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2040 ez form 2. 2040 ez form   American Opportunity Credit Table of Contents Introduction Can You Claim the CreditWho Can Claim the Credit Who Cannot Claim the Credit What Expenses QualifyQualified Education Expenses No Double Benefit Allowed Expenses That Do Not Qualify Who Is an Eligible StudentException. 2040 ez form Who Can Claim a Dependent's Expenses Figuring the CreditEffect of the Amount of Your Income on the Amount of Your Credit Refundable Part of Credit Claiming the Credit Introduction For 2013, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. 2040 ez form They are the American opportunity credit (this chapter) and the lifetime learning credit ( chapter 3 ). 2040 ez form This chapter explains: Who can claim the American opportunity credit, What expenses qualify for the credit, Who is an eligible student, Who can claim a dependent's expenses, How to figure the credit, How to claim the credit, and When the credit must be repaid. 2040 ez form What is the tax benefit of the American opportunity credit. 2040 ez form   For the tax year, you may be able to claim an American opportunity credit of up to $2,500 for qualified education expenses paid for each eligible student. 2040 ez form   A tax credit reduces the amount of income tax you may have to pay. 2040 ez form Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. 2040 ez form Forty percent of the American opportunity credit may be refundable. 2040 ez form This means that if the refundable portion of your credit is more than your tax, the excess will be refunded to you. 2040 ez form   Your allowable American opportunity credit may be limited by the amount of your income. 2040 ez form Also, the nonrefundable part of the credit may be limited by the amount of your tax. 2040 ez form Overview of the American opportunity credit. 2040 ez form   See Table 2-1, Overview of the American Opportunity Credit , for the basics of this credit. 2040 ez form The details are discussed in this chapter. 2040 ez form Can you claim more than one education credit this year. 2040 ez form   For each student, you can elect for any year only one of the credits. 2040 ez form For example, if you elect to take the American opportunity credit for a child on your 2013 tax return, you cannot use that same child's qualified education expenses to figure the lifetime learning credit for 2013. 2040 ez form   If you pay qualified education expenses for more than one student in the same year, you can choose to take the American opportunity credit on a per-student, per-year basis. 2040 ez form If you pay qualified education expenses for a student (or students) for whom you do not claim the American opportunity credit, you can use the adjusted qualified education expenses of that student (or those students) in figuring your lifetime learning credit. 2040 ez form This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. 2040 ez form Differences between the American opportunity and lifetime learning credits. 2040 ez form   There are several differences between these two credits. 2040 ez form For example, you can claim the American opportunity credit based on the same student's expenses for no more than 4 tax years, which includes any tax years you claimed the Hope Scholarship Credit for that student. 2040 ez form However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. 2040 ez form The differences between these credits are shown in Appendix B, Highlights of Education Tax Benefits for Tax Year 2013 near the end of this publication. 2040 ez form If you claim the American opportunity credit for any student, you can choose between using that student's adjusted qualified education expenses for the American opportunity credit or the lifetime learning credit. 2040 ez form If you have the choice, the American opportunity credit will always be greater than the lifetime learning credit. 2040 ez form Table 2-1. 2040 ez form Overview of the American Opportunity Credit Maximum credit Up to $2,500 credit per eligible student Limit on modified adjusted gross income (MAGI) $180,000 if married filing jointly; $90,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable 40% of credit may be refundable; the rest is nonrefundable Number of years of postsecondary education Available ONLY if the student had not completed the first 4 years of postsecondary education before 2013 Number of tax years credit available Available ONLY for 4 tax years per eligible student (including any year(s) Hope Scholarship Credit was claimed) Type of program required Student must be pursuing a program leading to a degree or other recognized education credential Number of courses Student must be enrolled at least half time for at least one academic period that begins during the tax year Felony drug conviction As of the end of 2013, the student had not been convicted of a felony for possessing or distributing a controlled substance Qualified expenses Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Can You Claim the Credit The following rules will help you determine if you are eligible to claim the American opportunity credit on your tax return. 2040 ez form Who Can Claim the Credit Generally, you can claim the American opportunity credit if all three of the following requirements are met. 2040 ez form You pay qualified education expenses of higher education. 2040 ez form You pay the education expenses for an eligible student. 2040 ez form The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. 2040 ez form Student qualifications. 2040 ez form   Generally, you can take the American opportunity credit for a student only if all of the following four requirements are met. 2040 ez form As of the beginning of 2013, the student had not completed the first four years of postsecondary education (generally, the freshman through senior years of college), as determined by the eligible educational institution. 