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Military tax discounts 11. Military tax discounts   Your Rights as a Taxpayer Table of Contents Declaration of Taxpayer Rights Examinations, Appeals, Collections, and RefundsBy mail. Military tax discounts By interview. Military tax discounts Repeat examinations. Military tax discounts The first part of this chapter explains some of your most important rights as a taxpayer. Military tax discounts The second part explains the examination, appeal, collection, and refund processes. Military tax discounts Declaration of Taxpayer Rights Protection of your rights. Military tax discounts   IRS employees will explain and protect your rights as a taxpayer throughout your contact with us. Military tax discounts Privacy and confidentiality. Military tax discounts   The IRS will not disclose to anyone the information you give us, except as authorized by law. Military tax discounts You have the right to know why we are asking you for information, how we will use it, and what happens if you do not provide requested information. Military tax discounts Professional and courteous service. Military tax discounts   If you believe that an IRS employee has not treated you in a professional, fair, and courteous manner, you should tell that employee's supervisor. Military tax discounts If the supervisor's response is not satisfactory, you should write to the IRS director for your area or the center where you file your return. Military tax discounts Representation. Military tax discounts   You can either represent yourself or, with proper written authorization, have someone else represent you in your place. Military tax discounts Your representative must be a person allowed to practice before the IRS, such as an attorney, certified public accountant, or enrolled agent. Military tax discounts If you are in an interview and ask to consult such a person, then we must stop and reschedule the interview in most cases. Military tax discounts   You can have someone accompany you at an interview. Military tax discounts You can make sound recordings of any meetings with our examination, appeal, or collection personnel, provided you tell us in writing 10 days before the meeting. Military tax discounts Payment of only the correct amount of tax. Military tax discounts   You are responsible for paying only the correct amount of tax due under the law—no more, no less. Military tax discounts If you cannot pay all of your tax when it is due, you may be able to make monthly installment payments. Military tax discounts Help with unresolved tax problems. Military tax discounts   The Taxpayer Advocate Service can help you if you have tried unsuccessfully to resolve a problem with the IRS. 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Military tax discounts We will waive interest that is the result of certain errors or delays caused by an IRS employee. Military tax discounts Examinations, Appeals, Collections, and Refunds Examinations (audits). Military tax discounts   We accept most taxpayers' returns as filed. Military tax discounts If we inquire about your return or select it for examination, it does not suggest that you are dishonest. Military tax discounts The inquiry or examination may or may not result in more tax. Military tax discounts We may close your case without change; or, you may receive a refund. Military tax discounts   The process of selecting a return for examination usually begins in one of two ways. Military tax discounts First, we use computer programs to identify returns that may have incorrect amounts. Military tax discounts These programs may be based on information returns, such as Forms 1099 and W-2, on studies of past examinations, or on certain issues identified by compliance projects. Military tax discounts Second, we use information from outside sources that indicates that a return may have incorrect amounts. Military tax discounts These sources may include newspapers, public records, and individuals. Military tax discounts If we determine that the information is accurate and reliable, we may use it to select a return for examination. Military tax discounts   Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund, explains the rules and procedures that we follow in examinations. Military tax discounts The following sections give an overview of how we conduct examinations. Military tax discounts By mail. Military tax discounts   We handle many examinations and inquiries by mail. Military tax discounts We will send you a letter with either a request for more information or a reason why we believe a change to your return may be needed. Military tax discounts You can respond by mail or you can request a personal interview with an examiner. 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Military tax discounts   If we examined your return for the same items in either of the 2 previous years and proposed no change to your tax liability, please contact us as soon as possible so we can see if we should discontinue the examination. Military tax discounts Appeals. Military tax discounts   If you do not agree with the examiner's proposed changes, you can appeal them to the Appeals Office of the IRS. Military tax discounts Most differences can be settled without expensive and time-consuming court trials. Military tax discounts Your appeal rights are explained in detail in both Publication 5, Your Appeal Rights and How To Prepare a Protest If You Don't Agree, and Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund. Military tax discounts   If you do not wish to use the Appeals Office or disagree with its findings, you may be able to take your case to the U. Military tax discounts S. Military tax discounts Tax Court, U. Military tax discounts S. Military tax discounts Court of Federal Claims, or the U. Military tax discounts S. Military tax discounts District Court where you live. Military tax discounts If you take your case to court, the IRS will have the burden of proving certain facts if you kept adequate records to show your tax liability, cooperated with the IRS, and meet certain other conditions. Military tax discounts If the court agrees with you on most issues in your case and finds that our position was largely unjustified, you may be able to recover some of your administrative and litigation costs. Military tax discounts You will not be eligible to recover these costs unless you tried to resolve your case administratively, including going through the appeals system, and you gave us the information necessary to resolve the case. Military tax discounts Collections. Military tax discounts   Publication 594, The IRS Collection Process, explains your rights and responsibilities regarding payment of federal taxes. Military tax discounts It describes: What to do when you owe taxes. Military tax discounts It describes what to do if you get a tax bill and what to do if you think your bill is wrong. Military tax discounts It also covers making installment payments, delaying collection action, and submitting an offer in compromise. Military tax discounts IRS collection actions. Military tax discounts It covers liens, releasing a lien, levies, releasing a levy, seizures and sales, and release of property. Military tax discounts   Your collection appeal rights are explained in detail in Publication 1660, Collection Appeal Rights. Military tax discounts Innocent spouse relief. Military tax discounts   Generally, both you and your spouse are responsible, jointly and individually, for paying the full amount of any tax, interest, or penalties due on your joint return. Military tax discounts To seek relief from any liability related to your spouse (or former spouse), you must file a claim on Form 8857, Request for Innocent Spouse Relief. Military tax discounts In some cases, Form 8857 may need to be filed within 2 years of the date on which the IRS first attempted to collect the tax from you. Military tax discounts Do not file Form 8857 with your Form 1040. Military tax discounts For more information, see Publication 971, Innocent Spouse Relief, and Form 8857 or you can call the Innocent Spouse office toll-free at 1-855-851-2009. Military tax discounts Refunds. Military tax discounts   You can file a claim for refund if you think you paid too much tax. Military tax discounts You must generally file the claim within 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. Military tax discounts The law generally provides for interest on your refund if it is not paid within 45 days of the date you filed your return or claim for refund. Military tax discounts Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund, has more information on refunds. Military tax discounts   If you were due a refund but you did not file a return, you must file within 3 years from the date the return was due (including extensions) to get that refund. Military tax discounts Prev  Up  Next   Home   More Online Publications
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IRS Releases the “Dirty Dozen” Tax Scams for 2014; Identity Theft, Phone Scams Lead List

