TAX SEMINAR FOR GRADUATE STUDENTS

Transcription

1 TAX SEMINAR FOR GRADUATE STUDENTS Education-Related Income and Expenses March 3, 2015

2 DISCLOSURE The materials presented in today s workshop are for informational purposes only and not for the purpose of providing legal or accounting advice. Any information contained in or accompanying this presentation is not intended or written to be used as advocating for the proper treatment of a reporting position unique to an individual person s circumstances. It is not intended or presented to be used, and it cannot be used, by anyone for the purpose of avoiding penalties that may be imposed federal tax law. You should contact your attorney or tax professional to obtain advice with respect to the proper treatment applicable to any particular situation. The goal of this presentation is to give a general overview of the U.S. federal income tax regime with a focus on certain authorized credits and deductions. Use of this information does not create an attorney-client relationship. Any opinions expressed are the opinions of the individual author and may not reflect the position of The University. The University is not responsible for any positions taken on an individual s return.

3 AGENDA Expectations What is Form 1040? How do I report my income? Which education credits or deductions am I eligible for? Example tax calculation NEW for 2014: Affordable Care Act Additional resources

4 EXPECTATIONS: THIS SEMINAR DOES NOT COVER Reporting requirements for international students Income/deductions outside of education-related items Exception: Healthcare (only briefly)

5

6 HOW DO I REPORT MY INCOME?

7 EDUCATION-RELATED INCOME Scholarship and fellowship payments (Form 1098-T) RA/TA wages (Form W-2)

8 HOW DO I REPORT MY INCOME? TAX-FREE FELLOWSHIPS/SCHOLARSHIPS A scholarship or fellowship is tax-free only if: You are a candidate for a degree at an eligible education institution, You use the scholarship or fellowship to pay qualified education expenses, and It does not represent payment for teaching, research or other services required as a condition for receiving the scholarship

9 HOW DO I REPORT MY INCOME? TAX-FREE FELLOWSHIPS/SCHOLARSHIPS What are Qualified Education Expenses? For purposes of tax-free scholarships or fellowships, these are expenses for: Tuition and fees required to enroll at or attend an eligible educational institution, and Course-related expenses, such as fees, books, supplies and equipment that are required for the courses at the eligible educational institution These items MUST be REQUIRED of all students in your course of instruction

10 HOW DO I REPORT MY INCOME? TAX-FREE FELLOWSHIPS/SCHOLARSHIPS What are NOT Qualified Education Expenses? Room and board, Travel, Research, Clerical help, or Equipment or other expenses that are not required for enrollment in or attendance at an eligible educational institution

11 HOW DO I REPORT MY INCOME? SCHOLARSHIPS/FELLOWSHIPS The University of Texas at Austin 10, Shannon Chen 30, UT EID X X

12 HOW DO I REPORT MY INCOME? SCHOLARSHIPS/FELLOWSHIPS 30, , ,000 10,000 10,000 20,000 20,000

13 HOW DO I REPORT MY INCOME? RA/TA WAGES , , The University of Texas at Austin Shannon Chen DD 6,000.00

14 WHERE DO I REPORT MY INCOME? 20, SCH 38,000.00

15 WHICH CREDITS AND DEDUCTIONS AM I ELIGIBLE FOR?

16 EDUCATION-RELATED DEDUCTIONS & CREDITS Student loan interest deduction Tuition and fees deduction American Opportunity Credit Lifetime Learning Credit

17 WHAT IS THE DIFFERENCE BETWEEN A CREDIT AND A DEDUCTION? A tax deduction reduces your taxable income Its value (your tax savings) will depend on your tax rate A tax credit directly reduces your tax liability Each $1 of tax credit reduces your tax liability by $1

18 WHAT IS THE DIFFERENCE BETWEEN A CREDIT AND A DEDUCTION? Baseline Tax Deduction Tax Credit Income 1,000 1,000 1,000 Tax Deduction 0 (100) 0 Taxable Income 1, ,000 Tax Due (20%) Tax Credit 0 0 (100) Total Tax Due