2040 ez form For this purpose, do not include academic credit awarded solely because of the student's performance on proficiency examinations. 2040 ez form Neither the American opportunity credit nor the Hope Scholarship Credit has been claimed (by you or anyone else) for this student for any four tax years before 2013. 2040 ez form If the American opportunity credit (and Hope Scholarship Credit) has been claimed for this student for any three or fewer tax years before 2013, this requirement is met. 2040 ez form For at least one academic period beginning (or treated as beginning) in 2013, the student both: Was enrolled in a program that leads to a degree, certificate, or other recognized educational credential; and Carried at least one-half the normal full-time workload for his or her course of study. 2040 ez form The standard for what is half of the normal full-time work load is determined by each eligible educational institution. 2040 ez form However, the standard may not be lower than any of those established by the U. 2040 ez form S. 2040 ez form Department of Education under the Higher Education Act of 1965. 2040 ez form For purposes of whether the student satisfies this third requirement for 2013, treat an academic period beginning in the first three months of 2014 as if it began in 2013 if qualified education expenses for the student were paid in 2013 for that academic period. 2040 ez form See Prepaid expenses, later. 2040 ez form As of the end of 2013, the student had not been convicted of a federal or state felony for possessing or distributing a controlled substance. 2040 ez form Example 1. 2040 ez form Sharon was eligible for the Hope Scholarship Credit for 2007 and 2008 and for the American opportunity credit for 2010 and 2012. 2040 ez form Her parents claimed the Hope Scholarship Credit for Sharon on their tax returns for 2007 and 2008 and claimed the American opportunity credit for Sharon on their 2010 tax return. 2040 ez form Sharon claimed the American opportunity credit on her 2012 tax return. 2040 ez form The American opportunity credit and Hope Scholarship Credit have been claimed for Sharon for four tax years before 2013. 2040 ez form Therefore, the American opportunity credit cannot be claimed by Sharon for 2013. 2040 ez form If Sharon were to file Form 8863 for 2013, she would check “Yes” for Part III, line 23, and would be eligible to claim only the lifetime learning credit. 2040 ez form Example 2. 2040 ez form Wilbert was eligible for the American opportunity credit for 2009, 2010, 2011, and 2013. 2040 ez form His parents claimed the American opportunity credit for Wilbert on their tax returns for 2009, 2010, and 2011. 2040 ez form No one claimed an American opportunity credit or Hope Scholarship Credit for Wilbert for any other tax year. 2040 ez form The American opportunity credit and Hope Scholarship Credit have been claimed for Wilbert for only three tax years before 2013. 2040 ez form Therefore, Wilbert meets the second requirement to be eligible for the American opportunity credit. 2040 ez form If Wilbert were to file Form 8863 for 2013, he would check “No” for Part III, line 23. 2040 ez form If Wilbert meets all of the other requirements, he is eligible for the American opportunity credit. 2040 ez form Example 3. 2040 ez form Glenda enrolls on a full-time basis in a degree program for the 2014 Spring semester, which begins in January 2014. 2040 ez form Glenda pays her tuition for the 2014 Spring semester in December 2013. 2040 ez form Because the tuition Glenda paid in 2013 relates to an academic period that begins in the first 3 months of 2014, her eligibility to claim an American opportunity credit in 2013 is determined as if the 2014 Spring semester began in 2013. 2040 ez form If the requirements above are not met for any student, you cannot take the American opportunity credit for that student. 2040 ez form You may be able to take the lifetime learning credit for part or all of that student's qualified education expenses instead. 2040 ez form Note. 2040 ez form Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you. 2040 ez form “Qualified education expenses” are defined later under Qualified Education Expenses . 2040 ez form “Eligible students” are defined later under Who Is an Eligible Student . 2040 ez form A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . 2040 ez form You may find Figure 2-1, Can You Claim the American Opportunity Credit for 2013 , later, helpful in determining if you can claim an American opportunity credit on your tax return. 2040 ez form This image is too large to be displayed in the current screen. 2040 ez form Please click the link to view the image. 2040 ez form Figure 2-1 Can you claim the American opportunity credit for 2012? Who Cannot Claim the Credit You cannot claim the American opportunity credit for 2013 if any of the following apply. 2040 ez form Your filing status is married filing separately. 2040 ez form You are listed as a dependent on another person's tax return (such as your parents'). 2040 ez form See Who Can Claim a Dependent's Expenses , later. 2040 ez form Your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more in the case of a joint return). 2040 ez form MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . 2040 ez form You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. 2040 ez form More information on nonresident aliens can be found in Publication 519, U. 2040 ez form S. 2040 ez form Tax Guide for Aliens. 2040 ez form What Expenses Qualify The American opportunity credit is based on adjusted qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. 