Posted on June 4, 2013May 31, 2016 by Jan Roberg

Help! I Got an IRS Letter About My Education Tax Credit!

Photo by Jack Amick at Flickr.com

Did you receive a letter from the IRS denying your Education Tax Credit? Before you give up on that important tax benefit, take a few minutes to see if perhaps you can reclaim it.

First—did you have your taxes done by H&R Block? They had a little glitch in their tax program early in the tax season. Although most of those tax returns have been fixed, if you had an H&R Block prepared return, make sure you call them and let them know about the problem. They will take care of it. If you cannot reach your local HR Block tax preparer, then call their national number at 1 (800) HRBLOCK. Be patient with the automated answering service. Eventually you will get through to a human being who can help you.

So you got a letter and you didn’t use H&R Block? Well that’s not so surprising. Although Block had all the publicity for their software having a glitch, it turns out they weren’t the only ones. (They were just the biggest and got all the blame.)

Before you write the IRS a check (or accept a smaller refund), take a look at your Education Tax Credit Form (number 8863) and see if it was done correctly. Here’s where I’m finding mistakes:

Question number 23: Has the Hope Scholarship Credit or American opportunity credit been claimed for this student for any 4 prior tax years?

The question means: Have you claimed a Hope or American Opportunity credit 4 times already for this particular student? The way it reads, it seems like it’s asking if you’ve ever claimed it at all in the last 4 years. You want to answer NO (unless of course you’ve already gotten the credit 4 times already.)

Many people have been answering YES. If you say YES, you don’t qualify for the American Opportunity Credit; you only qualify for the Lifetime Learning Credit which is smaller.

What I’ve been seeing is that some programs have let the American Opportunity credit carry through on the 1040 even though the taxpayer said YES. Usually, the software “idiot light” tells you about the error, but not all tax software did that. And the question is so confusing that it’s an easy mistake to make. Once the IRS reviews the returns, they’re catching the YES and sending out letters.

So, if this is your problem, you don’t need to amend your tax return. Just call the IRS at 1 800 829-1040 and talk to someone there. You will be able to fax a corrected form 8863 form to them and they’ll take care of it right away saving you a couple of weeks of waiting.

If you had a different IRS problem with the Education Tax Credit, please post about it. Thanks.

Posted on February 19, 2013May 31, 2016 by Jan Roberg

Why Isn’t My Refund as Big as my Friends?

I get this question every year. Why did my friend, neighbor, co-worker, relative, etc. get a bigger refund than I did? And the honest answer to that question is: I don’t know, I didn’t prepare their taxes. But here are some common reasons why some people might get a bigger refund than you do.

1. They withheld more. That’s the simplest explanation. Technically, you only get back if you overpaid your taxes. So, people who withhold too much, get refunds. If you get less, that actually means you win because you didn’t over withhold. (But trust me, I know. It really doesn’t feel like winning.)

2. They qualified for the earned income tax credit. EItC is one of those tax credits that you can actually receive even if you didn’t pay anything into the system. But—there are many requirements—most notably you have to have earned income. The EIC can make a huge difference in someone’s refund.

3. College tax credits—the American Opportunity Credit can be worth up to $2,500 on someone’s tax return. If your friend was attending school while you stayed home—that could be part of the difference also.

4. Different filing statuses—if you’re single, you could be in a higher tax bracket than your married friend. Or, if you’re married and your wife is also working—then you could be in a higher tax bracket than your single friend. Even though two people have the same job and earn the same amount of money—their circumstances outside of work could have a huge impact on their tax refund.

5. Different deductions—once again, it all has to do with things that happen outside of work. A person renting an apartment could be paying higher taxes than someone paying a mortgage because of the mortgage interest deduction—or any number of other deductions. There are just too many things to name.

6. Income—The more money you make, the more tax you pay. And people who make a lot of money have to pay the alternative minimum tax or AMT.

So, don’t waste your time worrying about your friend’s refund. The important thing is to think about what your goals are. Do you want a big refund? If so, how big of a refund do you want and what would you do with it?

Or would you rather take home more money with each paycheck? If so, what will you do with the extra take home pay?

But whether you choose a larger refund, choose larger take home pay, or maybe choose some middle ground; our job at Roberg Tax Solutions is to help you pay the least amount of tax while making smart decisions for yourself and your family. As long as you’re doing what’s best for you, it really doesn’t matter what your friends are doing anyway now does it?