IR-2014-16, Feb. 19, 2014

WASHINGTON — The Internal Revenue Service today issued its annual “Dirty Dozen” list of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.

The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.

"Taxpayers should be on the lookout for tax scams using the IRS name,” said IRS Commissioner John Koskinen. “These schemes jump every year at tax time. Scams can be sophisticated and take many different forms. We urge people to protect themselves and use caution when viewing e-mails, receiving telephone calls or getting advice on tax issues.”

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

The following are the Dirty Dozen tax scams for 2014:

Identity Theft

Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information, such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.

The agency’s work on identity theft and refund fraud continues to grow, touching nearly every part of the organization. For the 2014 filing season, the IRS has expanded these efforts to better protect taxpayers and help victims.

The IRS has a special section on IRS.gov dedicated to identity theft issues, including YouTube videos, tips for taxpayers and an assistance guide. For victims, the information includes how to contact the IRS Identity Protection Specialized Unit. For other taxpayers, there are tips on how taxpayers can protect themselves against identity theft.

Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. Taxpayers can call the IRS Identity Protection Specialized Unit at 800-908-4490. More information can be found on the special identity protection page.

Pervasive Telephone Scams

The IRS has seen a recent increase in local phone scams across the country, with callers pretending to be from the IRS in hopes of stealing money or identities from victims.

These phone scams include many variations, ranging from instances from where callers say the victims owe money or are entitled to a huge refund. Some calls can threaten arrest and threaten a driver’s license revocation. Sometimes these calls are paired with follow-up calls from people saying they are from the local police department or the state motor vehicle department.

Characteristics of these scams can include:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security Number.
  • Scammers “spoof” or imitate the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.

After threatening victims with jail time or a driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

In another variation, one sophisticated phone scam has targeted taxpayers, including recent immigrants, throughout the country. Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.

If you get a phone call from someone claiming to be from the IRS, here’s what you should do: If you know you owe taxes or you think you might owe taxes, call the IRS at 800-829-1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.

If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 800-366-4484.

