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Hrblock Taxcut

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Hrblock Taxcut

Hrblock taxcut 7. Hrblock taxcut   Figuring Gross Profit Table of Contents Introduction Items To Check Testing Gross Profit AccuracyExample. Hrblock taxcut Additions to Gross Profit Introduction After you have figured the gross receipts from your business (chapter 5) and the cost of goods sold (chapter 6), you are ready to figure your gross profit. Hrblock taxcut You must determine gross profit before you can deduct any business expenses. Hrblock taxcut These expenses are discussed in chapter 8. Hrblock taxcut If you are filing Schedule C-EZ, your gross profit is your gross receipts plus certain other amounts, explained later under Additions to Gross Profit. Hrblock taxcut Businesses that sell products. Hrblock taxcut   If you are filing Schedule C, figure your gross profit by first figuring your net receipts. Hrblock taxcut Figure net receipts (line 3) on Schedule C by subtracting any returns and allowances (line 2) from gross receipts (line 1). Hrblock taxcut Returns and allowances include cash or credit refunds you make to customers, rebates, and other allowances off the actual sales price. Hrblock taxcut   Next, subtract the cost of goods sold (line 4) from net receipts (line 3). Hrblock taxcut The result is the gross profit from your business. Hrblock taxcut Businesses that sell services. Hrblock taxcut   You do not have to figure the cost of goods sold if the sale of merchandise is not an income-producing factor for your business. Hrblock taxcut Your gross profit is the same as your net receipts (gross receipts minus any refunds, rebates, or other allowances). Hrblock taxcut Most professions and businesses that sell services rather than products can figure gross profit directly from net receipts in this way. Hrblock taxcut Illustration. Hrblock taxcut   This illustration of the gross profit section of the income statement of a retail business shows how gross profit is figured. Hrblock taxcut Income Statement Year Ended December 31, 2013 Gross receipts $400,000 Minus: Returns and allowances 14,940 Net receipts $385,060 Minus: Cost of goods sold 288,140 Gross profit $96,920   The cost of goods sold for this business is figured as follows: Inventory at beginning of year $37,845 Plus: Purchases $285,900   Minus: Items withdrawn for personal use 2,650 283,250 Goods available for sale $321,095 Minus: Inventory at end of year 32,955 Cost of goods sold $288,140 Items To Check Consider the following items before figuring your gross profit. Hrblock taxcut Gross receipts. Hrblock taxcut   At the end of each business day, make sure your records balance with your actual cash and credit receipts for the day. Hrblock taxcut You may find it helpful to use cash registers to keep track of receipts. Hrblock taxcut You should also use a proper invoicing system and keep a separate bank account for your business. Hrblock taxcut Sales tax collected. Hrblock taxcut   Check to make sure your records show the correct sales tax collected. Hrblock taxcut   If you collect state and local sales taxes imposed on you as the seller of goods or services from the buyer, you must include the amount collected in gross receipts. Hrblock taxcut   If you are required to collect state and local taxes imposed on the buyer and turn them over to state or local governments, you generally do not include these amounts in income. Hrblock taxcut Inventory at beginning of year. Hrblock taxcut   Compare this figure with last year's ending inventory. Hrblock taxcut The two amounts should usually be the same. Hrblock taxcut Purchases. Hrblock taxcut   If you take any inventory items for your personal use (use them yourself, provide them to your family, or give them as personal gifts, etc. Hrblock taxcut ) be sure to remove them from the cost of goods sold. Hrblock taxcut For details on how to adjust cost of goods sold, see Merchandise withdrawn from sale in chapter 6. Hrblock taxcut Inventory at end of year. Hrblock taxcut   Check to make sure your procedures for taking inventory are adequate. Hrblock taxcut These procedures should ensure all items have been included in inventory and proper pricing techniques have been used. Hrblock taxcut   Use inventory forms and adding machine tapes as the only evidence for your inventory. Hrblock taxcut Inventory forms are available at office supply stores. Hrblock taxcut These forms have columns for recording the description, quantity, unit price, and value of each inventory item. Hrblock taxcut Each page has space to record who made the physical count, who priced the items, who made the extensions, and who proofread the calculations. Hrblock taxcut These forms will help satisfy you that the total inventory is accurate. Hrblock taxcut They will also provide you with a permanent record to support its validity. Hrblock taxcut   Inventories are discussed in chapter 2. Hrblock taxcut Testing Gross Profit Accuracy If you are in a retail or wholesale business, you can check the accuracy of your gross profit figure. Hrblock taxcut First, divide gross profit by net receipts. Hrblock taxcut The resulting percentage measures the average spread between the merchandise cost of goods sold and the selling price. Hrblock taxcut Next, compare this percentage to your markup policy. Hrblock taxcut Little or no difference between these two percentages shows that your