2040 ez form Generally, the credit is allowed for adjusted qualified education expenses paid in 2013 for an academic period beginning in 2013 or beginning in the first three months of 2014. 2040 ez form For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning January 2014, you can use that $1,500 in figuring your 2013 credit. 2040 ez form Academic period. 2040 ez form   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. 2040 ez form In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. 2040 ez form Paid with borrowed funds. 2040 ez form   You can claim an American opportunity credit for qualified education expenses paid with the proceeds of a loan. 2040 ez form Use the expenses to figure the American opportunity credit for the year in which the expenses are paid, not the year in which the loan is repaid. 2040 ez form Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account. 2040 ez form Student withdraws from class(es). 2040 ez form   You can claim an American opportunity credit for qualified education expenses not refunded when a student withdraws. 2040 ez form Qualified Education Expenses 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. 2040 ez form Eligible educational institution. 2040 ez form   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. 2040 ez form S. 2040 ez form Department of Education. 2040 ez form It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. 2040 ez form The educational institution should be able to tell you if it is an eligible educational institution. 2040 ez form   Certain educational institutions located outside the United States also participate in the U. 2040 ez form S. 2040 ez form Department of Education's Federal Student Aid (FSA) programs. 2040 ez form Related expenses. 2040 ez form   Student-activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. 2040 ez form   However, expenses for books, supplies, and equipment needed for a course of study are included in qualified education expenses whether or not the materials are purchased from the educational institution. 2040 ez form Prepaid expenses. 2040 ez form   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring an education credit for 2013 only. 2040 ez form See Academic period, earlier. 2040 ez form For example, if you pay $2,000 in December 2013, for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). 2040 ez form    You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). 2040 ez form   In the following examples, assume that each student is an eligible student at an eligible educational institution. 2040 ez form Example 1. 2040 ez form Jefferson is a sophomore in University V's degree program in dentistry. 2040 ez form This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. 2040 ez form Because the equipment rental is needed for his course of study, Jefferson's equipment rental fee is a qualified expense. 2040 ez form Example 2. 2040 ez form Grace and William, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. 2040 ez form The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. 2040 ez form William bought his books from a friend; Grace bought hers at College W's bookstore. 2040 ez form Both are qualified education expenses for the American opportunity credit. 2040 ez form Example 3. 2040 ez form When Kelly enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. 2040 ez form This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and the student government. 2040 ez form No portion of the fee covers personal expenses. 2040 ez form Although labeled as a student activity fee, the fee is required for Kelly's enrollment and attendance at College X and is a qualified expense. 2040 ez form No Double Benefit Allowed You cannot do any of the following. 2040 ez form Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an American opportunity credit based on those same expenses. 2040 ez form Claim an American opportunity credit in the same year that you are claiming a tuition and fees deduction for the same student. 2040 ez form Claim an American opportunity credit for any student and use any of that student's expenses in figuring your lifetime learning credit. 2040 ez form Figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP) using the same expenses you used to figure the American opportunity credit. 2040 ez form See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program. 2040 ez form Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. 2040 ez form See Adjustments to Qualified Education Expenses, next. 2040 ez form Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. 2040 ez form The result is the amount of adjusted qualified education expenses for each student. 2040 ez form Tax-free educational assistance. 2040 ez form   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. 2040 ez form See Academic period, earlier. 2040 ez form   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. 2040 ez form This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). 2040 ez form   If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed, later. 2040 ez form If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed, later. 2040 ez form   Tax-free educational assistance includes: The tax-free parts of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions). 2040 ez form Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. 2040 ez form Generally, any scholarship or fellowship is treated as tax free. 2040 ez form However, a scholarship or fellowship is not treated as tax free to the extent the student includes it in gross income (if the student is required to file a tax return for the year the scholarship or fellowship is received) and either of the following is true. 2040 ez form The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. 