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Alan (27) and Kara (26) are married and filing a joint return. Both Alan and Kara were full-time students all year at State College, located at 11100 College Boulevard, Your City, Your State. During the year, Alan paid $5,000 in tuition and fees, substantiated with Form 1098-T. Kara paid $3,900 in tuition and fees, also substantiated with Form 1098-I. Both Alan and Kara have part-time jobs outside of school. They did not receive any scholarships during the year. Their adjusted gross income is $45,000. Their total tax on line 11 of their federal Form 1040 is $2,142. They had no additional taxes. Both Alan and Kara meet all the requirements to qualify for the American Opportunity Tax Credit.


Complete Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits) for Alan and Kara.

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Answer:

AOLC_{Allan}=$2750

AOLC_{Kara}=$2475

AOLC_{Allan}=$1000

AOLC_{Kara}=$780

Explanation:

American Opportunity Learning credit.

First, assuming Allan and Kara are eligible, we must know how the two forms of credit work. For the American Opportunity Learning credit (AOLC), it is possible to receive 100% of the tax deduction for the first 2000 and then 25% of the deduction up to a maximum of 2500. So, the amount of the opportunity credit for Allan and Kara is given by:

[tex]AOLC_{Allan}=2000+(5000-2000)*0.25=2750[/tex]

[tex]AOLC_{Kara}=2000+(3900-2000)*0.25=2475[/tex]

Now, for the American Lifetime Learning credit (ALLC), we have to allow 20% deduction  of taxes up to $2000 if the person meets the requirement of not earning more than 68000, then:

[tex]AOLC_{Allan}=5000*0.2=1000[/tex]

[tex]AOLC_{Kara}=3900*0.2=780[/tex]

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