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H&r Block Taxes

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H&r Block Taxes

H&r block taxes Publication 517 - Main Content Table of Contents Social Security CoverageCoverage of Members of the Clergy Coverage of Religious Workers (Church Employees) U. H&r block taxes S. H&r block taxes Citizens and Resident and Nonresident Aliens Ministerial ServicesMinisters Members of Religious Orders Christian Science Practitioners and Readers Exemption From Self-Employment (SE) TaxMembers of the Clergy Members of Recognized Religious Sects Self-Employment Tax: Figuring Net EarningsRegular Method Nonfarm Optional Method Income Tax: Income and ExpensesIncome Items Expense Items Income Tax Withholding and Estimated Tax Filing Your Return Retirement Savings ArrangementsDeducting contributions to tax-sheltered annuity plans. H&r block taxes Full-time student. H&r block taxes Adjusted gross income. H&r block taxes More information. H&r block taxes Earned Income Credit Comprehensive ExampleForm W-2 From Church Form W-2 From College Schedule C-EZ (Form 1040) Form 2106-EZ Schedule A (Form 1040) Schedule SE (Form 1040) Form 1040 Attachment 1 Attachment 2 How To Get Tax HelpLow Income Taxpayer Clinics Social Security Coverage This section gives information about which system (SECA or FICA) is used to collect social security and Medicare taxes from members of the clergy (ministers, members of a religious order, and Christian Science practitioners and readers) and religious workers (church employees). H&r block taxes Coverage of Members of the Clergy The services you perform in the exercise of your ministry, of the duties required by your religious order, or of your profession as a Christian Science practitioner or reader are covered by social security and Medicare under SECA. H&r block taxes Your earnings for these ministerial services (defined later) are subject to self-employment (SE) tax unless one of the following applies. H&r block taxes You are a member of a religious order who has taken a vow of poverty. H&r block taxes You ask the Internal Revenue Service (IRS) for an exemption from SE tax for your services and the IRS approves your request. H&r block taxes See Exemption From Self-Employment (SE) Tax , later. H&r block taxes You are subject only to the social security laws of a foreign country under the provisions of a social security agreement between the United States and that country. H&r block taxes For more information, see Bilateral Social Security (Totalization) Agreements in Publication 54. H&r block taxes Your earnings that are not from ministerial services may be subject to social security tax under FICA or SECA according to the rules that apply to taxpayers in general. H&r block taxes See Ministerial Services , later. H&r block taxes Ministers If you are a minister of a church, your earnings for the services you perform in your capacity as a minister are subject to SE tax, even if you perform these services as an employee of that church. H&r block taxes However, you can request that the IRS grant you an exemption, as discussed under Exemption From Self-Employment (SE) Tax , later. H&r block taxes For the specific services covered, see Ministerial Services , later. H&r block taxes Ministers defined. H&r block taxes   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. H&r block taxes Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. H&r block taxes   If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes. H&r block taxes Employment status for other tax purposes. H&r block taxes   Even though all of your income from performing ministerial services is subject to self-employment tax for social security tax purposes, you may be an employee for income tax or retirement plan purposes in performing those same services. H&r block taxes For income tax or retirement plan purposes, your income earned as an employee will be considered wages. H&r block taxes Common-law employee. H&r block taxes   Under common-law rules, you are considered either an employee or a self-employed person. H&r block taxes Generally, you are an employee if you perform services for someone who has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. H&r block taxes For more information about the common-law rules, see Publication 15-A, Employer's Supplemental Tax Guide. H&r block taxes   If a congregation employs you and pays you a salary, you are generally a common-law employee and income from the exercise of your ministry is wages for income tax purposes. H&r block taxes However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are not wages; such amounts are self-employment income for both income tax purposes and social security tax purposes. H&r block taxes Example. H&r block taxes A church hires and pays you a salary to perform ministerial services subject to its control. H&r block taxes Under the common-law rules, you are an employee of the church while performing those services. H&r block taxes Form SS-8. H&r block taxes   If you are not certain whether you are an employee or a self-employed person, you can get a determination from the IRS by filing Form SS-8. H&r block taxes Members of Religious Orders If you are a member of a religious order who has not taken a vow of poverty, your earnings for ministerial services you perform as a member of the order are subject to SE tax. H&r block taxes See Ministerial Services , later. H&r block taxes However, you can request that the IRS grant you an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. H&r block taxes Vow of poverty. H&r block taxes   If you are a member of a religious order and have taken a vow of poverty, you are already exempt from paying SE tax on your earnings for ministerial services you perform as an agent of your church or its agencies. H&r block taxes You do not need to request a separate exemption. H&r block taxes For income tax purposes, the earnings are tax free to you. H&r block taxes Your earnings are considered the income of the religious order. H&r block taxes Services covered under FICA at the election of the order. H&r block taxes   However, even if you have taken a vow of poverty, the services you perform for your church or its agencies may be covered under social security. H&r block taxes Your services are covered if your order, or an autonomous subdivision of the order, elects social security coverage for its current and future vow-of-poverty members. H&r block taxes   The order or subdivision elects coverage by filing Form SS-16. H&r block taxes The election may cover certain vow-of-poverty members for a retroactive period of up to 20 calendar quarters before the quarter in which it files the certificate. H&r block taxes If the election is made, the order or subdivision pays both the employer's and employee's share of the tax. H&r block taxes You do not pay any of the FICA tax. H&r block taxes Services performed outside the order. H&r block taxes   Even if you are a member of a religious order who has taken a vow of poverty and the order requires you to turn over amounts you earn, your