gross profit figure is accurate. Hrblock taxcut A large difference between these percentages may show that you did not accurately figure sales, purchases, inventory, or other items of cost. Hrblock taxcut You should determine the reason for the difference. Hrblock taxcut Example. Hrblock taxcut   Joe Able operates a retail business. Hrblock taxcut On the average, he marks up his merchandise so that he will realize a gross profit of 331/3% on its sales. Hrblock taxcut The net receipts (gross receipts minus returns and allowances) shown on his income statement is $300,000. Hrblock taxcut His cost of goods sold is $200,000. Hrblock taxcut This results in a gross profit of $100,000 ($300,000 − $200,000). Hrblock taxcut To test the accuracy of this year's results, Joe divides gross profit ($100,000) by net receipts ($300,000). Hrblock taxcut The resulting 331/3% confirms his markup percentage of 331/3%. Hrblock taxcut Additions to Gross Profit If your business has income from a source other than its regular business operations, enter the income on line 6 of Schedule C and add it to gross profit. Hrblock taxcut The result is gross business income. Hrblock taxcut If you use Schedule C-EZ, include the income on line 1 of the schedule. Hrblock taxcut Some examples include income from an interest-bearing checking account, income from scrap sales, income from certain fuel tax credits and refunds, and amounts recovered from bad debts. Hrblock taxcut Prev  Up  Next   Home   More Online Publications
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Hrblock taxcut 3. Hrblock taxcut   Lifetime Learning 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 Student Who Can Claim a Dependent's Expenses Figuring the CreditEffect of the Amount of Your Income on the Amount of Your 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. Hrblock taxcut They are the American opportunity credit and the lifetime learning credit. Hrblock taxcut This chapter discusses the lifetime learning credit. Hrblock taxcut The American opportunity credit is discussed in chapter 2, The American Opportunity Credit . Hrblock taxcut This chapter explains: Who can claim the lifetime learning 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. Hrblock taxcut What is the tax benefit of the lifetime learning credit. Hrblock taxcut   For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all eligible students. Hrblock taxcut There is no limit on the number of years the lifetime learning credit can be claimed for each student. Hrblock taxcut   A tax credit reduces the amount of income tax you may have to pay. Hrblock taxcut Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Hrblock taxcut The lifetime learning credit is a nonrefundable credit. Hrblock taxcut This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you. Hrblock taxcut   Your allowable lifetime learning credit may be limited by the amount of your income and the amount of your tax. Hrblock taxcut Can you claim more than one education credit this year. Hrblock taxcut   For each student, you can elect for any year only one of the credits. Hrblock taxcut For example, if you elect to take the lifetime learning credit for a child on your 2013 tax return, you cannot, for that same child, also claim the American opportunity credit for 2013. Hrblock taxcut   If you are eligible to claim the lifetime learning credit and you are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both. Hrblock taxcut   If you pay qualified education expenses for more than one student in the same year, you can choose to take certain credits on a per-student, per-year basis. Hrblock taxcut 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. Hrblock taxcut Differences between the American opportunity and lifetime learning credits. Hrblock taxcut   There are several differences between these two credits. Hrblock taxcut For example, you can claim the American opportunity credit for the same student for no more than 4 tax years, but any year in which the Hope Scholarship Credit was claimed counts toward the 4 years. Hrblock taxcut 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. Hrblock taxcut 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. Hrblock taxcut Overview of the lifetime learning credit. Hrblock taxcut   See Table 3-1, Overview of the Lifetime Learning Credit for the basics of the lifetime learning credit. Hrblock taxcut The details are discussed in this chapter. Hrblock taxcut Can You Claim the Credit The following rules will help you determine if you are eligible to claim the lifetime learning credit on your tax return. Hrblock taxcut Who Can Claim the Credit Generally, you can claim the lifetime learning credit if all three of the following requirements are met. Hrblock taxcut You pay qualified education expenses of higher education. Hrblock taxcut You pay the education expenses for an eligible student. Hrblock taxcut The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Hrblock taxcut Table 3-1. Hrblock taxcut Overview of the Lifetime Learning Credit Maximum credit Up to $2,000 credit per return Limit on modified adjusted gross income (MAGI) $127,000 if married filling jointly;  $63,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable Nonrefundable—credit limited to the amount of tax you must pay on your taxable income Number of years of postsecondary education Available for all years of postsecondary education and for courses to acquire or improve job