2040 ez form The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. 2040 ez form You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. 2040 ez form For examples, see Coordination with Pell grants and other scholarships, later. 2040 ez form Refunds. 2040 ez form   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. 2040 ez form Some tax-free educational assistance received after 2013 may be treated as a refund. 2040 ez form See Tax-free educational assistance, earlier. 2040 ez form Refunds received in 2013. 2040 ez form   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses for 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. 2040 ez form Refunds received after 2013 but before your income tax return is filed. 2040 ez form   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid before you file an income tax return for 2013, the amount of qualified education expenses for 2013 is reduced by the amount of the refund. 2040 ez form Refunds received after 2013 and after your income tax return is filed. 2040 ez form   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid after you file an income tax return for 2013, you may need to repay some or all of the credit. 2040 ez form See Credit recapture, next. 2040 ez form Credit recapture. 2040 ez form    If any tax-free educational assistance for the qualified education expenses paid in 2013, or any refund of your qualified education expenses paid in 2013, is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. 2040 ez form You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. 2040 ez form You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you claimed the refigured credit(s). 2040 ez form Include that amount as an additional tax for the year the refund or tax-free assistance was received. 2040 ez form Example. 2040 ez form   You paid $7,000 tuition and fees in August 2013, and your child began college in September 2013. 2040 ez form You filed your 2013 tax return on February 17, 2014, and claimed an American opportunity credit of $2,500. 2040 ez form After you filed your return, you received a refund of $4,000. 2040 ez form You must refigure your 2013 American opportunity credit using $3,000 of qualified education expenses instead of $7,000. 2040 ez form The refigured credit is $2,250. 2040 ez form The increase to your tax liability is also $250. 2040 ez form Include the difference of $250 as additional tax on your 2014 tax return. 2040 ez form See the instructions for your 2014 income tax return to determine where to include this tax. 2040 ez form If you pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. 2040 ez form Amounts that do not reduce qualified education expenses. 2040 ez form   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. 2040 ez form   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. 2040 ez form The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. 2040 ez form The use of the money is not restricted. 2040 ez form Example 1. 2040 ez form Joan paid $3,000 for tuition and $5,000 for room and board at University X. 2040 ez form The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. 2040 ez form To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. 2040 ez form The terms of the scholarship state that it can be used to pay any of Joan's college expenses. 2040 ez form University X applies the $2,000 scholarship against Joan's $8,000 total bill, and Joan pays the $6,000 balance of her bill from University X with a combination of her student loan and her savings. 2040 ez form Joan does not report any portion of the scholarship as income on her tax return. 2040 ez form In figuring the amount of either education credit (American opportunity or lifetime learning), Joan must reduce her qualified education expenses by the amount of the scholarship ($2,000) because she excluded the entire scholarship from her income. 2040 ez form The student loan is not tax-free educational assistance, so she does not need to reduce her qualified expenses by any part of the loan proceeds. 2040 ez form Joan is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship). 2040 ez form Example 2. 2040 ez form The facts are the same as in Example 1, except that Joan reports her entire scholarship as income on her tax return. 2040 ez form Because Joan reported the entire $2,000 scholarship in her income, she does not need to reduce her qualified education expenses. 2040 ez form Joan is treated as having paid $3,000 in qualified education expenses. 2040 ez form Coordination with Pell grants and other scholarships. 2040 ez form   In some cases, you may be able to reduce your tax liability by including scholarships in income. 2040 ez form If you are claiming an education credit for a claimed dependent who received a scholarship, you may be able to reduce your tax liability if the student includes the scholarship in income. 2040 ez form The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. 2040 ez form Example 1—No scholarship. 2040 ez form Bill Pass, age 28 and unmarried, enrolled full-time in 2013 as a first-year student at a local college to earn a degree in law enforcement. 2040 ez form This was his first year of postsecondary education. 2040 ez form During 2013, he paid $5,600 for his qualified education expenses and $4,400 for his room and board for the fall 2013 semester. 2040 ez form He and the college meet all the requirements for the American opportunity credit. 2040 ez form Bill's AGI and his MAGI, for purposes of figuring his credit, are $30,000. 2040 ez form Bill takes the standard deduction of $5,950 and personal exemption of $3,800, reducing his AGI to taxable income of $20,250. 2040 ez form His income tax liability, before credits, is $2,599 and Bill claims no credits other than the American opportunity credit. 