earnings are subject to federal income tax and either SE tax or FICA tax (including estimated tax payments and/or withholding) if you: Are self-employed or an employee of an organization outside your religious community, and Perform work not required by, or done on behalf of, the order. H&r block taxes   In these cases, your income from self-employment or as an employee of that outside organization is taxable to you directly. H&r block taxes You may, however, be able to take a charitable deduction for the amount you turn over to the order. H&r block taxes See Publication 526, Charitable Contributions. H&r block taxes Rulings. H&r block taxes   Organizations and individuals may request rulings from the IRS on whether they are religious orders, or members of a religious order, respectively, for FICA tax, SE tax, and federal income tax withholding purposes. H&r block taxes To request a ruling, follow the procedures in Revenue Procedure 2014-1, 2014-1 I. H&r block taxes R. H&r block taxes B. H&r block taxes 1, available at www. H&r block taxes irs. H&r block taxes gov/irb/2014-1_IRB/ar05. H&r block taxes html. H&r block taxes Christian Science Practitioners and Readers Generally, your earnings from services you perform in your profession as a Christian Science practitioner or reader are subject to SE tax. H&r block taxes However, you can request an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. H&r block taxes Practitioners. H&r block taxes   Christian Science practitioners are members in good standing of the Mother Church, The First Church of Christ, Scientist, in Boston, Massachusetts, who practice healing according to the teachings of Christian Science. H&r block taxes State law specifically exempts Christian Science practitioners from licensing requirements. H&r block taxes   Some Christian Science practitioners also are Christian Science teachers or lecturers. H&r block taxes Income from teaching or lecturing is considered the same as income from their work as practitioners. H&r block taxes Readers. H&r block taxes   For tax purposes, Christian Science readers are considered the same as ordained, commissioned, or licensed ministers. H&r block taxes Coverage of Religious Workers (Church Employees) If you are a religious worker (a church employee) and are not in one of the classes already discussed, your wages are generally subject to social security and Medicare tax under FICA, not SECA. H&r block taxes Some exceptions are discussed next. H&r block taxes Election by Church To Exclude Its Employees From FICA Coverage Churches and qualified church-controlled organizations (church organizations) that are opposed for religious reasons to the payment of social security and Medicare taxes can elect to exclude their employees from FICA coverage. H&r block taxes If your employer makes this election, it does not pay the employer's portion of the FICA taxes or withhold from your pay your portion of the FICA taxes. H&r block taxes Instead, your wages are subject to SECA and you must pay SE tax on your wages if they exceed $108. H&r block taxes 28 during the tax year. H&r block taxes However, you can request an exemption from SE tax if you are a member of a recognized religious sect, as discussed below. H&r block taxes Churches and church organizations make this election by filing two copies of Form 8274. H&r block taxes For more information about making this election, see Form 8274. H&r block taxes Election by Certain Church Employees Who Are Opposed to Social Security and Medicare You may be able to choose to be exempt from social security and Medicare taxes, including the SE tax, if you are a member of a recognized religious sect or division and work for a church (or church-controlled nonprofit division) that does not pay the employer's part of the social security tax on wages. H&r block taxes This exemption does not apply to your service, if any, as a minister of a church or as a member of a religious order. H&r block taxes Make this choice by filing Form 4029. H&r block taxes See Requesting Exemption—Form 4029 , later, under Members of Recognized Religious Sects. H&r block taxes U. H&r block taxes S. H&r block taxes Citizens and Resident and Nonresident Aliens To be covered under the SE tax provisions (SECA), individuals generally must be citizens or resident aliens of the United States. H&r block taxes Nonresident aliens are not covered under SECA unless a social security agreement in effect between the United States and the foreign country determines that you are covered under the U. H&r block taxes S. H&r block taxes social security system. H&r block taxes To determine your alien status, see Publication 519, U. H&r block taxes S. H&r block taxes Tax Guide for Aliens. H&r block taxes Residents of Puerto Rico, the U. H&r block taxes S. H&r block taxes Virgin Islands, Guam, the CNMI, and American Samoa. H&r block taxes   If you are a resident of one of these U. H&r block taxes S. H&r block taxes possessions but not a U. H&r block taxes S. H&r block taxes citizen, for SE tax purposes you are treated the same as a citizen or resident alien of the United States. H&r block taxes For information on figuring the tax, see Self-Employment Tax: Figuring Net Earnings , later. H&r block taxes Ministerial Services Ministerial services, in general, are the services you perform in the exercise of your ministry, in the exercise of your duties as required by your religious order, or in the exercise of your profession as a Christian Science practitioner or reader. H&r block taxes Income you receive for performing ministerial services is subject to SE tax unless you have an exemption as explained later. H&r block taxes Even if you have an exemption, only the income you receive for performing ministerial services is exempt. H&r block taxes The exemption does not apply to any other income. H&r block taxes The following discussions provide more detailed information on ministerial services of ministers, members of a religious order, and Christian Science practitioners and readers. H&r block taxes Ministers Most services you perform as a minister, priest, rabbi, etc. H&r block taxes , are ministerial services. H&r block taxes These services include: Performing sacerdotal functions, Conducting religious worship, and Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination. H&r block taxes You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization's activities. H&r block taxes A religious organization is under the authority of a religious body that is a church or denomination if it is organized for and dedicated to carrying out the principles of a faith according to the requirements governing the creation of institutions of the faith. H&r block taxes Services for nonreligious organizations. H&r block taxes   Your services for a nonreligious organization are ministerial services if the services are assigned or designated by your church. H&r block taxes Assigned or designated services qualify even if they do not involve performing sacerdotal functions or conducting religious worship. H&r block taxes   If your