19 WHAT IS THE DIFFERENCE BETWEEN A CREDIT AND A DEDUCTION? Baseline Tax Deduction Tax Credit Income 1,000 1,000 1,000 Tax Deduction 0 (100) 0 Taxable Income 1, ,000 Tax Due (10%) Tax Credit 0 0 (100) Total Tax Due

20 WHICH DEDUCTIONS AM I ELIGIBLE FOR? STUDENT LOAN INTEREST DEDUCTION Max benefit is $2,500 Smaller of $2,500 or the interest you paid in 2014 Check form 1098-E Your student loan: Must have been taken out solely to pay qualified education expenses, and Cannot be from a related person or made under a qualified employer plan Enrolled at least half-time in a degree program

21 WHICH DEDUCTIONS AM I ELIGIBLE FOR? STUDENT LOAN INTEREST DEDUCTION Qualified Education Expenses for student loans are different!! Tuition and fees Room and board No more than the greater of (1) the max listed by UT as part of cost of attendance or (2) the actual amount paid to housing owned and operated by the university Required books, supplies and equipment Other necessary expenses (such as transportation) NO DOUBLE BENEFITS!

22 WHICH DEDUCTIONS AM I ELIGIBLE FOR? STUDENT LOAN INTEREST DEDUCTION

23 WHICH DEDUCTIONS AM I ELIGIBLE FOR? TUITION AND FEES DEDUCTION Use Form 8917 Reduce income by up to $4,000 Tuition and fees required for enrollment or attendance at an eligible postsecondary educational institution, but not including personal, living or family expenses NO DOUBLE BENEFITS!

24 WHICH DEDUCTIONS AM I ELIGIBLE FOR? TUITION AND FEES DEDUCTION

25 WHICH CREDITS AM I ELIGIBLE FOR? NO DOUBLE BENEFITS!!!! You cannot: Claim a Lifetime Learning Credit and American Opportunity Credit during the same year Claim a credit based on qualified education expenses paid with tax-free educational assistance (such as a fellowship/scholarship) Use Form 8863 to claim either credit

26 WHICH CREDITS AM I ELIGIBLE FOR?

27 WHICH CREDITS AM I ELIGIBLE FOR? AMERICAN OPPORTUNITY CREDIT Available ONLY for the first 4 years of postsecondary education Must be pursuing a degree Must be enrolled at least half-time Qualified education expenses Tuition and fees required for the student's enrollment or attendance at an eligible educational institution Books, supplies, and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance

28 WHICH CREDITS AM I ELIGIBLE FOR? AMERICAN OPPORTUNITY CREDIT Maximum amount of the credit is $2,500 per person Calculation: 100% credit for the first $2,000 of qualified education expenses paid by the eligible student, and 25% credit for the next $2,000 of qualified education expenses paid by the eligible student If you paid at least $4,000 in qualified education expenses, you can claim the full credit

29 WHICH CREDITS AM I ELIGIBLE FOR? LIFETIME LEARNING CREDIT Available for all years of postsecondary education and for courses to acquire or improve job skills Unlimited number of years Student does not need to be pursuing a degree or other educational credential Qualified education expenses: Tuition and fees required for the student's enrollment or attendance at an eligible educational institution Books, supplies, and equipment only if required to be paid to the institution as a condition of enrollment or attendance

30 WHICH CREDITS AM I ELIGIBLE FOR? LIFETIME LEARNING CREDIT Maximum of $2,000 per return Calculation: 20% of the first $10,000 of qualified education expenses

31 WHAT SHOULD I DO? Remember: you can t double-dip! Qualified education-related expenses can only be used toward one purpose Reducing taxable amount of scholarship/fellowship Lifetime Learning Credit or American Opportunity Credit Tuition and Fees Deduction Student Loan Interest Deduction Room and board counts! A $1 credit will reduce your tax expense by $1 whereas a $1 deduction will reduce your tax expense by less than $1.