2040 ez form He figures his American opportunity credit based on qualified education expenses of $4,000, which results in a credit of $2,500 and tax after credits of $99. 2040 ez form Example 2—Scholarship excluded from income. 2040 ez form The facts are the same as in Example 1—No scholarship, except that Bill was awarded a $5,600 scholarship. 2040 ez form Under the terms of his scholarship, it may be used to pay any educational expenses, including room and board. 2040 ez form If Bill excludes the scholarship from income, he will be deemed (for purposes of computing his education credit) to have used the scholarship to pay for tuition, required fees, and course materials. 2040 ez form His adjusted qualified education expenses will be zero and he will not have an education credit. 2040 ez form Therefore, Bill's tax after credits would be $2,599. 2040 ez form Example 3—Scholarship partially included in income. 2040 ez form The facts are the same as in Example 2—Scholarship excluded from income. 2040 ez form If, unlike Example 2, Bill includes $4,000 of the scholarship in income, he will be deemed to have used that amount to pay for room and board. 2040 ez form The remaining $1,600 of the $5,600 scholarship will reduce his qualified education expenses and his adjusted qualified education expenses will be $4,000. 2040 ez form Bill's AGI will increase to $34,000, his taxable income will increase to $24,250, and his tax before credits will increase to $3,199. 2040 ez form Based on his adjusted qualified education expenses of $4,000, Bill would be able to claim an American opportunity tax credit of $2,500 and his tax after credits would be $699. 2040 ez form Expenses That Do Not Qualify Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. 2040 ez form This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. 2040 ez form Sports, games, hobbies, and noncredit courses. 2040 ez form   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. 2040 ez form However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify. 2040 ez form Comprehensive or bundled fees. 2040 ez form   Some eligible educational institutions combine all of their fees for an academic period into one amount. 2040 ez form If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed earlier, contact the institution. 2040 ez form The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T, Tuition Statement. 2040 ez form See Figuring the Credit , later, for more information about Form 1098-T. 2040 ez form Who Is an Eligible Student To claim the American opportunity credit, the student for whom you pay qualified education expenses must be an eligible student. 2040 ez form This is a student who meets all of the following requirements. 2040 ez form The student did not have expenses that were used to figure an American opportunity credit in any 4 earlier tax years. 2040 ez form This includes any tax year(s) in which you claimed the Hope Scholarship Credit for the same student. 2040 ez form The student had not completed the first 4 years of postsecondary education (generally, the freshman, sophomore, junior, and senior years of college) before 2013. 2040 ez form For at least one academic period beginning in 2013, the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. 2040 ez form The student has not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of 2013. 2040 ez form These requirements are also shown in Figure 2-2, Who is an Eligible Student for the American Opportunity Credit , later. 2040 ez form Completion of first 4 years. 2040 ez form   A student has completed the first 4 years of postsecondary education if the institution at which the student is enrolled awards the student 4 years of academic credit at that institution for coursework completed by the student before 2013. 2040 ez form This student generally would not be an eligible student for purposes of the American opportunity credit. 2040 ez form Exception. 2040 ez form   Any academic credit awarded solely on the basis of the student's performance on proficiency examinations is disregarded in determining whether the student has completed 4 years of postsecondary education. 2040 ez form Enrolled at least half-time. 2040 ez form   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study. 2040 ez form   The standard for what is half of the normal full-time work load is determined by each eligible educational institution. 2040 ez form However, the standard may not be lower than any of those established by the U. 2040 ez form S. 2040 ez form Department of Education under the Higher Education Act of 1965. 2040 ez form Please click here for the text description of the image. 2040 ez form Figure 2-2 Example 1. 2040 ez form Mack graduated from high school in June 2012. 2040 ez form In September, he enrolled in an undergraduate degree program at College U, and attended full-time for both the 2012 fall and 2013 spring semesters. 2040 ez form For the 2013 fall semester, Mack was enrolled less than half-time. 2040 ez form Because Mack was enrolled in an undergraduate degree program on at least a half-time basis for at least one academic period that began during 2012 and at least one academic period that began during 2013, he is an eligible student for tax years 2012 and 2013 (including the 2013 fall semester when he enrolled at College U on less than a half-time basis). 2040 ez form Example 2. 2040 ez form After taking classes at College V on a part-time basis for a few years, Shelly became a full-time student for the 2013 spring semester. 2040 ez form College V classified Shelly as a second-semester senior (fourth year) for the 2013 spring semester and as a first-semester graduate student (fifth year) for the 2013 fall semester. 