Discussion:American Opportunity Credit - How About A good Discussion!

What criteria will you have or use? What information will you expect the client to have or furnish?

Example - client comes in with a 1098T that shows 6,000 in qualified tuition and fees. The client states that they also spent 500 dollars on books, had to have a laptop, a calculator, and or other misc supplies and materials. None of which would, I suspect, be included in the 1098T as the school would have no idea what a student spent on such things. Would you say that the above would absolutely have to be required in order to enroll. If you did not have a computer or calculator or certain books you could not enroll or attend a class.

There ARE students who can't afford books and computers. Oh, the libraries have computers also. So I sincerely doubt your statement, Ddoshan. It is not correct.

See Questions 4 & 5

Books Supplies and materials it still does mention as a condition of enrollment or attendance. Do you think that means that somewhere in order to enroll it is stated that you must have a certain book, calculator, or whatever otherwise you can't enroll. Somehow I suspect it is not quite that clear cut. If it is that clear cut, then I would think that the client better have some sort of document or something from the school stating that they cannot enroll or attend unless they have particular books, supplies or materials.

Just trying to see how others see this and how they plan on dealing with it.

I agree with NoVa's read on it. Seems to me that's what I heard at a recent seminar.

btw, at a Working Together seminar we were shown the 886-H for the FTHBC.

Form 8863 instructions state- short version... books, supplies, and equipment needed for a course of study ...... as a condition of enrollment or attendance. Just how do you interpret the as a condition of enrollment or attendance? You can't enroll or take a certain class or classes unless you buy or have a computer, or certain book, or whatever. Need something in writing from the school stating such or what.

It may be clear to most but not to me. Note that in various places they use the term needed rather than required. Are these terms interchangeable.

That's the most liberal interpretation I've heard or seen yet for the AOC.

Things are much more standardized today, especially in the large colleges. You go to the campus bookstore or used bookstore, and Class X generally always uses the same texts no matter who is teaching it. You can buy the book even before you see the syllabus.

I don't know anything about this AOC, but I think it's accepted today that a computer is just as necessary as paper used to be to attend college. I find it hard to believe that that means you are entitled to a new one every year though, or every semester.

Just as important, and with no questions asked, computers and internet access can be used as qualified spending from a 529 Plan.

Crow .. A lot of things may be necessary but the rules previously were reasonably clear (and still are the same for the hope credit and or lifetime learning credit I believe) that a computer purchase was not an eligible qualified expense in connection with the education credit. Same for books and supplies unless under very specific circumstances. Required for enrollment, have to have been purchased thru the school etc. Basically included as part of tuition.

As far as I know the rules for the AOC may very well still be the same just that it now includes materials, / equipment etc. and they no longer are required to be purchased from or thru the school.

If the student is in their 5th year of college, use the Lifetime Learning Credit. They don't qualify for the AO/Hope credit -- and they can't add books, supplies, and equipment to the tuition when figuring the Lifetime Learning credit.

If income exceeds the Lifetime Learning credit limits, take the tuition & fees deduction on the 1040. Books, supplies, and equipment can't be added to the tuition & fees deduction on the 1040.

Basically, the Hope Credit has been renamed to the American Opportunity Credit and extended for two years (that is, the first four years of college now qualifies for the AO/Hope credit).

Books, supplies, and equipment can only be included if the student qualifies for the American Opportunity credit (that is, they are in their first four years of college).

"To claim the American opportunity credit, the student for whom you pay qualified education expenses must be an eligible student. This is a student who meets all of the following requirements.

• The student did not have expenses that were used to figure an American opportunity credit in any 4 earlier tax years. This includes any tax year(s) in which you claimed the Hope credit for the same student."

What a puzzling way to word it! Or at least to me. So a client whose income [married-joint] for the past many years has been between 125K-160K had to use the deduction. He has a fifth year student, 23, with a small net amount spent but a full time student. Seems he meets the definition of Example 2.

