IRS Logo - American Opportunity Tax Credit

The American opportunity tax credit (AOTC) 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.

The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student. But, if the credit pays your tax down to zero, you can have 40 percent of the remaining amount of the credit (up to $1,000) refunded to you.

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Tax credit systems are in place to let tax payers deduct a certain amount from their tax liability to the state or federal government based on different programs. One such initiative is the American Opportunity Tax Credit, or commonly known as AOTC. This tax credit system is designed specifically for college going students, allowing them to settle their college costs via tax credits. AOTC is much more beneficial when compared to tuition deduction since it allows for an actual reduction in taxes that you owe to the government. But there are certain eligibility criteria that one must meet to be able to benefit from this system. Read More

The final version of the GOP tax bill that passed last month rewrites the tax code in many ways, eliminating deductions and adding new benefits. Some of these new provisions affect those paying for college. The final version of the GOP tax bill that passed last month rewrites the tax code in many ways, eliminating deductions and adding new benefits. Some of these new provisions affect those paying for college. Read More

Annette Nellen

The addition of these two credits to the required due diligence of paid preparers in preparing a return that claims either or both was made by the PATH Act (P.L. 114-113, 12/18/15). The statutory language added at §6695(g) implied that regulations were needed. The IRS released draft Form 8867 and instructions in summer 2016, but did not release the regulations until 12/5/16. [TD 9799 (12/5/16) and REG 102952-16 (12/5/16)]

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The 1099-Q form shows distributions from education savings accounts and 529 plans.  The form has the gross distributions, plus the basis and the earnings on that distribution.  If you don’t report education expenses to offset the 1099-Q distribution, then the earnings will be taxable as ordinary income plus a 10% penalty.  The 10% penalty is basically for taking the money out but not using it for educational purposes.

The trick here is that you can’t use the same dollars for education credits and offsetting the 1099-Q distribution.  If you have $5k of education expenses with your $5k distribution, you can either use the education expenses to offset the distribution, or you can use a portion to claim the education credit, but then pick up the income on the distribution.  If you used $4k to claim the American Opportunity Credit, then you would have $1k to offset the 1099-Q distribution.

The result in that example would be 20% of the earnings on the distribution would be offset, but the other 80% would be taxable plus penalty.  Usually the education credits are better, but it depends on your specific situation.  It’s just something to keep in mind.  Whichever way you go, you just need to be sure to report that distribution.

The Internal Revenue Service has found that changes in Form 8863, Education Credits, are delaying more than 600,000 tax returns, many of which appear to come from H&R Block. The IRS acknowledged in an email Friday that it revised the form for tax year 2012 “to help taxpayers and tax preparers understand the qualifications for the American Opportunity Tax Credit. Checkboxes for lines 23-26 were added to confirm basic qualifications for taxpayers claiming this credit. If these lines are left blank, there will be a delay in the processing of the taxpayer’s return. To avoid delays, ensure your clients complete Form 8863 correctly.”

The IRS originally warned about the delays last month, telling preparers that they needed to fill out Yes or No in response to certain questions asking whether students had completed four years of post-secondary education before 2012 and whether they had ever been convicted before the end of 2012 of a federal or state felony for possession or distribution of a controlled substance (see IRS Warns of Problems with Education Credit Filings). However, it turns out the IRS had actually made further changes in the programming of the forms so that an N needed to be filled out instead of a No. The form itself, though, has checkboxes next to the words Yes and No. All this confusion has led to many frustrating refund delays for taxpayers, particularly at the nation’s largest tax prep chain, H&R Block. On Sunday, Block posted a message on its Facebook page saying it was working to resolve the issues with the IRS after being inundated with complaints from customers.

“H&R Block has confirmed with the IRS that there was an issue with certain tax returns filed before February 22, 2013 that included certain education tax credits claimed on Form 8863,” the company wrote. “We have worked with the IRS to expedite a solution to this issue for all of our affected clients.  If you received this letter of notice requesting additional information for Form 8863 and already responded to the IRS, or have not received a notification to date, there is no additional action needed at this time. For those clients who have received notification from the IRS and have yet to respond, please call your local H&R Block office or 800-HRBLOCK. The office or customer service agent will be able to better serve you and provide next steps. For those clients who received the IRS notice regarding form 8863 that said it would take 6-8 weeks to receive a refund after this issue was resolved, we are assured it will not take that long. We continue to work with the IRS and as we have more specifics on timing and any other updated information, we will share it with our clients.”

