Question

Walt and Deloris, who file a joint return, have two dependent children, Bill and Tiffany. Bill is a freshman at State University, and Tiffany is working on her graduate degree. The couple paid qualified expenses of $3,700 for Bill (who is a half-time student) and $7,100 for Tiffany.

Required:

What education tax credits are available if Walt and Deloris report modified AGI of $123,300?

What education tax credits are available if Walt and Deloris report modified AGI of $123,300 and Tiffany is taking one class a semester (is less than a half-time student) and not taking classes in a degree program?

Answer 1

Since the couple's modified AGI is less than the lower threshold for the American opportunity tax credit (AOTC) of $160,000, the AGI limits do not affect the AOTC for Bill. The lower threshold for the lifetime learning credit for 2019 however, is $116,000 and completely phases out at $136,000, and therefore, the credit for Tiffany must be phased out. The fact that Tiffany is not in a degree program or is attending less than half-time does not affect the answer since these are not limitations for the lifetime learning credit (although both are limitations of the AOTC).

Education tax credit for Bill = $2,500 as it is limited to $2,500.

Lifetime learning credit for Tiffany = 20% of $7,100 = $1,420

The phaseout is as follows:

$1,420 * [($136,000 -$123,300)/ $20,000] = $902

Walt and Deloris would take the $2,500 amount of AOTC but the lifetime learning credit would be limited only to $902.