This goes to the same old question. Person graduates from college in 1996 with a bachelors degree in English. In 2009 he goes back to some business school or some culinary institute or whatever for some sort of degree in cooking or financial planning. I doubt if the school gives him credit for having completed 4 years of college. I don't think this person would be eligible for the AOC credit or in prior years for the Hope credit.

Some years ago I had a client that had got a masters degree several years prior to these education credits. She went back to some 2 year type of school to get a degree or certificate to be a Master Chef or whatever. Paid a small fortune for this schooling. I'm sure the school could have cared less how much college she had had prior to enrolling in their program. I don't think the Hope credit applied in her case or cases such as these. Although when I think back, I believe I did give it to her right or wrong.

This is TRA 1997.

I do wonder, Dan, what happens when student has attended five or six schools in those five years! Putting the onus on the college to make the determination seems a little unfair, though I understand they measure by credits and credit hours and not anything qualitative.

also, i see a few graduate students who are doing their own taxes and claiming the AOC.

I told one person "you can't claim the AOC you are a graduate student" person replied "but turbotax is letting me do it even though i answered their interview questions"

That is why people who don't know what they are doing, should not count on the accuracy of Turbo Tax.

I doubt it and it's a shame becuase claiming the AOC does result in substantially more money especialy with the refundable portion. The IRS may lose out quite a bit on these.

The A & C limitations are found in IRC 25A(b)(2) for the Hope Credit and in IRC 25A(i)(2) for the AOC credit.

I'm allowing most college expenses that seem reasonable. This includes books, computer, internet access, pencils, notebooks etc. It doesn't appear to me there is any limit on the number of times the credit could be taken, if a person fails lots of classes and is still considered a senior in his 10th year thats fine by me.

There seems to be no condition of actually passing the courses. Theoretically(sp?) I could enroll in the cheapest online school available for the minimum required to be considered half time for 1 semester. I don't know but let's say that costs $1,000. I then go buy a laptop that also costs $1,000(obviously required for online school). I fail the class but I get a $2,000 credit on my tax return. Hence the federal government just bought me a $1,000 laptop for $2,000. Can someone please tell me this wont work?

I do work for an Agency that administers one of the federal education assistance programs for displaced workers. Under its rules we are always deciding on which expeses we can approve. Computers are an expense that the program does not consider as a requirement for enrollment. Has anyone seen something on ARRA that I am missing?

American oppportunity credit: Qualified edducation expenses include amounts spent on books, supplies, and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendence.

Hope and lifetime learning credits: Qualified education expenses inclued only amounts for books, supplies, and equipment required to be paid to the instition as a condition of enrollment or attendence.

books, supplies and equipment needed for a course of study. A laptop is needed for most courses, definetly any that are online.

What I mean is the Hope Credit has been replaced by the American Opportunity Credit, except for students meeting the special rules for Midwestern disaster areas. For those students, they can claim the higher amount Hope Credit instead. One caveat is, if there are multiple students on the return, and if any qualifies for the Midwestern disaster Hope Credit and claims it, the AOC cannot be claimed by any other student on the same return.

A lot of things may be needed, useful, wanted or whatever but are they a condition of enrollment or a requirement to attend. Even an online course, I suspect that whoever you take the course from does not make it a condition of enrollment that you have a computer.

I do agree that the IRS or the powers to be could make all this education credit stuff just a little bit less confusing. I've been agonizing over various aspects of it since inception of.

Today, most professors post assignments and communicate via the internet. If all students had to rely on college library computers there would not be enough to go around. A computer (be it laptop or desktop) is an essential piece of equipment for a college education. Since the cost of most computers loaded with necessary software plus course text books and other out of pocket expenses will exceed the annual credit, the vast majority of students and parents are being aided (as intended) - they are not making a profit on these credits.

The pub 17 specifically says is does not need to be a condition of enrollment for the AOC. I could see how it could be interpreted differently, but I'll point out that there is no comma in this paragraph from pub 17.