An IRS spokesperson told MarketWatch on Tuesday that the problem was delaying the processing of about 10 percent of the approximately 6.6 million tax returns filed with the Form 8863. Block has apparently been the major recipient of thousands of complaints on Facebook and Twitter about the problem. The IRS is able to process the tax returns now that it knows the source of the errors, but because that means there are extra steps involved, taxpayers will still be subject to delays. One recent comment on Block’s Facebook page from a customer indicated they have been waiting a month and a half for their tax refund.

Block updated the Facebook page Tuesday to say that it was going to reach out individually to the taxpayers who were affected, referring obliquely to articles like the one on MarketWatch as well as other outlets like USA Today and Forbes about the problem. “Sorry for the late update but we’ve always assured you we would share information as soon as it becomes available,” said Block. “There continues to be a lot of information floating around regarding the Form 8863 issue that is impacting a number of our clients. We wanted to give you a place to go to get those facts and the next steps for those in this situation. In addition to this page on our website, we are reaching out to each and every one of you individually to give you direction and give you the facts. Please look for those emails, calls or letters starting tomorrow. Again, we apologize for the inconvenience this has caused and we’re glad to hear some clients are already seeing their refund status change due to the work with the IRS. Please keep checking here and on the website for the latest information.”

On the new page about the situation on its site, Block stated, “The IRS has informed us and other impacted providers that they are currently processing these returns. This review process means the IRS may need 4-6 weeks from this date to issue a refund. H&R Block clients are already reporting a change in their refund status since the IRS began processing these returns.”

Block added that the IRS is reminding taxpayers to check the “Where’s My Refund?” tool on to learn the status of their tax refund, but since the site is updated overnight by the IRS, taxpayers do not need to check it more than once a day. Early in tax season, the IRS asked taxpayers not to check “Where’s My Refund?” too often because it was getting bogged down with requests from anxious taxpayers (see IRS Asks Preparers and Taxpayers to Limit Use of ‘Where’s My Refund’ Tool).

Block said no additional action is needed for H&R Block clients who have already received an IRS letter requesting additional information for Form 8863 and already responded to the IRS; or have not received an IRS letter about Form 8863 to date. For those H&R Block clients who have received a letter from the IRS and have yet to respond, they are asked to call their local H&R Block office or 800-HRBLOCK. “The IRS has stopped sending letters based on this Form 8863 issue to this group of affected H&R Block clients,” Block noted.

The glitch is also causing problems for taxpayers who are applying for financial aid through the Free Application for Federal Student Aid program. Block advised that there are manual steps they can take that will allow their FAFSA application to proceed while their return is still processing. The Department of Education suggests that if the tax return has not yet been processed by the IRS, they can manually enter the tax return data on the application. They can then return to the online FAFSA to update the information when the return has been processed. The information about this is posted on the FAFSA section of the Department of Education’s website.

Block offered a statement of regret to its clients, saying, “H&R Block appreciates that this issue may cause problems for our clients and we are doing everything in our power to address the processing of these returns. We will continue to update clients as more information becomes available. We thank our clients for their patience while we continue to work with the IRS to expedite the filing process on their behalf.”

The delays in tax refunds this year after the last-minute fiscal cliff deal are also starting to have an impact on the economy at large. Walmart CFO Charles Holley told an investor conference Tuesday that the big box retailer has cashed $2.7 billion worth of tax refund checks this year so far in the U.S., compared to approximately $4 billion at this time last year, according to Reuters.

What with all the confusion this tax season, including the late start to the season and delays in forms including the one for education tax credits, the last thing that taxpayers and preparers needed was a major software bug caused by a difference of one letter in the alphabet. To paraphrase an old saying, sometimes…

“No really does mean No!”


 What do you think?  Feel Free To Comment.


By Michael Cohn, Editor-in-Chief, Accounting,  March 13, 2013

Edited and posted by Harold Goedde CPA, CMA, Ph.D. (taxation and accounting)