What’s “Hot” about Refundable Credits?

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. 

Also check:

 Hot Topics for Return Preparers

 Hot Topics for Other Refundable Credits.

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:
 

  • Maximize the credits your client qualifies for…Don’t leave money on the table!
  • Minimize the likelihood of an audit and mistakes your client could pay for…  Stay out of the HOT WATER with the IRS and your clients!
  • Reduce the possibility of preparer related penalties that might apply if you file inaccurate returns

 

Find more tips on our page, Interview Best Practices. (Coming Soon!)

American Opportunity Tax Credit

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. 

What’s Hot about AOTC?

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.

Form 1098-T

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.

What you need to know AOTC eligibility

 

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

 

Maximize your client’s education benefits

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.

Avoiding these Common AOTC Errors  may minimize delays in processing AOTC returns.

No double dipping

And remember, no double dipping. Know where the funds came from. See our page, No Double Benefits Allowed.

Interview tips to avoid AOTC errors and how to work the Form 1098-T (Coming Soon!). 

Also, see, "Know the Questions to Ask About Refundable Credits."

More AOTC resources

  1. EITC Central, Refundable Credits tab
  2. Education-Credits-AOTC-LLC
  3. Publication 970, Tax Benefits for Education
  4. Form 8863, Education Credits and  Instructions for Form 8863
  5. Form 1098-T and Form 1098-T Instructions
  6. Forms 886-H-AOC ,  866-H-AOC-MAX and 866-H-AOC (Spanish)

Earned Income Tax Credit

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.

2014 Income Limits and maximum credit amounts

And, we update this income limit and range of EITC page after October 15th.

What is continuing and new for 2015 for our EITC Preparer Compliance focused and tiered strategy?

  • IRS is expanding our email correspondence program to preparers and uses email to notify tax return preparers that we placed a letter on their PTIN online secure inbox.
  • IRS revenue agents will show up for Due Diligence audits during the filing season without making appointment.

 

Find out more about meeting Preparer EITC Due Diligence

Basic Requirements

Know the EITC eligibility laws. All your clients must meet requirements to claim EITC. They must:

    1. Meet basic requirements
    2. Have earned income
    3. Have a qualifying child
    4. Or meet the requirements for those without a qualifying child

 

More resources for determining EITC eligibility

 

Most Common EITC Errors


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.

Common Compliance Errors

  • Not completing and submitting Form 8867, see What is Form 8867?
  • Not meeting due diligence requirements especially knowledge requirement. See Understand the Knowledge Requirement (coming soon)

 

Tips and Tools to help you meet your due diligence

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)

 

Interview Tips and Resources:

 

Helpful  EITC Resources

 

Additional Child Tax Credit

What’s Hot about the Additional Child Tax Credit?

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.

Instructions for Schedule 8812.

What’s New about Certified Acceptance Agents and the ITIN Process?

Visit irs.gov for  the Latest on the ITIN process

What You Need to Know about CTC and ACTC

  • Child must be your client’s dependent and meet tests under uniform child definition for relationship, residency, support and joint return. See our Understanding Who is a Qualifying Child for the uniform child definition.
  • But there is a special age test, the child must be under the age of 17.
  • Child can have ITIN but must be a U.S. Citizen, U.S. National or a U.S. resident alien.
  See the Child Related Tax Benefit Chart for comparison and links to reference materials.

Interview Best Practices

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).

Here are  interview tips just for the Child Tax Credit

  1. Complete Schedule 8812, Child Tax Credit with your client
  2. Verify the child's age
  3. Verify that the child is a United States Citizen or Resident and that the child has a Social Security number that is valid for employment.
  4. If the child has an ITIN, verify the child meets the substantial presence test. See Publication 519, U.S. Tax Guide for Aliens for more information.

 

Child Tax Credit Resources

  1. Publication 972, Child Tax Credit
  2. Publication 519, U.S. Tax Guide for Aliens
  3. Other Refundable Credits Toolkit on EITC Central
  4. Schedule 8812 and Instructions for Schedule 8812
  5. Child Related Tax Benefit Chart

We would like to hear from you…reach out to us at: EITC.program@irs.gov

Page Last Reviewed or Updated: 24-Jul-2014