services are not assigned or designated by your church, they are ministerial services only if they involve performing sacerdotal functions or conducting religious worship. H&r block taxes Services that are not part of your ministry. H&r block taxes   Income from services you perform as an employee that are not ministerial services is subject to social security and Medicare tax withholding under FICA (not SECA) under the rules that apply to employees in general. H&r block taxes The following are not ministerial services. H&r block taxes Services you perform for nonreligious organizations other than the services stated above. H&r block taxes Services you perform as a duly ordained, commissioned, or licensed minister of a church as an employee of the United States, the District of Columbia, a foreign government, or any of their political subdivisions. H&r block taxes These services are not ministerial services even if you are performing sacerdotal functions or conducting religious worship. H&r block taxes (For example, if you perform services as a chaplain in the Armed Forces of the United States, those services are not ministerial services. H&r block taxes ) Services you perform in a government-owned and operated hospital. H&r block taxes (These services are considered performed by a government employee, not by a minister as part of the ministry. H&r block taxes ) However, services that you perform at a church-related hospital or health and welfare institution, or a private nonprofit hospital, are considered to be part of the ministry and are considered ministerial services. H&r block taxes Books or articles. H&r block taxes   Writing religious books or articles is considered to be in the exercise of your ministry and is considered a ministerial service. H&r block taxes   This rule also applies to members of religious orders and to Christian Science practitioners and readers. H&r block taxes Members of Religious Orders Services you perform as a member of a religious order in the exercise of duties required by the order are ministerial services. H&r block taxes The services are considered ministerial because you perform them as an agent of the order. H&r block taxes For example, if the order directs you to perform services for another agency of the supervising church or an associated institution, you are considered to perform the services as an agent of the order. H&r block taxes However, if the order directs you to work outside the order, this employment will not be considered a duty required by the order unless: Your services are the kind that are ordinarily performed by members of the order, and Your services are part of the duties that must be exercised for, or on behalf of, the religious order as its agent. H&r block taxes Effect of employee status. H&r block taxes   Ordinarily, if your services are not considered directed or required of you by the order, you and the outside party for whom you work are considered employee and employer. H&r block taxes In this case, your earnings from the services are taxed under the rules that apply to employees in general, not under the rules for services provided as agent for the order. H&r block taxes This result is true even if you have taken a vow of poverty. H&r block taxes Example. H&r block taxes Pat Brown and Chris Green are members of a religious order and have taken vows of poverty. H&r block taxes They renounce all claims to their earnings. H&r block taxes The earnings belong to the order. H&r block taxes Pat is a licensed attorney. H&r block taxes The superiors of the order instructed her to get a job with a law firm. H&r block taxes Pat joined a law firm as an employee and, as she requested, the firm made the salary payments directly to the order. H&r block taxes Chris is a secretary. H&r block taxes The superiors of the order instructed him to accept a job with the business office of the church that supervises the order. H&r block taxes Chris took the job and gave all his earnings to the order. H&r block taxes Pat's services are not duties required by the order. H&r block taxes Her earnings are subject to social security and Medicare tax under FICA and to federal income tax. H&r block taxes Chris' services are duties required by the order. H&r block taxes He is acting as an agent of the order and not as an employee of a third party. H&r block taxes He does not include the earnings in gross income, and they are not subject to income tax withholding or to social security and Medicare tax under FICA or SECA. H&r block taxes Christian Science Practitioners and Readers Services you perform as a Christian Science practitioner or reader in the exercise of your profession are ministerial services. H&r block taxes Amounts you receive for performing these services are generally subject to SE tax. H&r block taxes You may request an exemption from SE tax, discussed next, which applies only to those services. H&r block taxes Exemption From Self-Employment (SE) Tax You can request an exemption from SE tax if you are a member of the clergy (minister, member of a religious order, or Christian Science practitioner or reader) or a member of a recognized religious sect. H&r block taxes Generally, members of religious orders who have taken a vow of poverty are already exempt from paying SE tax, as discussed earlier under Members of Religious Orders under Social Security Coverage. H&r block taxes They do not have to request the exemption. H&r block taxes Who cannot be exempt. H&r block taxes   You cannot be exempt from SE tax if you made one of the following elections to be covered under social security. H&r block taxes These elections are irrevocable. H&r block taxes You elected to be covered under social security by filing Form 2031, Revocation of Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners, for your 1986, 1987, 2000, or 2001 tax year. H&r block taxes You elected before 1968 to be covered under social security for your ministerial services. H&r block taxes Requesting exemption. H&r block taxes    Table 2, earlier, briefly summarizes the procedure for requesting exemption from the SE tax. H&r block taxes More detailed explanations follow. H&r block taxes If you are a minister, member of a religious order, or Christian Science practitioner, an approved exemption only applies to earnings you receive for ministerial services, discussed earlier. H&r block taxes It does not apply to any other self-employment income. H&r block taxes Table 2. H&r block taxes The Self-Employment Tax Exemption Application and Approval Process   Who Can Apply Members of the Clergy Members of Recognized  Religious Sects How File Form 4361 File Form 4029 When File by the due date (including extensions) of your income tax return for the second tax year in which you had at least $400 of net earnings from self-employment (at least part from ministerial services) File anytime Approval If approved, you will receive an approved copy of Form 4361 If approved, you will receive an approved copy of Form 4029 Effective Date For all tax years after 1967 in which you have at least $400 of net