If you’ve been targeted by these scams, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov.  Please add "IRS Telephone Scam" to the comments of your complaint.

Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information online that can help you protect yourself from email scams.

False Promises of “Free Money” from Inflated Refunds

Scam artists routinely pose as tax preparers during tax time, luring victims in by promising large federal tax refunds or refunds that people never dreamed they were due in the first place.

Scam artists use flyers, advertisements, phony store fronts and even word of mouth to throw out a wide net for victims. They may even spread the word through community groups or churches where trust is high. Scammers prey on people who do not have a filing requirement, such as low-income individuals or the elderly. They also prey on non-English speakers, who may or may not have a filing requirement.

Scammers build false hope by duping people into making claims for fictitious rebates, benefits or tax credits. They charge good money for very bad advice. Or worse, they file a false return in a person's name and that person never knows that a refund was paid.

Scam artists also victimize people with a filing requirement and due a refund by promising inflated refunds based on fictitious Social Security benefits and false claims for education credits, the Earned Income Tax Credit (EITC), or the American Opportunity Tax Credit, among others.

The IRS sometimes hears about scams from victims complaining about losing their federal benefits, such as Social Security benefits, certain veteran’s benefits or low-income housing benefits. The loss of benefits was the result of false claims being filed with the IRS that provided false income amounts.

While honest tax preparers provide their customers a copy of the tax return they’ve prepared, victims of scam frequently are not given a copy of what was filed. Victims also report that the fraudulent refund is deposited into the scammer’s bank account. The scammers deduct a large “fee” before cutting a check to the victim, a practice not used by legitimate tax preparers.

The IRS reminds all taxpayers that they are legally responsible for what’s on their returns even if it was prepared by someone else. Taxpayers who buy into such schemes can end up being penalized for filing false claims or receiving fraudulent refunds.

Taxpayers should take care when choosing an individual or firm to prepare their taxes. Honest return preparers generally: ask for proof of income and eligibility for credits and deductions; sign returns as the preparer; enter their IRS Preparer Tax Identification Number (PTIN); provide the taxpayer a copy of the return.

Beware: Intentional mistakes of this kind can result in a $5,000 penalty.

Return Preparer Fraud

About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But, some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.

It is important to choose carefully when hiring an individual or firm to prepare your return. This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).

The IRS also has a web page to assist taxpayers. For tips about choosing a preparer, details on preparer qualifications and information on how and when to make a complaint, view IRS Fact Sheet 2014-5, IRS Offers Advice on How to Choose a Tax Preparer.

Remember: Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. Make sure the preparer you hire is up to the task.

IRS.gov has general information on reporting tax fraud. More specifically, you report abusive tax preparers to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 and fill it out or order by mail at 800-TAX FORM (800-829-3676). The form includes a return address.

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore is increasingly more difficult.

At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS works on a wide range of international tax issues with DOJ to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

The IRS has collected billions of dollars in back taxes, interest and penalties so far from people who participated in offshore voluntary disclosure programs since 2009. It is in the best long-term interest of taxpayers to come forward, catch up on their filing requirements and pay their fair share.

Impersonation of Charitable Organizations

Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters.

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims. The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:

  • To help disaster victims, donate to recognized charities.
  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
  • Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money.
  • Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

Call the IRS toll-free disaster assistance telephone number (866-562-5227) if you are a disaster victim with specific questions about tax relief or disaster related tax issues.

False Income, Expenses or Exemptions

Another scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income in order to maximize refundable credits. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.

Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit although they were not eligible. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are wrong and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes.

Those who promote or adopt frivolous positions risk a variety of penalties.  For example, taxpayers could be responsible for an accuracy-related penalty, a civil fraud penalty, an erroneous refund claim penalty, or a failure to file penalty.  The Tax Court may also impose a penalty against taxpayers who make frivolous arguments in court.   

Taxpayers who rely on frivolous arguments and schemes may also face criminal prosecution for attempting to evade or defeat tax. Similarly, taxpayers may be convicted of a felony for willfully making and signing under penalties of perjury any return, statement, or other document that the person does not believe to be true and correct as to every material matter.  Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on frivolous arguments may be prosecuted for a criminal felony.

Falsely Claiming Zero Wages or Using False Form 1099

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.

Some people also attempt fraud using false Form 1099 refund claims. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Abusive Tax Structures

Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI's primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme (e.g., accountants, lawyers).  Secondarily, but equally important, is the investigation of investors who knowingly participate in abusive tax schemes.

