The Choosing a larger education credit screen-529 plan

[spikemarbles]

Hello,

I'm trying to understand the concept of this screen as it is suggesting I can enter a value between $0 and 4000 to help reduce my taxes.  I'm a little concerned of doing this wrong, and also if it is 0-4000, why is TT showing a larger amount ($8,862) in the first place?

I'm looking for any help in understanding the concept behind this and where the numbers come from so I can feel more comfortable about it!

[Hal_Al]

The $8862 is usually the full amount of tuition shown in box 1 of the 1098-T.  It's a flaw in TT. It pre populates with the maximum amount for the Lifetime Learning Credit (LLC), even though for most people, the AOTC (with a $4000 limit) is the better choice.  But, as you noted, if gives you the chance to change it. 

[spikemarbles]

Thanks, @Hal_Al!. So the bottom line seems to be that I should change that to $4000, correct?

I could use a little more understanding on this one though.  I've seen it before, as this is the third year we've gotten the AOTC, but simply plowed through in the past.  I'm trying to research this to get a better understanding, so I'd like to ask a few questions to try to walk through this, if I may:

• Do I qualify for this credit because I spent at least $4000 on education expenses, and therefore I get $2500 tax credit?
• What happens to any amount over $4000?

[Hal_Al]

 Q. So the bottom line seems to be that I should change that to $4000, correct?

A. Yes.

Q. Do I qualify for this credit because I spent at least $4000 on education expenses, and therefore I get $2500 tax credit?

A. Yes.

Q. What happens to any amount over $4000?

A. Nothing. The credit maxes out with $4000 of qualified expenses.  You get 100% of the first $2000 of expenses and 25% of the next $2000.  

The alternate credit is the Lifetime Learning Credit (LLC). It's 20% of the qualified expense up to $10,000  ($2000 max credit).  The LLC does not have a refundable portion, so it can only offset a tax liability.  Who would choose the LLC? Those no longer eligible for the AOTC; grad students, students/parents who already claimed the AOTC 4 times, less than half time undergrads, non degree seeking students. 

[spikemarbles]

Thanks @Hal_Al!. This background is helping my understanding!

So...We've gotten our AOTC, now how does this tie into the TT screen to choose $4000 to help reduce my taxes?  If I'm already using $4000 to claim the AOTC, what allows me to use $4000 as a tax credit?  My flawed reasoning tells me I should be entering $0.  Can you fill in what I'm misunderstanding?

[Hal_Al · Accepted solution]

If you're already getting the AOTC, you shouldn't be getting that screen any more.  If you are getting it, it should be pre populated with $4000.  If not, change it to $4000.  Do not change it to 0.  At that screen, you are telling TT how much tuition to use for the AOTC. 

Q. If I'm already using $4000 to claim the AOTC, what allows me to use $4000 for a tax credit?

A. The rules allow you to allocate your expenses where needed. You're not using an additional $4000. It's just one $4000 piece for the AOTC. 

[spikemarbles]

If you're already getting the AOTC, you shouldn't be getting that screen any more.  If you are getting it, it should be pre populated with $4000.  If not, change it to $4000.  Do not change it to 0.  At that screen, you are telling TT how much tuition to use for the AOTC. 

Ah-thank you!  This seems to be the piece of the puzzle that I think I have been missing.  It seems like Turbotax should not be throwing this at me at this point since I already have the AOTC selected for me.

Q. If I'm already using $4000 to claim the AOTC, what allows me to use $4000 for a tax credit?

A. The rules allow you to allocate your expenses where needed. You're not using an additional $4000. It's just one $4000 piece for the AOTC. 

Thank you very much, @Hal_Al !  I think I have it understood now!