American oppportunity credit: Qualified edducation expenses include amounts spent on books, supplies, and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendence.

I also agree that this definition is very vague and leaves the door wide open to abuses.

For purposes of the American opportunity credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. http://www.irs.gov/pub/irs-pdf/p970.pdf

Reads a little different then the pub 17. I think the key part is the or attendence. Online classes require a computer to attend, even if they don't consider it a required for enrollment.

From American Opportunity Credit Q &A. http://www.irs.gov/newsroom/article/0,,id=211309,00.html

Q5. Does an expenditure for a computer qualify for the American opprtunity tax credit?

A. Whether an expenditure for a computer qualifies for the credit depends on the facts. An expenditure for a computer would qualify for the credit if the computer is needed as a condition of enrollment or attendance at the educational institution.

Give me a yes or a no on these: 1. Dress code, must wear slacks and dress shoes to attend.(I went to such a college and was sent home for wearing tennis shoes once)?

2. Must get to school, can I use transportation costs? mileage?

3. Reports and projects must be submitted via internet, Take computer and iternet fees?

4. notebooks, paper, pencils, calculator, etc?

Traveling to school & clothing is on you.

Paper, pencils, while necessary, is pushing it.

Compare the consequence on gross income of including a state income tax refund on Line 10 of Form 1040 combined with the inclusion of the refund entered on Line 10 on the phase-out of the Social Security benenfit exclusion per IRS instructions with the language in section 111(a) of the IRC. A $1000 state income tax refund can add up to $1850 to gross income due to the modified AGI based phase-out of the Social Security benefit exclusion. The increase in taxable income attributable to a $1000 state income tax refund can exceed $1850 and we have not even gotten to the impact of the state income tax refund on credits. Of course the reduction in Taxablle Income attributable to an itemized deduction cannot exceed the amount of the deduction and itemized deductions cannnot increase the allowable tax credits.

You will find that Minnesota is one of the states that include state income tax refunds in the calculation of taxable Social Security benefits! Who says there is no more bi-partisanship? Go figure!

One of the problems of doing taxes on a computer is that preparers don't give some forms and instructions the scrutiny that they deserve. Of course there are big advantages to using a computer. The software outfits apparently are too timid to tell IRS they have things screwed-up. The upside to computers is that you can sit at your desk and have access to a world of information. You just have to figure out what is valid and what is bogus.

The students at the high school that my son graduated from 20 years ago have been required to have computers for several years now. When I was in college back in the previous millenium there were no hand held electronic calculators!

I've had a couple of students this year that graduated in 2009 from undergrad and therefore, had a last semester of tuition. Then they started grad school in the fall. I'm supposing I can take either the AOC for the undergrad semester, or the LLC for the grad semester on the parent's return if the child is under 24. If the child is 24, and had earned income over $3,650 the parents can't claim them, so it goes on their return. If they can't take the max on either, I see no way to take one for the undergrad and the other for grad school. Too bad.

Anyway, based on the assumption (which is what the code seems to say) that in order for a computer purchase to be eligible for the AOC credit it must be a requirement for enrollment or class attendance ... We did some research on the local college site about enrollment and class requirements. So far (perusing the site) I have only found 2 classes where the course outline indicated that the purchase of a computer is required for the class. One was some photographic imaging class where a laptop and various imaging programs were required to take the course. Another was some drafting and design class where a requirement for the class was a laptop etc.

Strangly under their various computer careers and classes offered not once was there listed a requirement of the student for a computer or any other such device for class enrollment.

My bottom line now has changed somewhat. If the client can show me that enrollment and or the course requires the purchase of a computer such as the above two courses did in their college outline then fine. Otherwise no.

So the just to be clear here...if the hope was claimed for two years and the the AOC was claimed for two years, then the AOC is OUT for the fifth year. Yes?

(I'm somewhat confused as I for some reason cannot find the code section that discusses the AOC...just the Hope.)

See Sec 25(A)(i) http://www.law.cornell.edu/uscode/text/26/25A