What is an abusive scheme? The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer's scheme to evade taxes.  These schemes are characterized by the use of Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments.  The schemes are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.

Form over substance are the most important words to remember before buying into any arrangements that promise to "eliminate" or "substantially reduce" your tax liability.  The promoters of abusive tax schemes often employ financial instruments in their schemes.  However, the instruments are used for improper purposes including the facilitation of tax evasion.

The IRS encourages taxpayers to report unlawful tax evasion. Where Do You Report Suspected Tax Fraud Activity?

Misuse of Trusts

Trusts also commonly show up in abusive tax structures. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes. These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel continue to see an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses, as well as to avoid estate transfer taxes. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

The IRS reminds taxpayers that tax scams can take many forms beyond the “Dirty Dozen,” and people should be on the lookout for many other schemes. More information on tax scams is available at IRS.gov.

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Page Last Reviewed or Updated: 21-Feb-2014

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Military tax discounts 2. Military tax discounts   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. Military tax discounts 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. Military tax discounts They are the American opportunity credit (this chapter) and the lifetime learning credit ( chapter 3 ). Military tax discounts 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. Military tax discounts What is the tax benefit of the American opportunity credit. Military tax discounts   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. Military tax discounts   A tax credit reduces the amount of income tax you may have to pay. Military tax discounts Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Military tax discounts Forty percent of the American opportunity credit may be refundable. Military tax discounts This means that if the refundable portion of your credit is more than your tax, the excess will be refunded to you. Military tax discounts   Your allowable American opportunity credit may be limited by the amount of your income. Military tax discounts Also, the nonrefundable part of the credit may be limited by the amount of your tax. Military tax discounts Overview of the American opportunity credit. Military tax discounts   See Table 2-1, Overview of the American Opportunity Credit , for the basics of this credit. Military tax discounts The details are discussed in this chapter. Military tax discounts Can you claim more than one education credit this year. Military tax discounts   For each student, you can elect for any year only one of the credits. Military tax discounts 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. Military tax discounts   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. Military tax discounts 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. Military tax discounts 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. Military tax discounts Differences between the American opportunity and lifetime learning credits. Military tax discounts   There are several differences between these two credits. Military tax discounts 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. Military tax discounts 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. Military tax discounts 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. Military tax discounts 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. Military tax discounts If you have the choice, the American opportunity credit will always be greater than the lifetime learning credit. Military tax discounts Table 2-1. Military tax discounts 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. Military tax discounts Who Can Claim the Credit Generally, you can claim the American opportunity credit if all three of the following requirements are met. Military tax discounts You pay qualified education expenses of higher education. Military tax discounts You pay the education expenses for an eligible student. Military tax discounts The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Military tax discounts Student qualifications. Military tax discounts   Generally, you can take the American opportunity credit for a student only if all of the following four requirements are met. Military tax discounts 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. Military tax discounts For this purpose, do not include academic credit awarded solely because of the student's performance on proficiency examinations. Military tax discounts 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. Military tax discounts 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. Military tax discounts 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. Military tax discounts The standard for what is half of the normal full-time work load is determined by each eligible educational institution. Military tax discounts However, the standard may not be lower than any of those established by the U. Military tax discounts S. Military tax discounts Department of Education under the Higher Education Act of 1965. Military tax discounts 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. Military tax discounts See Prepaid expenses, later. Military tax discounts 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. Military tax discounts Example 1. Military tax discounts Sharon was eligible for the Hope Scholarship Credit for 2007 and 2008 and for the American opportunity credit for 2010 and 2012. Military tax discounts 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. Military tax discounts Sharon claimed the American opportunity credit on her 2012 tax return. Military tax discounts The American opportunity credit and Hope Scholarship Credit have been claimed for Sharon for four tax years before 2013. Military tax discounts Therefore, the American opportunity credit cannot be claimed by Sharon for 2013. Military tax discounts 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. Military tax discounts Example 2. Military tax discounts Wilbert was eligible for the American opportunity credit for 2009, 2010, 2011, and 2013. Military tax discounts His parents claimed the American opportunity credit for Wilbert on their tax returns for 2009, 2010, and 2011. Military tax discounts No one claimed an American opportunity credit or Hope Scholarship Credit for Wilbert for any other tax year. Military tax discounts The American opportunity credit and Hope Scholarship Credit have been claimed for Wilbert for only three tax years before 2013. Military tax discounts Therefore, Wilbert meets the second requirement to be