This is a supplement to the tax forum seminar, What’s “Hot” about Refundable Credits? It has a brief synopsis of the presentation and links you to additional resources.
If you missed it or haven’t attended, the forum is about the latest requirements and issues concerning refundable credits. It covers the law, best practices and interview techniques to keep your tax preparation business and your clients out of “hot water” with the IRS.
You can find most of the resources on EITC Central and the Other Refundable Credits Toolkit tab on Central. We provide links to the direct source but you will want to bookmark Central as your place to go for everything you need to know about the American Opportunity Tax Credit, the Earned Income Tax Credit and the Additional Child Tax Credit.
Keep updated about the latest news on EITC and the other refundable credits, check our What's Hot page often.
Interview Best Practices
Throughout this seminar, we discuss helpful best practices and interview techniques for each of the refundable credits. Asking questions and conducting a good interview ensures you:
Find more tips on our page, Interview Best Practices. (Coming Soon!)
American Opportunity Tax Credit is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.
Note: We use the term college throughout our site, the correct term is eligible educational institution. We want you to know that when we use college, we mean all eligible colleges, universities, technical and vocational schools.
Census data shows that college enrollment has risen over the last ten years, nearly 20 million in 2010. This means there are more potential eligible students for AOTC. But, remember, just because a student is enrolled in college; it does not mean they are eligible for AOTC. There are eligibility rules about who is eligible and what expenses qualify.
Colleges are now required to submit the student's name, address, and taxpayer’s identification number (TIN), enrollment and academic status on Form 1098-T. They must report the information for most of their enrolled students but there are exceptions, see the Form 1098-T instructions for the exceptions. Colleges must also report the amount of scholarships and/or grants they administer whether they are taxable or not. Colleges must report the information for most of their enrolled students but there are exceptions, see the Form 1098-T Instructions for the exceptions.
The Form 1098-T is informational only and alerts students that they may be eligible for federal income tax education credits. The form is a good starting point to determine eligibility. But, it does not contain all of the information needed to claim a tax credit. The presence of the form suggests the student is potentially eligible, while the absence of the form suggests the opposite.
If the student didn't receive a Form 1098-T, inform your client that IRS may ask for documentation to support the credit. See Forms 866-H-AOC and 866-H-AOC-MAX for examples of the documentation needed. Form 866-H-AOC is also available in Spanish.
If you find your client doesn’t qualify for AOTC, don’t forget to check if your client qualifies for the Lifetime Learning Credit and the Tuition and Fees Deduction. See our handy chart comparing the education credits and the tuition and fees deduction.
More AOTC eligibility resources
Help your clients maximize education benefits. There are times when it is better to claim traditionally non-taxable income such as the Pell Grant to get a larger education benefit. And, treating the income as taxable also affects other refundable credits. Work the return treating the income as taxable and then not reporting it. See what works best for your client. Remember you have to claim all the non-taxable income or none of it; you can’t choose to use a part of it to maximize the tax benefits. Software doesn’t do it for you, although it makes easier.
See the Treasury Department Fact Sheet: Interaction of Pell Grants and Tax Credits for more information. We will have examples of how it works on our page on (coming soon!) Maximizing your Client’s Education Benefits and in the 2014 Publication 970, available later this year.
And remember, no double dipping. Know where the funds came from. See our page, No Double Benefits Allowed.
Also, see, "Know the Questions to Ask About Refundable Credits."
The Earned Income Tax Credit is a tax credit to help your clients keep more of what they earned. To qualify, they must meet certain requirements and file a tax return, even if they don’t owe any tax or are not required to file. It’s the largest refundable credit for tax year 2014—up to $6,143 dollars for a couple filing a joint return with three or more qualifying children.
And, we update this income limit and range of EITC page after October 15th.
Know the EITC eligibility laws. All your clients must meet requirements to claim EITC. They must:
More resources for determining EITC eligibility
Find out more about the common EITC errors that account for more than 60 percent of all EITC errors on our Handling EITC Most Common Errors page.
You must know the law but the knowledge requirement is more. It is also using your knowledge of industry standards and information about your clients to apply the tax law and determine what questions you are going to ask your clients. See our Understand the Knowledge Requirement page (coming soon)
Develop client interview techniques, see our page, Interview Best Practices (coming soon)
What’s Hot about the Additional Child Tax Credit? ITINs are! ITINs are strongly tied to ACTC, why? Although a child may be your client’s dependent, he or she may only claim the child tax credit for a dependent who is a citizen, national, or resident of the United States.
To be treated as a resident, a child must meet the substantial presence test. Generally, it is met if the child lived in the U. S. for more than half the year or 183 days during the tax year. But, there are calculations to consider in some cases, see Publication 519, U.S. Tax Guide for Aliens for more information.
If your clients have children with ITINS, you must complete Part 1 of Schedule 8812, Child Tax Credit. Part 1 is for filers who have dependents with an ITIN.
||See the Child Related Tax Benefit Chart for comparison and links to reference materials.|
The key here is not to make assumptions. The requirements for child-related benefits are similar, yet they each have distinct rules. The child’s residence is a HOT issue for the child tax credit. IRS changed the Form 8812 to the Schedule 8812 for tax year 2012. We changed it to a schedule and added part 1 if the child has an ITIN. Use Part I of Schedule 8812 to document that any child who has an ITIN is a resident of the United States and meets the substantial presence test. See our Interview Best Practices page (coming soon).