32 HOW DO I PROCEED? In general, a credit is better than a deduction, so when attacking your tax return, look at your credit opportunities first. Let s do an example!

33 EXAMPLE: KATIE FACTS Katie is single with no children. She received $30,000 fellowship income, $25,000 RA income and paid $21,000 in qualified education expenses. She does not have a student loan.

34 EXAMPLE: KATIE FACTS, CONTINUED Some basics: Everyone is entitled to a standard deduction of $6,200 and personal exemption of $3,950 Tax rate schedule for single-filers 2014: If Taxable Income is: Below $9,075 The Tax is: 10% of taxable income Over $9,075 but below $36,900 $ % of excess over $9,075 Over $36,900 but below $89,350 $5, % of excess over $36,900

35 EXAMPLE: KATIE HOW TO REPORT: SITUATION 1 Katie offsets her fellowship with her qualified education expenses. Form 1040 Description Amount Calculation Line 7 Income $34,000 $30,000 - $21,000 + $25,000 Line 33 Student loan interest $0 Line 34 Tuition and fees $0 Line 40 Standard deduction $6,200 Line 42 Personal exemption $3,950 Line 43 Taxable income $23,850 $34,000 - $6,200 - $3,950 Line 44 Tax $3,124 $ %[$23,850 - $9,075] Line 50 Education credits $0 Line 78 Amount due $3,124

36 EXAMPLE: KATIE HOW TO REPORT: SITUATION 2 Katie calculates her American Opportunity Credit and then offsets her fellowship with the remaining qualified education expenses ( QEE ). American Opportunity Credit: $2,000 * 100% = $2,000 $2,000 * 25% = $500 Total credit = $2,500 Total QEE used = $4,000 Total QEE remaining = $17,000

37 EXAMPLE: KATIE HOW TO REPORT: SITUATION 2 Katie calculates her American Opportunity Credit and then offsets her fellowship with the remaining qualified education expenses. Form 1040 Description Amount Calculation Line 7 Income $38,000 $30,000 - $17,000 + $25,000 Line 33 Student loan interest $0 Line 34 Tuition and fees $0 Line 40 Standard deduction $6,200 Line 42 Personal exemption $3,950 Line 43 Taxable income $27,850 $38,000 - $6,200 - $3,950 Line 44 Tax $3,724 $ %[$27,850 - $9,075] Line 50 Education credits $2,500 Line 78 Amount due $1,224 $3,724 - $2,500

38 EXAMPLE: KATIE WHAT IS THE MOST EFFICIENT WAY FOR KATIE TO REPORT HER INCOME? What should Katie do? Situation 1: Katie offsets her fellowship with her qualified education expenses. Tax = $3,124 Situation 2: Katie calculates her American Opportunity Credit and then offsets her fellowship with the remaining qualified education expenses. Tax = $1,224

39 AFFORDABLE CARE ACT Required to have healthcare each month of 2014 (you and your dependents) Eligible coverage includes plans provided by an employer, Health Insurance Marketplace coverage, and government-sponsored programs, such as Medicare or Medicaid If you had healthcare for the full year, simply check the box on line 61 and leave the amount blank

40 AFFORDABLE CARE ACT If you did not have healthcare for the full year, then you are required to make a Shared Responsibility Payment unless you qualify for an exemption The payment is the greater of: $95 per adult and $47.50 per child, or 1% * [household income - filing threshold] File Form 8965 to report or claim exemptions The penalty will increase significantly in 2015, so get healthcare!

41 ADDITIONAL RESOURCES VITA: IRS website: All forms and instructions Publication 970 includes all education-related explanations, credits and deductions Appendix B has a nice overview of the credits/deductions Interactive calculator: Claim-an-Education-Credit%3F Publication 17 covers individual taxes more broadly