Question

Matt and Carrie are married, have two children, and file a joint return. Their daughter Katie is 19 years old and is a full-time student at State University. During 2017, she completed her freshman year and one semester as a sophomore. Katie’s expenses while she was away at school during the year were as follows: Use Tax Rate Schedule for reference.

   

Tuition	$	5,020
Class fees		305
Books		505
Room and board		4,510

Katie received a half-tuition scholarship that paid for $2,510 of her tuition costs. Katie’s parents paid the rest of these expenses. Matt and Carrie are able to claim Katie as a dependent on their tax return.  

Matt and Carrie's 23-year-old son Todd also attended graduate school (fifth year of college) full time at a nearby college. Todd’s expenses while away at school were as follows:

   

Tuition	$	3,100
Class fees		0
Books		255
Room and board		4,010

Matt and Carrie paid for Todd's tuition, books, and room and board.   

Since Matt and Carrie still benefit from claiming Todd as a dependent on their tax return, they decided to provide Todd with additional financial assistance by making the payments on Todd’s outstanding student loans. Besides paying off some of the loan principal, Matt and Carrie paid a total of $905 of interest on the loan.

This year Carrie decided to take some classes at the local community college to help improve her skills as a school teacher. The community college is considered to be a qualifying post secondary institution of higher education. Carrie spent a total of $1,310 on tuition for the classes, and she was not reimbursed by her employer. Matt and Carrie's AGI for 2017 before any education related tax deductions is $121,000 and their taxable income before considering any education-related tax benefits is $79,750. Matt and Carrie incurred $300 of miscellaneous itemized deductions subject to the 2 percent floor not counting any education-related expenses.

Their options for credits for each student are as follows:

They may claim either a credit or a qualified education deduction for Katie’s expenses.

They may claim either a credit or a qualified education deduction for Todd.

They may claim (1) a credit or (2) a qualified education deduction for Carrie. They may deduct any amount not included in (1) or (2) as a miscellaneous itemized deduction subject to the 2 percent of AGI floor.

Consider two alternatives:

Alternative 1: Claim all $3,100 of Todd’s expense as a for AGI deduction and $900 of Katie’s expenses as a for AGI deduction. Finally, deduct Carrie’s expenses as a from AGI deduction.

Alternative 2: Claim $3,100 for AGI deduction for Todd’s expense, claim $900 of Carrie’s expense as a for AGI deduction, claim the remaining $310 of Carrie’s expenses as a from AGI deduction, and claim the American opportunity credit (AOC) for Katie’s expenses.

Remember to apply any applicable limits or phase-outs in your computations.

a. Which mix of tax benefits provides the most tax savings?

    

Alternative 1

Alternative 2

b. What is the total tax savings for the alternative you selected for part a?

Answer 1

Marginal Tax Rate = 25%

Part (a)

Altetnative 1

Particulars	Amount
Clam $3100 of todd expenses for AGI Deduction ($3100*25%)	$775
Claim $900 for katie's expenses for AGI ($900*25%)	$225
$1310 for carrie's expenses deduction ($1310*25%)	$327.5
Total Tax Savings	$1327.5

Alternative 2

Particulars	Amount
$3100 for Todd's expenses for AGI deduction ($3100*25%)	$775
$900 for Carrie's expenses for AGI deduction ($900*25%)	$225
Claim $310 of remaining expenses of carrie for AGI deduction ($310*25%)	$77.5
Katie's AOC (Note 1)	$2510
Total Tax Benefits	$3587.5

Note 1

Particulars	Amount
Before phased out katie's AOC	$2510
AGI ($121000 - $4010)	$116990
Phase out threshold	$160000
Excess AGI ($116990 is less than $160000)	$0
After Phased out katie's AOC	$2510

Part (b) - Alternative 2 provide more tax benefits