2040 ez form Because College V did not classify Shelly as having completed the first 4 years of postsecondary education as of the beginning of 2013, Shelly is an eligible student for tax year 2013. 2040 ez form Therefore, the qualified education expenses paid for the 2013 spring semester and the 2013 fall semester are taken into account in calculating the American opportunity credit for 2013. 2040 ez form Example 3. 2040 ez form During the 2012 fall semester, Larry was a high school student who took classes on a half-time basis at College X. 2040 ez form Larry was not enrolled as part of a degree program at College X because College X only admits students to a degree program if they have a high school diploma or equivalent. 2040 ez form Because Larry was not enrolled in a degree program at College X during 2012, Larry was not an eligible student for tax year 2012. 2040 ez form Example 4. 2040 ez form The facts are the same as in Example 3. 2040 ez form During the 2013 spring semester, Larry again attended College X but not as part of a degree program. 2040 ez form Larry graduated from high school in June 2013. 2040 ez form For the 2013 fall semester, Larry enrolled as a full-time student in College X as part of a degree program, and College X awarded Larry credit for his prior coursework at College X. 2040 ez form Because Larry was enrolled in a degree program at College X for the 2013 fall term on at least a half-time basis, Larry is an eligible student for all of tax year 2013. 2040 ez form Therefore, the qualified education expenses paid for classes taken at College X during both the 2013 spring semester (during which Larry was not enrolled in a degree program) and the 2013 fall semester are taken into account in computing any American opportunity credit. 2040 ez form Example 5. 2040 ez form Dee graduated from high school in June 2012. 2040 ez form In January 2013, Dee enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a travel agent. 2040 ez form Dee completed the program in December 2013, and was awarded a certificate. 2040 ez form In January 2014, she enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a computer programmer. 2040 ez form Dee is an eligible student for both tax years 2013 and 2014 because she meets the degree requirement, the work load requirement, and the year of study requirement for those years. 2040 ez form Who Can Claim a Dependent's Expenses If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim an American opportunity credit for your dependent's expenses for that year. 2040 ez form For you to claim an American opportunity credit for your dependent's expenses, you must also claim an exemption for your dependent. 2040 ez form You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. 2040 ez form IF you. 2040 ez form . 2040 ez form . 2040 ez form THEN only. 2040 ez form . 2040 ez form . 2040 ez form claim an exemption on  your tax return for a  dependent who is an  eligible student you can claim the American opportunity credit based on that dependent's expenses. 2040 ez form The dependent cannot claim the credit. 2040 ez form do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the American opportunity credit. 2040 ez form You cannot claim the credit based on this dependent's expenses. 2040 ez form Expenses paid by dependent. 2040 ez form   If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. 2040 ez form Include these expenses when figuring the amount of your American opportunity credit. 2040 ez form    Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent. 2040 ez form Expenses paid by you. 2040 ez form   If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the American opportunity credit. 2040 ez form If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the American opportunity credit. 2040 ez form Expenses paid by others. 2040 ez form   Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. 2040 ez form In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. 2040 ez form If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. 2040 ez form Example. 2040 ez form In 2013, Ms. 2040 ez form Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. 2040 ez form For purposes of claiming an American opportunity credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. 2040 ez form Unless an exemption for Todd is claimed on someone else's 2013 tax return, only Todd can use the payment to claim an American opportunity credit. 2040 ez form If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2013 tax return, whoever claims the exemption may be able to use the expenses to claim an American opportunity credit. 2040 ez form If anyone else claims an exemption for Todd, Todd cannot claim an American opportunity credit. 2040 ez form Tuition reduction. 2040 ez form    When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. 2040 ez form If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. 2040 ez form For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. 2040 ez form Figuring the Credit The amount of the American opportunity credit (per eligible student) is the sum of: 100% of the first $2,000 of qualified education expenses you paid for the eligible student, and 25% of the next $2,000 of qualified education expenses you paid for that student. 2040 ez form The maximum amount of American opportunity credit you can claim in 2013 is $2,500 multiplied by the number of eligible students. 2040 ez form You can claim the full $2,500 for each eligible student for whom you paid at least $4,000 of adjusted qualified education expenses. 2040 ez form However, the credit may be reduced based on your MAGI. 2040 ez form See Effect of the Amount of Your Income on the Amount of Your Credit , later. 2040 ez form Example. 2040 ez form Jack and Kay Ford are married and file a joint tax return. 