skills Number of tax years credit available Available for an unlimited number of years Type of program required Student does not need to be pursuing a program leading to a degree or other recognized education credential Number of courses Available for one or more courses Felony drug conviction Felony drug convictions do not make the student ineligible Qualified expenses Tuition and fees required for enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment) Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Note. Hrblock taxcut 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. Hrblock taxcut “Qualified education expenses” are defined later under Qualified Education Expenses . Hrblock taxcut “Eligible students” are defined later under Who Is an Eligible Student . Hrblock taxcut A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . Hrblock taxcut You may find Figure 3-1, Can You Claim the Lifetime Learning Credit for 2013 , later, helpful in determining if you can claim a lifetime learning credit on your tax return. Hrblock taxcut Who Cannot Claim the Credit You cannot claim the lifetime learning credit for 2013 if any of the following apply. Hrblock taxcut Your filing status is married filing separately. Hrblock taxcut You are listed as a dependent on another person's tax return (such as your parents'). Hrblock taxcut See Who Can Claim a Dependent's Expenses , later. Hrblock taxcut Your modified adjusted gross income (MAGI) is $63,000 or more ($127,000 or more in the case of a joint return). Hrblock taxcut MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . Hrblock taxcut 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. Hrblock taxcut More information on nonresident aliens can be found in Publication 519. Hrblock taxcut You claim the American Opportunity Credit (see chapter 2) or a Tuition and Fees Deduction (see chapter 6) for the same student in 2013. Hrblock taxcut What Expenses Qualify The lifetime learning credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Hrblock taxcut Generally, the credit is allowed for qualified education expenses paid in 2013 for an academic period beginning in 2013 or in the first 3 months of 2014. Hrblock taxcut For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning in January 2014, you may be able to use that $1,500 in figuring your 2013 credit. Hrblock taxcut Academic period. Hrblock taxcut   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. Hrblock taxcut 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. Hrblock taxcut Paid with borrowed funds. Hrblock taxcut   You can claim a lifetime learning credit for qualified education expenses paid with the proceeds of a loan. Hrblock taxcut You use the expenses to figure the lifetime learning credit for the year in which the expenses are paid, not the year in which the loan is repaid. Hrblock taxcut Treat loan disbursements sent directly to the educational institution as paid on the date the institution credits the student's account. Hrblock taxcut Student withdraws from class(es). Hrblock taxcut   You can claim a lifetime learning credit for qualified education expenses not refunded when a student withdraws. Hrblock taxcut Qualified Education Expenses For purposes of the lifetime learning credit, qualified education expenses are tuition and certain related expenses required for enrollment in a course at an eligible educational institution. Hrblock taxcut The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills. Hrblock taxcut Eligible educational institution. Hrblock taxcut   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. Hrblock taxcut S. Hrblock taxcut Department of Education. Hrblock taxcut It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Hrblock taxcut The educational institution should be able to tell you if it is an eligible educational institution. Hrblock taxcut   Certain educational institutions located outside the United States also participate in the U. Hrblock taxcut S. Hrblock taxcut Department of Education's Federal Student Aid (FSA) programs. Hrblock taxcut Related expenses. Hrblock taxcut   Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution for enrollment or attendance. Hrblock taxcut Prepaid expenses. Hrblock taxcut   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. Hrblock taxcut See Academic period , earlier. Hrblock taxcut For example, 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). Hrblock taxcut 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). Hrblock taxcut In the following examples, assume that each student is an eligible student at an eligible educational institution. Hrblock taxcut Example 1. Hrblock taxcut   Jackson is a sophomore in University V's degree program in dentistry. Hrblock taxcut 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. Hrblock taxcut Because the equipment rental fee must be paid to University V for enrollment and attendance, Jackson's equipment rental fee is a qualified expense. Hrblock taxcut Example 2. Hrblock taxcut   Donna and Charles, 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. Hrblock taxcut 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. Hrblock taxcut Charles bought his books from a friend, so what he paid for them is not a qualified education expense. Hrblock taxcut Donna bought hers at College W's bookstore. Hrblock taxcut Although Donna paid College W directly for her first-year books and materials, her payment is not a qualified expense