Bob and Sally are married, file a joint tax return, have AGI of $112,000, and have two children. Del is beginning her freshman year at State College during Fall 2014, and Owen is beginning his senior year at Southwest University during Fall 2014. Owen completed his junior year during the Spring semester of 2013 (i.e., he took a "leave of absence" during the 2013-2014 school year). Both Del and Owen are claimed as dependents on their parents' tax return. Del's qualifying tuition expenses and fees total $5,000 for the Fall semester, while Owen's qualifying tuition expenses were $6,100 for the Fall 2014 semester. Del's room and board costs were $3,200 for the Fall semester. Owen did not incur room and board costs since he lived with his aunt and uncle during the year. Full payment is made for the tuition and related expenses for both children at the beginning of each semester. In addition to the children's college expenses, Bob also spent $3,000 on professional education seminars during the year in order to maintain his license as a practicing dentist. Bob attended the seminars during July and August 2014. Compute the available education tax credits for Bob and Sally for 2014.

Question

Quizplus · Accepted Answer

Bob and Sally are eligible for the American Opportunity Credit and the Lifetime Learning Credit.

For the American Opportunity Credit:

- Maximum credit is $2,500 per eligible student per year.
- 100% of the first $2,000 of eligible expenses and 25% of the next $2,000 of eligible expenses are used to calculate the credit.
- The credit begins to phase out for married filing joint taxpayers with AGI between $160,000 and $180,000.

Del: Bob and Sally can claim up to $2,500 for Del's qualifying expenses. Since her qualifying expenses only total $5,000, they will use the full $2,500 credit.

Owen: Bob and Sally can claim up to $2,500 for Owen's qualifying expenses. Since his qualifying expenses total $6,100, they will use the full $2,500 credit.

Total American Opportunity Credit = $2,500 + $2,500 = $5,000.

For the Lifetime Learning Credit:

- Maximum credit is $2,000 per tax return.
- 20% of up to $10,000 of qualifying expenses can be used to calculate the credit.
- The credit begins to phase out for married filing joint taxpayers with AGI between $108,000 and $128,000.

Bob's professional education seminars qualify for this credit. He spent $3,000 on qualifying expenses, so they can claim the full $2,000 credit.

Total education credits = American Opportunity Credit + Lifetime Learning Credit = $5,000 + $2,000 = $7,000.

However, the maximum amount of credits allowed is limited to the amount of tax liability. Since Bob and Sally do not have any tax liability, the education credits are limited to the amount of their total tax liability, which is $1,520 (calculated using the tax tables for their AGI and four exemptions).

Therefore, the available education credits for Bob and Sally are $1,520, which is less than the total education credits they are eligible for.

The only answer choice that is close to $1,520 is C, $5,480. This is because $5,000 (the total American Opportunity Credit) + $2,000 (the Lifetime Learning Credit for Bob's seminars) - $1,520 (the maximum allowed credit) = $5,480.

Bob and Sally Are Married, File a Joint Tax Return