2040 ez form For 2013, they claim an exemption for their dependent daughter on their tax return. 2040 ez form Their MAGI is $70,000. 2040 ez form Their daughter is in her junior (third) year of studies at the local university. 2040 ez form Jack and Kay paid qualified education expenses of $4,300 in 2013. 2040 ez form Jack and Kay, their daughter, and the local university meet all of the requirements for the American opportunity credit. 2040 ez form Jack and Kay can claim a $2,500 American opportunity credit in 2013. 2040 ez form This is 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000. 2040 ez form Form 1098-T. 2040 ez form   To help you figure your American opportunity credit, the student should receive Form 1098-T, Tuition Statement. 2040 ez form Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2014. 2040 ez form An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. 2040 ez form However, the amounts in boxes 1 and 2 of Form 1098-T might be different than what you paid. 2040 ez form When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. 2040 ez form   In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student. 2040 ez form    The eligible educational institution may ask for a completed Form W-9S, Request for Student's or Borrower's Taxpayer Identification Number and Certification, or similar statement to obtain the student's name, address, and taxpayer identification number. 2040 ez form Effect of the Amount of Your Income on the Amount of Your Credit The amount of your American opportunity credit is phased out (gradually reduced) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). 2040 ez form You cannot claim an American opportunity credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return). 2040 ez form Modified adjusted gross income (MAGI). 2040 ez form   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. 2040 ez form MAGI when using Form 1040A. 2040 ez form   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. 2040 ez form MAGI when using Form 1040. 2040 ez form   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. 2040 ez form You can use Worksheet 2-1, next, to figure your MAGI. 2040 ez form    Worksheet 2-1. 2040 ez form MAGI for the American Opportunity Credit 1. 2040 ez form Enter your adjusted gross income  (Form 1040, line 38)   1. 2040 ez form   2. 2040 ez form Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. 2040 ez form       3. 2040 ez form Enter your foreign housing deduction (Form 2555, line 50)   3. 2040 ez form       4. 2040 ez form Enter the amount of income from Puerto Rico you are excluding   4. 2040 ez form       5. 2040 ez form Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. 2040 ez form       6. 2040 ez form Add the amounts on lines 2, 3, 4, and 5   6. 2040 ez form   7. 2040 ez form Add the amounts on lines 1 and 6. 2040 ez form  This is your modified adjusted  gross income. 2040 ez form Enter here and  on Form 8863, line 3   7. 2040 ez form   Phaseout. 2040 ez form   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 2-7, of Form 8863, Part I. 2040 ez form The same method is shown in the following example. 2040 ez form Example. 2040 ez form You are filing a joint return and your MAGI is $165,000. 2040 ez form In 2013, you paid $5,000 of qualified education expenses. 2040 ez form You figure a tentative American opportunity credit of $2,500 (100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000 of qualified education expenses). 2040 ez form Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($2,500) by a fraction. 2040 ez form The numerator of the fraction is $180,000 (the upper limit for those filing a joint return) minus your MAGI. 2040 ez form The denominator is $20,000, the range of incomes for the phaseout ($160,000 to $180,000). 2040 ez form The result is the amount of your phased out (reduced) American opportunity credit ($1,875). 2040 ez form      $2,500 × $180,000 − $165,000  $20,000 = $1,875   Refundable Part of Credit Forty percent of the American opportunity credit is refundable for most taxpayers. 2040 ez form However, if you were under age 24 at the end of 2013 and the conditions listed below apply to you, you cannot claim any part of the American opportunity credit as a refundable credit on your tax return. 2040 ez form Instead, your allowed credit (figured on Form 8863, Part II) will be used to reduce your tax as a nonrefundable credit only. 2040 ez form You do not qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you. 2040 ez form You were: Under age 18 at the end of 2013, or Age 18 at the end of 2013 and your earned income (defined below) was less than one-half of your support (defined below), or Over age 18 and under age 24 at the end of 2013 and a full-time student (defined below) and your earned income (defined below) was less than one-half of your support (defined below). 2040 ez form At least one of your parents was alive at the end of 2013. 2040 ez form You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2013. 2040 ez form Earned income. 2040 ez form   Earned income includes wages, salaries, professional fees, and other payments received for personal services actually performed. 2040 ez form Earned income includes the part of any scholarship or fellowship that represents payment for teaching, research, or other services performed by the student that are required as a condition for receiving the scholarship or fellowship. 2040 ez form Earned income does not include that part of the compensation for personal services rendered to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. 