eligible for the American opportunity credit. Military tax discounts If Wilbert were to file Form 8863 for 2013, he would check “No” for Part III, line 23. Military tax discounts If Wilbert meets all of the other requirements, he is eligible for the American opportunity credit. Military tax discounts Example 3. Military tax discounts Glenda enrolls on a full-time basis in a degree program for the 2014 Spring semester, which begins in January 2014. Military tax discounts Glenda pays her tuition for the 2014 Spring semester in December 2013. Military tax discounts 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. Military tax discounts If the requirements above are not met for any student, you cannot take the American opportunity credit for that student. Military tax discounts You may be able to take the lifetime learning credit for part or all of that student's qualified education expenses instead. Military tax discounts Note. Military tax discounts 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. Military tax discounts “Qualified education expenses” are defined later under Qualified Education Expenses . Military tax discounts “Eligible students” are defined later under Who Is an Eligible Student . Military tax discounts A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . Military tax discounts 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. Military tax discounts This image is too large to be displayed in the current screen. Military tax discounts Please click the link to view the image. Military tax discounts 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. Military tax discounts Your filing status is married filing separately. Military tax discounts You are listed as a dependent on another person's tax return (such as your parents'). Military tax discounts See Who Can Claim a Dependent's Expenses , later. Military tax discounts Your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more in the case of a joint return). Military tax discounts MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . Military tax discounts 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. Military tax discounts More information on nonresident aliens can be found in Publication 519, U. Military tax discounts S. Military tax discounts Tax Guide for Aliens. Military tax discounts 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. Military tax discounts 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. Military tax discounts 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. Military tax discounts Academic period. Military tax discounts   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. Military tax discounts 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. Military tax discounts Paid with borrowed funds. Military tax discounts   You can claim an American opportunity credit for qualified education expenses paid with the proceeds of a loan. Military tax discounts 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. Military tax discounts Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account. Military tax discounts Student withdraws from class(es). Military tax discounts   You can claim an American opportunity credit for qualified education expenses not refunded when a student withdraws. Military tax discounts 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. Military tax discounts Eligible educational institution. Military tax discounts   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. Military tax discounts S. Military tax discounts Department of Education. Military tax discounts It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Military tax discounts The educational institution should be able to tell you if it is an eligible educational institution. Military tax discounts   Certain educational institutions located outside the United States also participate in the U. Military tax discounts S. Military tax discounts Department of Education's Federal Student Aid (FSA) programs. Military tax discounts Related expenses. Military tax discounts   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. Military tax discounts   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. Military tax discounts Prepaid expenses. Military tax discounts   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. Military tax discounts See Academic period, earlier. Military tax discounts 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). Military tax discounts    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). Military tax discounts   In the following examples, assume that each student is an eligible student at an eligible educational institution. Military tax discounts Example 1. Military tax discounts Jefferson is a sophomore in University V's degree program in dentistry. Military tax discounts 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. Military tax discounts Because the equipment rental is needed for his course of study, Jefferson's equipment rental fee is a qualified expense. Military tax discounts Example 2. Military tax discounts 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. Military tax discounts 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. Military tax discounts William bought his books from a friend; Grace bought hers at College W's bookstore. Military tax discounts Both are qualified education expenses for the American opportunity credit. Military tax discounts Example 3. Military tax discounts When Kelly enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. Military tax discounts 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. Military tax discounts No portion of the fee covers personal expenses. Military tax discounts 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. Military tax discounts No Double Benefit Allowed You cannot do any of the following. Military tax discounts 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. Military tax discounts Claim an American opportunity credit in the same year that you are claiming a tuition and fees deduction for the same student. Military tax discounts Claim an American opportunity credit for any student and use any of that student's expenses in figuring your lifetime learning credit. Military tax discounts 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. Military tax discounts 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. Military tax discounts 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. Military tax discounts See Adjustments to Qualified Education Expenses, next. Military tax discounts 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. Military tax discounts The result is the amount of adjusted qualified education expenses for each student. Military tax discounts Tax-free educational assistance. Military tax discounts   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. Military tax discounts See Academic period, earlier. Military tax discounts   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. Military tax discounts 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). Military