earnings from self-employment For all tax years beginning with the first year you meet the eligibility requirements discussed later Members of the Clergy To claim the exemption from SE tax, you must meet all of the following conditions. H&r block taxes You file Form 4361, described below under Requesting Exemption—Form 4361 . H&r block taxes You are conscientiously opposed to public insurance because of your individual religious considerations (not because of your general conscience), or you are opposed because of the principles of your religious denomination. H&r block taxes You file for other than economic reasons. H&r block taxes You inform the ordaining, commissioning, or licensing body of your church or order that you are opposed to public insurance if you are a minister or a member of a religious order (other than a vow-of-poverty member). H&r block taxes This requirement does not apply to Christian Science practitioners or readers. H&r block taxes You establish that the organization that ordained, commissioned, or licensed you, or your religious order, is a tax-exempt religious organization. H&r block taxes You establish that the organization is a church or a convention or association of churches. H&r block taxes You did not make an election discussed earlier under Who cannot be exempt . H&r block taxes You sign and return the statement the IRS mails to you to certify that you are requesting an exemption based on the grounds listed on the statement. H&r block taxes Requesting Exemption—Form 4361 To request exemption from SE tax, file Form 4361 in triplicate (original and two copies) with the IRS. H&r block taxes The IRS will return to you a copy of the Form 4361 that you filed indicating whether it has approved your exemption. H&r block taxes If it is approved, keep the approved copy of Form 4361 in your permanent records. H&r block taxes When to file. H&r block taxes   File Form 4361 by the date your income tax return is due, including extensions, for the second tax year in which both of the following are true. H&r block taxes You have net earnings from self-employment of at least $400. H&r block taxes Any part of those net earnings was from ministerial services you performed as a: Minister, Member of a religious order, or Christian Science practitioner or reader. H&r block taxes The 2 years do not have to be consecutive tax years. H&r block taxes    The approval process can take some time, so you should file Form 4361 as soon as possible. H&r block taxes Example 1. H&r block taxes Rev. H&r block taxes Lawrence Jaeger, a clergyman ordained in 2013, has net self-employment earnings as a minister of $450 in 2013 and $500 in 2014. H&r block taxes He must file his application for exemption by the due date, including extensions, for his 2014 income tax return. H&r block taxes However, if Rev. H&r block taxes Jaeger does not receive IRS approval for an exemption by April 15, 2015, his SE tax for 2014 is due by that date. H&r block taxes Example 2. H&r block taxes Rev. H&r block taxes Louise Wolfe has only $300 in net self-employment earnings as a minister in 2013, but earned more than $400 in 2012 and expects to earn more than $400 in 2014. H&r block taxes She must file her application for exemption by the due date, including extensions, for her 2014 income tax return. H&r block taxes However, if she does not receive IRS approval for an exemption by April 15, 2015, her SE tax for 2014 is due by that date. H&r block taxes Example 3. H&r block taxes In 2011, Rev. H&r block taxes David Moss was ordained a minister and had $700 in net self-employment earnings as a minister. H&r block taxes In 2012, he received $1,000 as a minister, but his related expenses were over $1,000. H&r block taxes Therefore, he had no net self-employment earnings as a minister in 2012. H&r block taxes Also in 2012, he opened a book store and had $8,000 in net self-employment earnings from the store. H&r block taxes In 2013, he had net self-employment earnings of $1,500 as a minister and $10,000 net self-employment earnings from the store. H&r block taxes Rev. H&r block taxes Moss had net earnings from self-employment in 2011 and 2013 that were $400 or more each year, and part of the self-employment earnings in each of those years was for his services as a minister. H&r block taxes Thus, he must file his application for exemption by the due date, including extensions, for his 2013 income tax return. H&r block taxes Death of individual. H&r block taxes   The right to file an application for exemption ends with an individual's death. H&r block taxes A surviving spouse, executor, or administrator cannot file an exemption application for a deceased clergy member. H&r block taxes Effective date of exemption. H&r block taxes   An approved exemption is effective for all tax years after 1967 in which you have $400 or more of net earnings from self-employment and any part of those earnings is for services as a member of the clergy. H&r block taxes Once the exemption is approved, it is irrevocable. H&r block taxes Example. H&r block taxes Rev. H&r block taxes Trudy Austin, ordained in 2010, had $400 or more in net self-employment earnings as a minister in both 2010 and 2013. H&r block taxes She files an application for exemption on February 20, 2014. H&r block taxes If an exemption is granted, it is effective for 2010 and the following years. H&r block taxes Refunds of SE tax. H&r block taxes   If, after receiving an approved Form 4361, you find that you overpaid SE tax, you can file a claim for refund on Form 1040X. H&r block taxes Generally, for a refund, you must file Form 1040X within 3 years from the date you filed the return or within 2 years from the date you paid the tax, whichever is later. H&r block taxes A return you filed, or tax you paid, before the due date is considered to have been filed or paid on the due date. H&r block taxes   If you file a claim after the 3-year period but within 2 years from the time you paid the tax, the credit or refund will not be more than the tax you paid within the 2 years immediately before you file the claim. H&r block taxes Members of Recognized Religious Sects If you are a member of a recognized religious sect, or a division of a recognized religious sect, you can apply for an exemption from payment of social security and Medicare taxes on both your self-employment income and the wages you earn from an employer who also has an exemption. H&r block taxes Exception. H&r block taxes   If you received social security benefits or payments, or anyone else received these benefits or payments based on your wages or self-employment income, you cannot apply. H&r block taxes However, if you pay your benefits back, you may be considered for exemption. H&r block taxes Contact your local Social Security Administration office to find out the amount you must pay back. H&r block taxes Eligibility requirements. H&r block taxes   To claim this exemption from SE tax, all the following requirements must be met. H&r block taxes You must file Form 4029, discussed later under Requesting Exemption—Form 4029 . H&r