because the books and materials are not required to be purchased from College W for enrollment or attendance at the institution. Hrblock taxcut Example 3. Hrblock taxcut   When Marci enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. Hrblock taxcut 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 student government. Hrblock taxcut No portion of the fee covers personal expenses. Hrblock taxcut Although labeled as a student activity fee, the fee is required for Marci's enrollment and attendance at College X. Hrblock taxcut Therefore, it is a qualified expense. Hrblock taxcut No Double Benefit Allowed You cannot do any of the following: Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim a lifetime learning credit based on those same expenses. Hrblock taxcut Claim a lifetime learning credit in the same year that you are claiming a tuition and fees deduction for the same student. Hrblock taxcut Claim a lifetime learning credit and an American opportunity credit based on the same qualified education expenses. Hrblock taxcut Claim a lifetime learning credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP). Hrblock taxcut 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. Hrblock taxcut 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. Hrblock taxcut See Adjustments to Qualified Education Expenses, next. Hrblock taxcut This image is too large to be displayed in the current screen. Hrblock taxcut Please click the link to view the image. Hrblock taxcut Figure 3-1 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. Hrblock taxcut The result is the amount of adjusted qualified education expenses for each student. Hrblock taxcut Tax-free educational assistance. Hrblock taxcut   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. Hrblock taxcut See Academic period , earlier. Hrblock taxcut   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. Hrblock taxcut 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). Hrblock taxcut   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. Hrblock taxcut 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. Hrblock taxcut   Tax-free educational assistance includes: The tax-free part 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), 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. Hrblock taxcut Generally, any scholarship or fellowship is treated as tax free. Hrblock taxcut 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. Hrblock taxcut 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. Hrblock taxcut 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. Hrblock taxcut 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. Hrblock taxcut For examples, see Coordination with Pell grants and other scholarships, later. Hrblock taxcut Refunds. Hrblock taxcut   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. Hrblock taxcut Some tax-free educational assistance received after 2013 may be treated as a refund. Hrblock taxcut See Tax-free educational assistance , earlier. Hrblock taxcut Refunds received in 2013. Hrblock taxcut   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. Hrblock taxcut Refunds received after 2013 but before your income tax return is filed. Hrblock taxcut   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. Hrblock taxcut Refunds received after 2013 and after your income tax return is filed. Hrblock taxcut   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. Hrblock taxcut See Credit recapture, next. Hrblock taxcut Credit recapture. Hrblock taxcut    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. Hrblock taxcut 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. Hrblock taxcut You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you had claimed the refigured credit(s). Hrblock taxcut Include that amount as an additional tax for the year the refund or tax-free assistance was received. Hrblock taxcut Example. Hrblock taxcut   You pay $9,300 in tuition and fees in December 2013, and your child began college in January 2014. Hrblock taxcut You filed your 2013 tax return on February 14, 2014, and claimed a lifetime learning credit of $1,860. Hrblock taxcut You claimed no other tax credits. Hrblock taxcut After you filed your return, your child withdrew from two courses and you received a refund of $2,900. Hrblock taxcut You must refigure your 2013 lifetime learning credit using $6,400 of qualified education expenses instead of $9,300. Hrblock taxcut The refigured credit is $1,280 and your tax liability increased by $580. Hrblock taxcut See instructions for your 2014 income tax return to determine where to include this tax. Hrblock taxcut 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. Hrblock taxcut Amounts that do not reduce qualified education expenses. Hrblock taxcut   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. Hrblock taxcut   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. Hrblock taxcut 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. Hrblock taxcut The use of the money is not restricted. Hrblock taxcut For examples, see Adjustments to Qualified Education Expenses in chapter 2, American Opportunity Credit. Hrblock taxcut Coordination with Pell grants and other scholarships. Hrblock taxcut   In some cases, you may be able to reduce your tax liability by including scholarships in income. Hrblock taxcut 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. Hrblock taxcut The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. Hrblock