tax discounts   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. Military tax discounts 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. Military tax discounts   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). Military tax discounts 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. Military tax discounts Generally, any scholarship or fellowship is treated as tax free. Military tax discounts 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. Military tax discounts 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. Military tax discounts 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. Military tax discounts 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. Military tax discounts For examples, see Coordination with Pell grants and other scholarships, later. Military tax discounts Refunds. Military tax discounts   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. Military tax discounts Some tax-free educational assistance received after 2013 may be treated as a refund. Military tax discounts See Tax-free educational assistance, earlier. Military tax discounts Refunds received in 2013. Military tax discounts   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. Military tax discounts Refunds received after 2013 but before your income tax return is filed. Military tax discounts   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. Military tax discounts Refunds received after 2013 and after your income tax return is filed. Military tax discounts   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. Military tax discounts See Credit recapture, next. Military tax discounts Credit recapture. Military tax discounts    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. Military tax discounts 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. Military tax discounts 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). Military tax discounts Include that amount as an additional tax for the year the refund or tax-free assistance was received. Military tax discounts Example. Military tax discounts   You paid $7,000 tuition and fees in August 2013, and your child began college in September 2013. Military tax discounts You filed your 2013 tax return on February 17, 2014, and claimed an American opportunity credit of $2,500. Military tax discounts After you filed your return, you received a refund of $4,000. Military tax discounts You must refigure your 2013 American opportunity credit using $3,000 of qualified education expenses instead of $7,000. Military tax discounts The refigured credit is $2,250. Military tax discounts The increase to your tax liability is also $250. Military tax discounts Include the difference of $250 as additional tax on your 2014 tax return. Military tax discounts See the instructions for your 2014 income tax return to determine where to include this tax. Military tax discounts 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. Military tax discounts Amounts that do not reduce qualified education expenses. Military tax discounts   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. Military tax discounts   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. Military tax discounts 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. Military tax discounts The use of the money is not restricted. Military tax discounts Example 1. Military tax discounts Joan paid $3,000 for tuition and $5,000 for room and board at University X. Military tax discounts The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. Military tax discounts To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. Military tax discounts The terms of the scholarship state that it can be used to pay any of Joan's college expenses. Military tax discounts 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. Military tax discounts Joan does not report any portion of the scholarship as income on her tax return. Military tax discounts 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. Military tax discounts 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. Military tax discounts Joan is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship). Military tax discounts Example 2. Military tax discounts The facts are the same as in Example 1, except that Joan reports her entire scholarship as income on her tax return. Military tax discounts Because Joan reported the entire $2,000 scholarship in her income, she does not need to reduce her qualified education expenses. Military tax discounts Joan is treated as having paid $3,000 in qualified education expenses. Military tax discounts Coordination with Pell grants and other scholarships. Military tax discounts   In some cases, you may be able to reduce your tax liability by including scholarships in income. Military tax discounts 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. Military tax discounts The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. Military tax discounts Example 1—No scholarship. Military tax discounts 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. Military tax discounts This was his first year of postsecondary education. Military tax discounts During 2013, he paid $5,600 for his qualified education expenses and $4,400 for his room and board for the fall 2013 semester. Military tax discounts He and the college meet all the requirements for the American opportunity credit. Military tax discounts Bill's AGI and his MAGI, for purposes of figuring his credit, are $30,000. Military tax discounts Bill takes the standard deduction of $5,950 and personal exemption of $3,800, reducing his AGI to taxable income of $20,250. Military tax discounts His income tax liability, before credits, is $2,599 and Bill claims no credits other than the American opportunity credit. Military tax discounts 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. Military tax discounts Example 2—Scholarship excluded from income. Military tax discounts The facts are the same as in Example 1—No scholarship, except that Bill was awarded a $5,600 scholarship. Military tax discounts Under the terms of his scholarship, it may be used to pay any educational expenses, including room and board. Military tax discounts 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. Military tax discounts His adjusted qualified education expenses will be zero and he will not have an education credit. Military tax discounts Therefore, Bill's tax after credits would be $2,599. Military tax discounts Example 3—Scholarship partially included in income. Military tax discounts The facts are the same as in Example 2—Scholarship excluded from income. Military tax discounts 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. Military tax discounts 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. Military tax discounts 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. Military tax discounts 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. Military tax discounts 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. Military