block taxes As a follower of the established teachings of the sect or division, you must be conscientiously opposed to accepting benefits of any private or public insurance that makes payments for death, disability, old age, retirement, or medical care, or provides services for medical care. H&r block taxes You must waive all rights to receive any social security payment or benefit and agree that no benefits or payments will be made to anyone else based on your wages and self-employment income. H&r block taxes The Commissioner of Social Security must determine that: Your sect or division has the established teachings as described in (2) above, It is the practice, and has been for a substantial period of time, for members of the sect or division to provide for their dependent members in a manner that is reasonable in view of the members' general level of living, and The sect or division has existed at all times since December 31, 1950. H&r block taxes Requesting Exemption—Form 4029 To request the exemption, file Form 4029 in triplicate (original and two copies) with the Social Security Administration at the address shown on the form. H&r block taxes The sect or division must complete part of the form. H&r block taxes The IRS will return to you a copy of the Form 4029 that you filed indicating whether it has approved your exemption. H&r block taxes If it is approved, keep the approved copy of Form 4029 in your permanent records. H&r block taxes When to file. H&r block taxes   You can file Form 4029 at any time. H&r block taxes   If you have an approved exemption from SE tax and for some reason that approved exemption ended, you must file a new Form 4029 if you subsequently meet the eligibility requirements, discussed earlier. H&r block taxes See Effective date of exemption next for information on when the newly approved exemption would become effective. H&r block taxes    If you have a previously approved exemption from SE tax and you change membership to another recognized religious sect, without any change to your eligibility requirements, then you do not need to file a new Form 4029. H&r block taxes Effective date of exemption. H&r block taxes   An approved exemption from SE tax generally is effective for all tax years beginning with the first year you meet the eligibility requirements discussed earlier. H&r block taxes (For example, if you meet the eligibility requirements in 2011, you file Form 4029 in 2012, and the IRS approves your exemption in 2013, your exemption is effective for tax year 2011 and all later years. H&r block taxes )   The exemption will end if you fail to meet the eligibility requirements or if the Commissioner of Social Security determines that the sect or division fails to meet them. H&r block taxes You must notify the IRS within 60 days if you are no longer a member of the religious group, or if you no longer follow the established teachings of this group. H&r block taxes The exemption will end for the tax year where you or your sect/division first fails to meet the eligibility requirements. H&r block taxes Refunds of SE tax paid. H&r block taxes    To get a refund of any SE tax you paid while the exemption was in effect, file Form 1040X. H&r block taxes For information on filing this form, see Refunds of SE tax under Requesting Exemption—Form 4361, earlier. H&r block taxes Exemption From FICA Taxes Generally, under FICA, the employer and the employee each pay half of the social security and Medicare tax. H&r block taxes Both the employee and the employer, if they meet the eligibility requirements discussed earlier, can apply to be exempt from their share of FICA taxes on wages paid by the employer to the employee. H&r block taxes A partnership in which each partner holds a religious exemption from social security and Medicare is an employer for this purpose. H&r block taxes If the employer's application is approved, the exemption will apply only to FICA taxes on wages paid to employees who also received an approval of identical applications. H&r block taxes Information for employers. H&r block taxes   If you have an approved Form 4029 and you have an employee who has an approved Form 4029, do not report wages you paid to the employee as social security and Medicare wages. H&r block taxes   If you have an employee who does not have an approved Form 4029, you must withhold the employee's share of social security and Medicare taxes and pay the employer's share. H&r block taxes Form W-2. H&r block taxes   When preparing a Form W-2 for an employee with an approved Form 4029, enter “Form 4029” in box 14, “Other. H&r block taxes ” Do not make any entries in boxes 3, 4, 5, or 6. H&r block taxes Forms 941, 943, and 944. H&r block taxes   If both you and your employee have received approved Forms 4029, do not include these exempt wages on the following forms. H&r block taxes Instead, follow the instructions given below. H&r block taxes Form 941, Employer's QUARTERLY Federal Tax Return: check the box on line 4 and enter “Form 4029” in the empty space below the check box. H&r block taxes Form 943, Employer's Annual Federal Tax Return for Agricultural Employees: enter “Form 4029” on the dotted line next to the lines 2 and 4 entry spaces. H&r block taxes Form 944, Employer's ANNUAL Federal Tax Return: check the box on line 3 and enter “Form 4029” in the empty space below the check box. H&r block taxes Effective date. H&r block taxes   An approved exemption from FICA becomes effective on the first day of the first calendar quarter after the quarter in which you file Form 4029. H&r block taxes The exemption will end on the last day of the calendar quarter before the quarter in which the employer, employee, sect, or division fails to meet the requirements. H&r block taxes Self-Employment Tax: Figuring Net Earnings There are two methods for figuring your net earnings from self-employment as a member of the clergy or a religious worker. H&r block taxes Regular method. H&r block taxes Nonfarm optional method. H&r block taxes You may find Worksheets 1 through 4 helpful in figuring your net earnings from self-employment. H&r block taxes Blank worksheets are in the back of this publication, after the Comprehensive Example. H&r block taxes Regular Method Most people use the regular method. H&r block taxes Under this method, figure your net earnings from self-employment by totaling your gross income for services you performed as a minister, a member of a religious order who has not taken a vow of poverty, or a Christian Science practitioner or reader. H&r block taxes Then, subtract your allowable business deductions and multiply the difference by 92. H&r block taxes 35% (. H&r block taxes 9235). H&r block taxes Use Schedule SE (Form 1040) to figure your net earnings and SE tax. H&r block taxes If you are an employee of a church that elected to exclude you from FICA coverage, figure net earnings by multiplying your church wages shown on Form W-2 by 92. H&r block taxes 35% (. H&r block taxes 9235). H&r block taxes Do not reduce your wages by any business deductions when making this computation. H&r