing tuition of $4,000 and scholarships of $4,000 from Pell grants. She is a full-time student and is a freshman, never used the American Opportunity Credit and has never been convicted of a felony. What can we do to optimize the education credit?