tax discounts This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Military tax discounts Sports, games, hobbies, and noncredit courses. Military tax discounts   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. Military tax discounts However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify. Military tax discounts Comprehensive or bundled fees. Military tax discounts   Some eligible educational institutions combine all of their fees for an academic period into one amount. Military tax discounts 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. Military tax discounts 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. Military tax discounts See Figuring the Credit , later, for more information about Form 1098-T. Military tax discounts 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. Military tax discounts This is a student who meets all of the following requirements. Military tax discounts The student did not have expenses that were used to figure an American opportunity credit in any 4 earlier tax years. Military tax discounts This includes any tax year(s) in which you claimed the Hope Scholarship Credit for the same student. Military tax discounts The student had not completed the first 4 years of postsecondary education (generally, the freshman, sophomore, junior, and senior years of college) before 2013. Military tax discounts 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. Military tax discounts 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. Military tax discounts These requirements are also shown in Figure 2-2, Who is an Eligible Student for the American Opportunity Credit , later. Military tax discounts Completion of first 4 years. Military tax discounts   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. Military tax discounts This student generally would not be an eligible student for purposes of the American opportunity credit. Military tax discounts Exception. Military tax discounts   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. Military tax discounts Enrolled at least half-time. Military tax discounts   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. Military tax discounts   The standard for what is half of the normal full-time work load is determined by each eligible educational institution. Military tax discounts However, the standard may not be lower than any of those established by the U. Military tax discounts S. Military tax discounts Department of Education under the Higher Education Act of 1965. Military tax discounts Please click here for the text description of the image. Military tax discounts Figure 2-2 Example 1. Military tax discounts Mack graduated from high school in June 2012. Military tax discounts 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. Military tax discounts For the 2013 fall semester, Mack was enrolled less than half-time. Military tax discounts 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). Military tax discounts Example 2. Military tax discounts 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. Military tax discounts 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. Military tax discounts 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. Military tax discounts 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. Military tax discounts Example 3. Military tax discounts During the 2012 fall semester, Larry was a high school student who took classes on a half-time basis at College X. Military tax discounts 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. Military tax discounts Because Larry was not enrolled in a degree program at College X during 2012, Larry was not an eligible student for tax year 2012. Military tax discounts Example 4. Military tax discounts The facts are the same as in Example 3. Military tax discounts During the 2013 spring semester, Larry again attended College X but not as part of a degree program. Military tax discounts Larry graduated from high school in June 2013. Military tax discounts 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. Military tax discounts 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. Military tax discounts 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. Military tax discounts Example 5. Military tax discounts Dee graduated from high school in June 2012. Military tax discounts 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. Military tax discounts Dee completed the program in December 2013, and was awarded a certificate. Military tax discounts 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. Military tax discounts 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. Military tax discounts 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. Military tax discounts For you to claim an American opportunity credit for your dependent's expenses, you must also claim an exemption for your dependent. Military tax discounts You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. Military tax discounts IF you. Military tax discounts . Military tax discounts . Military tax discounts THEN only. Military tax discounts . Military tax discounts . Military tax discounts 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. Military tax discounts The dependent cannot claim the credit. Military tax discounts 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. Military tax discounts You cannot claim the credit based on this dependent's expenses. Military tax discounts Expenses paid by dependent. Military tax discounts   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. Military tax discounts Include these expenses when figuring the amount of your American opportunity credit. Military tax discounts    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. Military tax discounts Expenses paid by you. Military tax discounts   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. Military tax discounts 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. Military tax discounts Expenses paid by others. Military tax discounts   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. Military tax discounts In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. Military tax discounts If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. Military tax discounts Example. Military tax discounts In 2013, Ms. Military tax discounts Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. Military tax discounts 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. Military tax discounts 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. Military tax discounts 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. Military tax discounts If anyone else claims an exemption for Todd, Todd cannot claim an American opportunity credit. Military tax discounts Tuition reduction. Military tax discounts    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. Military tax discounts 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. Military tax discounts For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Military tax discounts 