block taxes Use Schedule SE (Form 1040), Section B, to figure your net earnings and SE tax. H&r block taxes If you have an approved exemption, or you are automatically exempt, do not include the income or deductions from ministerial services in figuring your net earnings from self-employment. H&r block taxes Amounts included in gross income. H&r block taxes   To figure your net earnings from self-employment (on Schedule SE (Form 1040)), include in gross income: Salaries and fees for your ministerial services (discussed earlier), Offerings you receive for marriages, baptisms, funerals, masses, etc. H&r block taxes , The value of meals and lodging provided to you, your spouse, and your dependents for your employer's convenience, The fair rental value of a parsonage provided to you (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities) paid to you, and Any amount a church pays toward your income tax or SE tax, other than withholding the amount from your salary. H&r block taxes This amount is also subject to income tax. H&r block taxes   For the income tax treatment of items (2) and (4), see Income Tax: Income and Expenses , later. H&r block taxes Example. H&r block taxes Pastor Roger Adams receives an annual salary of $39,000 as a full-time minister. H&r block taxes The $39,000 includes $5,000 that is designated as a rental allowance to pay utilities. H&r block taxes His church owns a parsonage that has a fair rental value of $12,000 per year. H&r block taxes The church gives Pastor Adams the use of the parsonage. H&r block taxes He is not exempt from SE tax. H&r block taxes He must include $51,000 ($39,000 plus $12,000) when figuring his net earnings for SE tax purposes. H&r block taxes The results would be the same if, instead of the use of the parsonage and receipt of the rental allowance for utilities, Pastor Adams had received an annual salary of $51,000 of which $17,000 ($5,000 plus $12,000) per year was designated as a rental allowance. H&r block taxes Overseas duty. H&r block taxes   Your net earnings from self-employment are determined without any foreign earned income exclusion or the foreign housing exclusion or deduction if you are a U. H&r block taxes S. H&r block taxes citizen or resident alien serving abroad and living in a foreign country. H&r block taxes   For information on excluding foreign earned income or the foreign housing amount, see Publication 54. H&r block taxes Example. H&r block taxes Diane Jones was the minister of a U. H&r block taxes S. H&r block taxes church in Mexico. H&r block taxes She earned $35,000 in that position and was able to exclude it all for income tax purposes under the foreign earned income exclusion. H&r block taxes The United States does not have a social security agreement with Mexico, so Mrs. H&r block taxes Jones is subject to U. H&r block taxes S. H&r block taxes SE tax and must include $35,000 when figuring net earnings from self-employment. H&r block taxes Specified U. H&r block taxes S. H&r block taxes possessions. H&r block taxes    The exclusion from gross income for amounts derived from American Samoa or Puerto Rico does not apply in computing net earnings from self-employment. H&r block taxes Also see Residents of Puerto Rico, the U. H&r block taxes S. H&r block taxes Virgin Islands, Guam, the CNMI, and American Samoa , earlier, under U. H&r block taxes S. H&r block taxes Citizens and Resident and Nonresident Aliens. H&r block taxes Amounts not included in gross income. H&r block taxes   Do not include the following amounts in gross income when figuring your net earnings from self-employment. H&r block taxes Offerings that others made to the church. H&r block taxes Contributions by your church to a tax-sheltered annuity plan set up for you, including any salary reduction contributions (elective deferrals) that are not included in your gross income. H&r block taxes Pension payments or retirement allowances you receive for your past ministerial services. H&r block taxes The rental value of a parsonage or a parsonage allowance provided to you after you retire. H&r block taxes Allowable deductions. H&r block taxes   When figuring your net earnings from self-employment, deduct all your expenses related to your ministerial services performed as a self-employed person. H&r block taxes These are ministerial expenses you incurred while working other than as a common-law employee of the church. H&r block taxes They include expenses incurred in performing marriages and baptisms, and in delivering speeches. H&r block taxes Deduct these expenses on Schedule C or C-EZ (Form 1040), and carry the net amount to line 2 of Schedule SE (Form 1040), Section A or B. H&r block taxes   Wages earned as a common-law employee (explained earlier) of a church are generally subject to self-employment tax unless an exemption is requested, as discussed earlier under Exemption From Self-Employment (SE) Tax . H&r block taxes Subtract any allowable expenses (including unreimbursed employee business expenses) from those wages, include the net amount on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. H&r block taxes Do not complete Schedule C or C-EZ (Form 1040). H&r block taxes However, for income tax purposes, the expenses are allowed only as an itemized deduction on Schedule A (Form 1040) to the extent they exceed 2% of adjusted gross income. H&r block taxes Employee reimbursement arrangements. H&r block taxes   If you received an advance, allowance, or reimbursement for your employee expenses, how you report this amount and your employee expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan. H&r block taxes Ask your employer if you are not sure if it reimburses you using an accountable or a nonaccountable plan. H&r block taxes Accountable plans. H&r block taxes   To be an accountable plan, your employer's reimbursement arrangement must include all three of the following rules. H&r block taxes Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. H&r block taxes You must adequately account to your employer for these expenses within a reasonable period of time. H&r block taxes You must return any excess reimbursement or allowance within a reasonable period of time. H&r block taxes   The reimbursement is not reported on your Form W-2. H&r block taxes Generally, if your expenses equal your reimbursement, you have no deduction. H&r block taxes If your expenses are more than your reimbursement, you can deduct your excess expenses for SE tax and income tax purposes. H&r block taxes Nonaccountable plan. H&r block taxes   A nonaccountable plan is a reimbursement arrangement that does not meet all three of the rules listed under Accountable plans above. H&r block taxes In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan. H&r block taxes Excess reimbursements you fail to return to your employer. H&r block taxes Reimbursement of nondeductible expenses related to your employer's business. H&r block taxes   Your employer will combine any reimbursement paid to you under a nonaccountable plan with your wages, salary, or other compensation and report the combined