Posted on July 8, 2010August 31, 2019 by Jan Roberg

College Tax Credit

Students heading back to school may qualify for up to $2500 in tax credits.

The American Opportunity Tax Credit can be worth up to $2,500 to help pay for tuition.

Updated August 2019

I’ve written in the past about saving for college, but what about if you’ve got that tuition payment coming due this fall? Here are a few tips to help you maximize your tax benefits.

The biggest tax advantage for tuition payers is the American Opportunity Credit which will still be available for 2019. It’s worth up to $2,500 in tax credits. I said tax credit, not a tax deduction! That means that $2500 is written off of your taxes! And for some people, up to $1000 of that is a refundable tax.

What’s a refundable tax? That means, even if you didn’t owe $2500 in taxes, you can still get up to $1000 back from the IRS. How cool is that?

Now the American Opportunity Tax Credit starts to phase out if your Modified Adjusted Gross Income (MAGI) is $80,000 ($160K if married filing jointly) and is completely erased by the time your income reaches $90,000 ($180K for MFJ.) If your income is near, or slightly over, the phaseout limit there are some things you can do now to keep your income in line. (MAGI for most people is their regular income.)

First, the easy thing is to reduce your taxable income by contributing (or increasing the contribution) to your company’s 401(k). Many companies have their benefit sign ups in November so you may have already missed the boat. But some companies are more flexible so it’s worth checking out. The maximum you can contribute to your 401K plan in 2019 is $19,000 (or $25,000 if you’re over 50.) Of course, you’re also trying to pay tuition and perhaps eat once in awhile, so reducing you income by $25,000 might not be an option.

In addition to 401(k) plans, some companies have exempt cafeteria plans for health care or day care. If you can take advantage of those programs it could be helpful in reducing your MAGI. If you know you’ll spend the dollars anyway, why not remove that money from your taxable income? (Frankly, that’s a good idea whether you’re tying to qualify for the college tax credit or not!)

If your income is clearly too high to qualify for the American Opportunity Tax Credit, it may make sense to not claim your student as a dependent and have her put the credit onto her taxes. You’ll need to play with it. The credit isn’t as good when a dependent student claims it herself – she’ll lose the refundable part – so if she doesn’t have enough income for a tax liability, it’s not going to be worth it.

So when paying tuition, how do you get the biggest bang for the buck? If you have a student whose tuition will easily exceed the $4000 required to take full advantage of the tax credit, you don’t really need to think about strategy here. The form you get from the college will show you paid $X dollars for tuition and you won’t have to think about qualifying expenses for tax credits. The form is called a 1098T form. For 2019, you absolutely must have that form to qualify for the American Opportunity Tax Credit. Here’s the thing – your college aged student is over 18, the school is going to give the form to her. You have to get it from your student to file your taxes.

If you’re lucky enough to get good scholarships or an inexpensive school, you’re going to need to be able to prove you spent money on qualified expenses. Tuition, fees, and books count. If your tuition is only $1500, it’s important to keep those receipts for books and campus fees as well to add to your tuition expense. Room and board won’t count.

{A note about books: if you have an older student and couldn’t claim books in the past because of the restrictive rules, it’s changed for this credit. Now, your student can buy books from a used bookstore, Amazon.com or any other place where student texts are sold, and still use the receipt towards this credit.}

On the flip side, if you’ve got a student at an expensive school and you’re well over the $4,000 threshold, you might not want to pay the second semester tuition before January, especially if you have a student thinking about taking a year off. Pay that next year’s tuition in January so you can spread out the tax credit.

With the American Opportunity Credit, you get a 100% tax credit on the first $2000 of tuition paid. That’s a dollar for dollar tax credit. After that, you get a credit of 25% of the next $2000 of tuition paid. The first $2000 worth of tuition is more valuable than the next. Still, a 25% tax credit is nothing to sneeze at either. Also, if you pay tuition in 2019 for classes that will be taken within the first three months of 2020, that counts towards the credit too. Come December, if you haven’t already exceeded the $4,000 tuition expense amount, it may make sense to pay your next semester a little early.

Which students qualify for this credit? It’s available to students who are in their first four years of college, they must be at least a half time student, they have to be at a qualified institution, and they cannot have a felony drug conviction.

If you’d like more information on the American Opportunity Credit, or other education credits, IRS publication 970 has answers. (It’s 83 pages long, but it does have almost everything in there.) You can access it here: IRS College Tax Credit

One final thing, because everybody asks me this: if you pay for tuition with a loan, it still counts as you paying tuition. You can still claim the credit.