taxcut Example 1—No scholarship. Hrblock taxcut Judy Green, who is unmarried, is taking courses at a public community college to be recertified to teach in public schools. Hrblock taxcut Her AGI and her MAGI, for purposes of the credit, are $27,000. Hrblock taxcut Judy takes the standard deduction of $5,950 and personal exemption of $3,800, reducing her AGI to taxable income of $17,250 and her tax before credits is $2,156. Hrblock taxcut She claims no credits other than the lifetime learning credit. Hrblock taxcut In July 2013 she paid $700 for the summer 2013 semester; in August 2013 she paid $1,900 for the fall 2013 semester; and in December 2013 she paid another $1,900 for the spring semester beginning in January 2014. Hrblock taxcut Judy and the college meet all requirements for the lifetime learning tax credit. Hrblock taxcut She can use all of the $4,500 tuition she paid in 2013 when figuring her 2013 lifetime learning credit. Hrblock taxcut She claims a $900 lifetime learning credit and her tax after credits is $1,256. Hrblock taxcut Example 2—Scholarship excluded from income. Hrblock taxcut The facts are the same as in Example 1—No scholarship, except that Judy was awarded a $1,500 scholarship. Hrblock taxcut Under the terms of her scholarship, it may be used to pay any educational expenses, including room and board. Hrblock taxcut If Judy excludes the scholarship from income, she will be deemed (for purposes of computing her education credit) as having used the scholarship to pay for tuition, required fees, and course materials. Hrblock taxcut Only $3,000 of the $4,500 tuition she paid in 2013 could be used when figuring her 2013 lifetime learning credit. Hrblock taxcut Her lifetime learning credit would be reduced to $600 and her tax after credits would be $1,556. Hrblock taxcut Example 3—Scholarship included in income. Hrblock taxcut The facts are the same as in Example 2—Scholarship excluded from income. Hrblock taxcut If, unlike Example 2, Judy includes the $1,500 scholarship in income, she will be deemed to have used the entire scholarship to pay for room and board. Hrblock taxcut Judy's AGI will increase to $28,500, her taxable income would be $18,750, and her tax before credits would be $2,381. Hrblock taxcut She would be able to use the $4,500 of adjusted qualified education expenses to figure her credit. Hrblock taxcut Judy could claim a $900 lifetime learning credit and her tax after credits would be $1,481. Hrblock taxcut 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. Hrblock taxcut This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Hrblock taxcut Sports, games, hobbies, and noncredit courses. Hrblock taxcut   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. Hrblock taxcut However, if the course of instruction or other education is part of the student's degree program or is taken by the student to acquire or improve job skills, these expenses can qualify. Hrblock taxcut Comprehensive or bundled fees. Hrblock taxcut   Some eligible educational institutions combine all of their fees for an academic period into one amount. Hrblock taxcut 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 above, contact the institution. Hrblock taxcut 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. Hrblock taxcut See Figuring the Credit , later, for more information about Form 1098-T. Hrblock taxcut Who Is an Eligible Student For purposes of the lifetime learning credit, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (as defined under Qualified Education Expenses , earlier). Hrblock taxcut 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 a lifetime learning credit for your dependent's expenses for that year. Hrblock taxcut For you to claim a lifetime learning credit for your dependent's expenses, you must also claim an exemption for your dependent. Hrblock taxcut You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. Hrblock taxcut IF you. Hrblock taxcut . Hrblock taxcut . Hrblock taxcut THEN only. Hrblock taxcut . Hrblock taxcut . Hrblock taxcut claim an exemption on your tax return for a dependent who is an eligible student you can claim the lifetime learning credit based on that dependent's expenses. Hrblock taxcut The dependent cannot claim the credit. Hrblock taxcut 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 lifetime learning credit. Hrblock taxcut You cannot claim the credit based on this dependent's expenses. Hrblock taxcut Expenses paid by dependent. Hrblock taxcut   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. Hrblock taxcut Include these expenses when figuring the amount of your lifetime learning credit. Hrblock taxcut    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. Hrblock taxcut Expenses paid by you. Hrblock taxcut   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 lifetime learning credit. Hrblock taxcut If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the lifetime learning credit. Hrblock taxcut Expenses paid by others. Hrblock taxcut   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. Hrblock taxcut In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. Hrblock taxcut If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. Hrblock taxcut Example. Hrblock taxcut In 2013, Ms. Hrblock taxcut Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. Hrblock taxcut For purposes of claiming a lifetime learning credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. Hrblock