total in box 1 of your Form W-2. H&r block taxes Since reimbursements under a nonaccountable plan are included in your gross income, you can deduct your related expenses (for SE tax and income tax purposes) regardless of whether they are more than, less than, or equal to your reimbursement. H&r block taxes   For more information on accountable and nonaccountable plans, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. H&r block taxes Married Couple Missionary Team If both spouses are duly ordained, commissioned, or licensed ministers of a church and have an agreement that each will perform specific services for which they are paid jointly or separately, they must divide the self-employment income according to the agreement. H&r block taxes If the agreement is with one spouse only and the other spouse is not paid for any specific duties, amounts received for their services are included only in the self-employment income of the spouse having the agreement. H&r block taxes Earnings Subject to SE Tax For 2013, the maximum net earnings from self-employment subject to social security (old age, survivors, and disability insurance) tax is $113,700 minus any wages and tips you earned that were subject to social security tax. H&r block taxes The tax rate for the social security part is 12. H&r block taxes 4%. H&r block taxes In addition, all of your net earnings are subject to the Medicare (hospital insurance) part of the SE tax. H&r block taxes This tax rate is 2. H&r block taxes 9%. H&r block taxes The combined self-employment tax rate is 15. H&r block taxes 3%. H&r block taxes Additional Medicare Tax. H&r block taxes   Beginning in 2013, a 0. H&r block taxes 9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 for any other filing status. H&r block taxes Medicare wages and self-employment income are combined to determine if income exceeds the threshold. H&r block taxes A self-employment loss is not considered for purposes of this tax. H&r block taxes RRTA compensation is separately compared to the threshold. H&r block taxes For more information, see Form 8959, Additional Medicare Tax, and its separate instructions. H&r block taxes Nonfarm Optional Method You may be able to use the nonfarm optional method for figuring your net earnings from self-employment. H&r block taxes In general, the nonfarm optional method is intended to permit continued coverage for social security and Medicare purposes when your income for the tax year is low. H&r block taxes You may use the nonfarm optional method if you meet all the following tests. H&r block taxes You are self-employed on a regular basis. H&r block taxes You meet this test if your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. H&r block taxes The net earnings can be from either farm or nonfarm earnings or both. H&r block taxes You have used this method less than 5 prior years. H&r block taxes (There is a 5-year lifetime limit. H&r block taxes ) The years do not have to be consecutive. H&r block taxes Your net nonfarm profits were: Less than $5,024, and Less than 72. H&r block taxes 189% of your gross nonfarm income. H&r block taxes If you meet all three tests, use Table 3 to figure your net earnings from self-employment under the nonfarm optional method. H&r block taxes Table 3. H&r block taxes Figuring Nonfarm Net Earnings IF your gross nonfarm income is . H&r block taxes . H&r block taxes . H&r block taxes THEN your net earnings are equal to . H&r block taxes . H&r block taxes . H&r block taxes $6,960 or less Two-thirds of your gross nonfarm income. H&r block taxes More than $6,960 $4,640. H&r block taxes Actual net earnings. H&r block taxes   Multiply your total earnings subject to SE tax by 92. H&r block taxes 35% (. H&r block taxes 9235) to get actual net earnings. H&r block taxes Actual net earnings are equivalent to net earnings under the “Regular Method. H&r block taxes ” More information. H&r block taxes   For more information on the nonfarm optional method, see Publication 334, Tax Guide for Small Business, and the Schedule SE (Form 1040) instructions. H&r block taxes Income Tax: Income and Expenses Some income and expense items are treated the same for both income tax and SE tax purposes and some are treated differently. H&r block taxes Note. H&r block taxes For purposes of this section, references to members of the clergy are only to ministers or members of a religious order. H&r block taxes Income Items The tax treatment of offerings and fees, outside earnings, rental allowances, rental value of a parsonage, earnings of members of religious orders, and foreign earned income is discussed here. H&r block taxes Offerings and Fees If you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc. H&r block taxes , in addition to your salary. H&r block taxes If the offering is made to the religious institution, it is not taxable to you. H&r block taxes Outside Earnings If you are a member of a religious organization and you give your outside earnings to the organization, you still must include the earnings in your income. H&r block taxes However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. H&r block taxes For more information, see Publication 526. H&r block taxes Exclusion of Rental Allowance and Fair Rental Value of a Parsonage Ordained, commissioned, or licensed ministers of the gospel may be able to exclude from income tax the rental allowance or fair rental value of a parsonage that is provided to them as pay for their services. H&r block taxes Services include: Ministerial services, discussed earlier, Administrative duties and teaching at theological seminaries, and The ordinary duties of a minister performed as an employee of the United States (other than as a chaplain in the Armed Forces), a state, possession, political subdivision, or the District of Columbia. H&r block taxes This exclusion applies only for income tax purposes. H&r block taxes It does not apply for SE tax purposes, as discussed earlier under Amounts included in gross income under Self-Employment Tax: Figuring Net Earnings. H&r block taxes Designation requirement. H&r block taxes   The church or organization that employs you must officially designate the payment as a housing allowance before it makes the payment. H&r block taxes It must designate a definite amount. H&r block taxes It cannot determine the amount of the housing allowance at a later date. H&r block taxes If the church or organization does not officially designate a definite amount as a housing allowance, you must include your total salary in your income. H&r block taxes   If you are employed and paid by a local congregation, a resolution by a national church agency of your denomination does not effectively designate a housing allowance for you. H&r block taxes The local congregation must officially designate the part of your salary that is a housing allowance. H&r block taxes However, a resolution of a national church agency can designate your housing allowance if you are directly employed by the national agency. H&r block taxes Rental allowances. H&r block taxes   If you receive in your salary an