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. Military tax discounts The maximum amount of American opportunity credit you can claim in 2013 is $2,500 multiplied by the number of eligible students. Military tax discounts You can claim the full $2,500 for each eligible student for whom you paid at least $4,000 of adjusted qualified education expenses. Military tax discounts However, the credit may be reduced based on your MAGI. Military tax discounts See Effect of the Amount of Your Income on the Amount of Your Credit , later. Military tax discounts Example. Military tax discounts Jack and Kay Ford are married and file a joint tax return. Military tax discounts For 2013, they claim an exemption for their dependent daughter on their tax return. Military tax discounts Their MAGI is $70,000. Military tax discounts Their daughter is in her junior (third) year of studies at the local university. Military tax discounts Jack and Kay paid qualified education expenses of $4,300 in 2013. Military tax discounts Jack and Kay, their daughter, and the local university meet all of the requirements for the American opportunity credit. Military tax discounts Jack and Kay can claim a $2,500 American opportunity credit in 2013. Military tax discounts This is 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000. Military tax discounts Form 1098-T. Military tax discounts   To help you figure your American opportunity credit, the student should receive Form 1098-T, Tuition Statement. Military tax discounts 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. Military tax discounts An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. Military tax discounts However, the amounts in boxes 1 and 2 of Form 1098-T might be different than what you paid. Military tax discounts When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. Military tax discounts   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. Military tax discounts    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. Military tax discounts 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). Military tax discounts 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). Military tax discounts Modified adjusted gross income (MAGI). Military tax discounts   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Military tax discounts MAGI when using Form 1040A. Military tax discounts   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Military tax discounts MAGI when using Form 1040. Military tax discounts   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. Military tax discounts You can use Worksheet 2-1, next, to figure your MAGI. Military tax discounts    Worksheet 2-1. Military tax discounts MAGI for the American Opportunity Credit 1. Military tax discounts Enter your adjusted gross income  (Form 1040, line 38)   1. Military tax discounts   2. Military tax discounts Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Military tax discounts       3. Military tax discounts Enter your foreign housing deduction (Form 2555, line 50)   3. Military tax discounts       4. Military tax discounts Enter the amount of income from Puerto Rico you are excluding   4. Military tax discounts       5. Military tax discounts Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Military tax discounts       6. Military tax discounts Add the amounts on lines 2, 3, 4, and 5   6. Military tax discounts   7. Military tax discounts Add the amounts on lines 1 and 6. Military tax discounts  This is your modified adjusted  gross income. Military tax discounts Enter here and  on Form 8863, line 3   7. Military tax discounts   Phaseout. Military tax discounts   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. Military tax discounts The same method is shown in the following example. Military tax discounts Example. Military tax discounts You are filing a joint return and your MAGI is $165,000. Military tax discounts In 2013, you paid $5,000 of qualified education expenses. Military tax discounts 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). Military tax discounts 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. Military tax discounts The numerator of the fraction is $180,000 (the upper limit for those filing a joint return) minus your MAGI. Military tax discounts The denominator is $20,000, the range of incomes for the phaseout ($160,000 to $180,000). Military tax discounts The result is the amount of your phased out (reduced) American opportunity credit ($1,875). Military tax discounts      $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. Military tax discounts 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. Military tax discounts Instead, your allowed credit (figured on Form 8863, Part II) will be used to reduce your tax as a nonrefundable credit only. Military tax discounts You do not qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you. Military tax discounts 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). Military tax discounts At least one of your parents was alive at the end of 2013. Military tax discounts You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2013. Military tax discounts Earned income. Military tax discounts   Earned income includes wages, salaries, professional fees, and other payments received for personal services actually performed. Military tax discounts 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. Military tax discounts 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. Military tax discounts   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). Military tax discounts However, if capital is not an income-producing factor and your personal services produced the business income, the 30% limit does not apply. Military tax discounts Support. Military tax discounts   Your support includes food, shelter, clothing, medical and dental care, education, and the like. Military tax discounts Generally, the amount of the item of support will be the amount of expenses incurred by the one furnishing such item. Military tax discounts 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. Military tax discounts However, a scholarship received by you is not considered support if you are a full-time student. Military tax discounts See Publication 501 for details. Military tax discounts Full-time student. Military tax discounts   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. Military tax discounts Claiming the Credit You claim the American opportunity credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. Military tax discounts Enter the nonrefundable part of the credit on Form 1040, line 49, or on Form 1040A, line 31. Military tax discounts Enter the refundable part of the credit on Form 1040, line 66, or on Form 1040A, line 40. Military tax discounts A filled-in Form 8863 is shown at the end of this publication. Military tax discounts Note. Military tax discounts In Appendix A. Military tax discounts 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. Military tax discounts Prev  Up  Next   Home   More Online Publications