taxcut Unless an exemption for Todd is claimed on someone else's 2013 tax return, only Todd can use the payment to claim a lifetime learning credit. Hrblock taxcut 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 a lifetime learning credit. Hrblock taxcut If anyone else claims an exemption for Todd, Todd cannot claim a lifetime learning credit. Hrblock taxcut Tuition reduction. Hrblock taxcut   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. Hrblock taxcut 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. Hrblock taxcut For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Hrblock taxcut Figuring the Credit The amount of the lifetime learning credit is 20% of the first $10,000 of qualified education expenses you paid for all eligible students. Hrblock taxcut The maximum amount of lifetime learning credit you can claim for 2013 is $2,000 (20% × $10,000). Hrblock taxcut However, that amount may be reduced based on your MAGI. Hrblock taxcut See Effect of the Amount of Your Income on the Amount of Your Credit , later. Hrblock taxcut Example. Hrblock taxcut Bruce and Toni Harper are married and file a joint tax return. Hrblock taxcut For 2013, their MAGI is $75,000. Hrblock taxcut Toni is attending a local college (an eligible educational institution) to earn credits toward a degree in nursing. Hrblock taxcut She already has a bachelor's degree in history and wants to become a nurse. Hrblock taxcut In August 2013, Toni paid $5,000 of qualified education expenses for her fall 2013 semester. Hrblock taxcut Bruce and Toni can claim a $1,000 (20% × $5,000) lifetime learning credit on their 2013 joint tax return. Hrblock taxcut Form 1098-T. Hrblock taxcut   To help you figure your lifetime learning credit, the student should receive Form 1098-T. Hrblock taxcut 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. Hrblock taxcut An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. Hrblock taxcut However, the amounts in boxes 1 and 2 of Form 1098-T might be different from what you paid. Hrblock taxcut When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. Hrblock taxcut   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. Hrblock taxcut    The eligible educational institution may ask for a completed Form W-9S, or similar statement to obtain the student's name, address, and taxpayer identification number. Hrblock taxcut Effect of the Amount of Your Income on the Amount of Your Credit The amount of your lifetime learning credit is phased out (gradually reduced) if your MAGI is between $53,000 and $63,000 ($107,000 and $127,000 if you file a joint return). Hrblock taxcut You cannot claim a lifetime learning credit if your MAGI is $63,000 or more ($127,000 or more if you file a joint return). Hrblock taxcut Modified adjusted gross income (MAGI). Hrblock taxcut   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Hrblock taxcut MAGI when using Form 1040A. Hrblock taxcut   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Hrblock taxcut MAGI when using Form 1040. Hrblock taxcut   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. Hrblock taxcut You can use Worksheet 3-1 to figure your MAGI. Hrblock taxcut Worksheet 3-1. Hrblock taxcut MAGI for the Lifetime Learning Credit 1. Hrblock taxcut Enter your adjusted gross income  (Form 1040, line 38)   1. Hrblock taxcut   2. Hrblock taxcut Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Hrblock taxcut       3. Hrblock taxcut Enter your foreign housing deduction (Form 2555, line 50)   3. Hrblock taxcut       4. Hrblock taxcut Enter the amount of income from Puerto Rico you are excluding   4. Hrblock taxcut       5. Hrblock taxcut Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Hrblock taxcut       6. Hrblock taxcut Add the amounts on lines 2, 3, 4, and 5   6. Hrblock taxcut   7. Hrblock taxcut Add the amounts on lines 1 and 6. Hrblock taxcut  This is your modified adjusted  gross income. Hrblock taxcut Enter this amount  on Form 8863, line 14   7. Hrblock taxcut   Phaseout. Hrblock taxcut   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 10-18 of Form 8863. Hrblock taxcut The same method is shown in the following example. Hrblock taxcut Example. Hrblock taxcut You are filing a joint return with a MAGI of $112,000. Hrblock taxcut In 2013, you paid $6,600 of qualified education expenses. Hrblock taxcut You figure the tentative lifetime learning credit (20% of the first $10,000 of qualified education expenses you paid for all eligible students). Hrblock taxcut The result is a $1,320 (20% x $6,600) tentative credit. Hrblock taxcut Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($1,320) by a fraction. Hrblock taxcut The numerator of the fraction is $127,000 (the upper limit for those filing a joint return) minus your MAGI. Hrblock taxcut The denominator is $20,000, the range of incomes for the phaseout ($107,000 to $127,000). Hrblock taxcut The result is the amount of your phased out (reduced) lifetime learning credit ($990). Hrblock taxcut   $1,320 × $127,000 − $112,000  $20,000 = $990   Claiming the Credit You claim the lifetime learning credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. Hrblock taxcut Enter the credit on Form 1040, line 49, or Form 1040A, line 31. Hrblock taxcut Note. Hrblock taxcut In Appendix A, Illustrated Example of Education Credits 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. Hrblock taxcut Prev  Up  Next   Home   More Online Publications