2040 ez form   If you are a sole proprietor or a partner in a trade or business in which both personal services and capital are material income-producing factors, earned income also includes a reasonable allowance for compensation for personal services, but not more than 30% of your share of the net profits from that trade or business (after subtracting the deduction for one-half of self-employment tax). 2040 ez form However, if capital is not an income-producing factor and your personal services produced the business income, the 30% limit does not apply. 2040 ez form Support. 2040 ez form   Your support includes food, shelter, clothing, medical and dental care, education, and the like. 2040 ez form Generally, the amount of the item of support will be the amount of expenses incurred by the one furnishing such item. 2040 ez form If the item of support is in the form of property or lodging, measure the amount of such item of support by its fair market value. 2040 ez form However, a scholarship received by you is not considered support if you are a full-time student. 2040 ez form See Publication 501 for details. 2040 ez form Full-time student. 2040 ez form   You are a full-time student for 2013 if during any part of any 5 calendar months during the year you were enrolled as a full-time student at an eligible educational institution (defined earlier), or took a full-time, on-farm training course given by such an institution or by a state, county, or local government agency. 2040 ez form Claiming the Credit You claim the American opportunity credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. 2040 ez form Enter the nonrefundable part of the credit on Form 1040, line 49, or on Form 1040A, line 31. 2040 ez form Enter the refundable part of the credit on Form 1040, line 66, or on Form 1040A, line 40. 2040 ez form A filled-in Form 8863 is shown at the end of this publication. 2040 ez form Note. 2040 ez form In Appendix A. 2040 ez form at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return. 2040 ez form Prev  Up  Next   Home   More Online Publications
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Understanding your CP501 Notice

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See if you may be able to set up a payment plan through our Online Payment Agreement Application.

What happens if I don't respond to this notice?
If you don't pay the amount due or call us to make payment arrangements, we can file a Notice of Federal Tax Lien on your property at any time, if we haven't already done so. In addition, if you don't pay the amount you owe by the due date on the notice, interest will increase and additional penalties may apply.

If the lien is in place, you may find it difficult to sell or borrow against your property. The tax lien would also appear on your credit report ― which may harm your credit rating ― and your creditors would also be publicly notified that the IRS has priority to seize your property.

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Yes. You will continue to be charged interest on any outstanding balance until the amount is paid in full. See the Penalties section that starts on page 2 of the notice.

Will I receive a penalty if I can't pay the full amount?
Yes, you'll receive a late payment penalty. The failure to pay penalty continues to accrue until the amount you owe is paid in full. Contact us by the due date of your payment and, depending on your situation, we may be able to remove the penalty.

What if I need to make a correction to my tax return?
You'll need to file Form 1040X, Amended U.S. Individual Income Tax Return.

Page Last Reviewed or Updated: 05-Mar-2014

The 2040 Ez Form

2040 ez form It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors. 2040 ez form Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors. 2040 ez form Select the Scenario that Applies to You: 2040 ez form I am an independent contractor or in business for myself 2040 ez form If you are a business owner or contractor who provides services to other businesses, then you are generally considered self-employed. For more information on your tax obligations if you are self-employed (an independent contractor), see our Self-Employed Tax Center. 2040 ez form I hire or contract with individuals to provide services to my business 2040 ez form If you are a business owner hiring or contracting with other individuals to provide services, you must determine whether the individuals providing services are employees or independent contractors. Follow the rest of this page to find out more about this topic and what your responsibilities are. 2040 ez form Determining Whether the Individuals Providing Services are Employees or Independent Contractors 2040 ez form Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be - 2040 ez form An independent contractor 2040 ez form An employee (common-law employee) 2040 ez form A statutory employee 2040 ez form A statutory nonemployee 2040 ez form In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. 2040 ez form Common Law Rules 2040 ez form Facts that provide evidence of the degree of control and independence fall into three categories: 2040 ez form Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? 2040 ez form Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) 2040 ez form Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? 2040 ez form Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another. 2040 ez form The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination. 2040 ez form Form SS-8 2040 ez form If, after reviewing the three categories of evidence, it is still unclear whether a worker is an employee or an independent contractor, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) can be filed with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status. 2040 ez form Be aware that it can take at least six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form SS-8 (PDF).