amount officially designated as a rental allowance (including an amount to pay utility costs), you can exclude the allowance from your gross income if: You use the amount to provide or rent a home, and The amount is not more than reasonable pay for your services. H&r block taxes   The amount you exclude cannot be more than the fair rental value of the home, including furnishings, plus the cost of utilities. H&r block taxes Fair rental value of parsonage. H&r block taxes   You can exclude from gross income the fair rental value of a house or parsonage, including utilities, furnished to you as part of your earnings. H&r block taxes However, the exclusion cannot be more than the reasonable pay for your services. H&r block taxes If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost. H&r block taxes Example. H&r block taxes Rev. H&r block taxes Joanna Baker is a full-time minister. H&r block taxes The church allows her to use a parsonage that has an annual fair rental value of $24,000. H&r block taxes The church pays her an annual salary of $67,000, of which $7,500 is designated for utility costs. H&r block taxes Her actual utility costs during the year were $7,000. H&r block taxes For income tax purposes, Rev. H&r block taxes Baker excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility costs). H&r block taxes She will report $60,000 ($59,500 salary plus $500 of unused utility allowance). H&r block taxes Her income for SE tax purposes, however, is $91,000 ($67,000 salary + $24,000 fair rental value of the parsonage). H&r block taxes Home ownership. H&r block taxes   If you own your home and you receive as part of your salary a housing or rental allowance, you may exclude from gross income the smallest of: The amount actually used to provide a home, The amount officially designated as a rental allowance, or The fair rental value of the home, including furnishings, utilities, garage, etc. H&r block taxes Excess rental allowance. H&r block taxes   You must include in gross income the amount of any rental allowance that is more than the smallest of: Your reasonable salary, The fair rental value of the home plus utilities, or The amount actually used to provide a home. H&r block taxes   Include in the total on Form 1040, line 7. H&r block taxes On the dotted line next to line 7, enter “Excess allowance” and the amount. H&r block taxes You may deduct the home mortgage interest and real estate taxes paid on your home even though you pay all or part of those expenses with funds you get through a tax-free rental or parsonage allowance. H&r block taxes However, you can only deduct these expenses as itemized deductions on Schedule A (Form 1040). H&r block taxes Retired ministers. H&r block taxes   If you are a retired minister, you can exclude from your gross income the rental value of a home (plus utilities) furnished to you by your church as a part of your pay for past services, or the part of your pension that was designated as a rental allowance. H&r block taxes However, a minister's surviving spouse cannot exclude the rental value unless the rental value is for ministerial services he or she performs or performed. H&r block taxes Teachers or administrators. H&r block taxes   If you are a minister employed as a teacher or administrator by a church school, college, or university, you are performing ministerial services for purposes of the housing exclusion. H&r block taxes However, if you perform services as a teacher or administrator on the faculty of a nonchurch college, you cannot exclude from your income a housing allowance or the value of a home that the college provides to you. H&r block taxes    If you live in faculty lodging as an employee of an educational institution or academic health center, all or part of the value of that lodging may be nontaxable under a different rule. H&r block taxes In Publication 525, see Faculty lodging in the discussion on meals and lodging under Fringe Benefits. H&r block taxes   If you serve as a minister of music or minister of education, or serve in an administrative or other function of your religious organization, but are not authorized to perform substantially all of the religious duties of an ordained minister in your church (even if you are commissioned as a minister of the gospel), the housing exclusion does not apply to you. H&r block taxes Theological students. H&r block taxes   If you are a theological student serving a required internship as a part-time or assistant pastor, you cannot exclude a parsonage or rental allowance from your income unless you are ordained, commissioned, or licensed as a minister. H&r block taxes Traveling evangelists. H&r block taxes   You can exclude a designated rental allowance from out-of-town churches if you meet all of the following requirements. H&r block taxes You are an ordained minister. H&r block taxes You perform ministerial services at churches located away from your community. H&r block taxes You actually use the rental allowance to maintain your permanent home. H&r block taxes Cantors. H&r block taxes   If you have a bona fide commission and your congregation employs you on a full-time basis to perform substantially all the religious functions of the Jewish faith, you can exclude a rental allowance from your gross income. H&r block taxes Earnings—Members of Religious Orders Your earnings may be exempt from both income tax and SE tax if you are a member of a religious order who: Has taken a vow of poverty, Receives earnings for services performed as an agent of the order and in the exercise of duties required by the order, and Renounces the earnings and gives them to the order. H&r block taxes See Members of Religious Orders , earlier, under Social Security Coverage. H&r block taxes Foreign Earned Income Certain income may be exempt from income tax if you work in a foreign country or in a specified U. H&r block taxes S. H&r block taxes possession. H&r block taxes Publication 54 discusses the foreign earned income exclusion. H&r block taxes Publication 570, Tax Guide for Individuals With Income From U. H&r block taxes S. H&r block taxes Possessions, covers the rules for taxpayers with income from U. H&r block taxes S. H&r block taxes possessions. H&r block taxes You can get these free publications from the Internal Revenue Service at IRS. H&r block taxes gov or from most U. H&r block taxes S. H&r block taxes Embassies or consulates. H&r block taxes Expense Items The tax treatment of ministerial trade or business expenses, expenses allocable to tax-free income, and health insurance costs is discussed here. H&r block taxes Ministerial Trade or Business Expenses as an Employee When you figure your income tax, you must itemize your deductions on Schedule A (Form 1040) to claim allowable deductions for ministerial trade or business expenses incurred while working as an employee. H&r block taxes You also may have to file Form 2106, Employee Business Expenses (or Form 2106-EZ, Unreimbursed Employee Business Expenses). H&r block taxes You claim these expenses as miscellaneous itemized deductions that are subject to the 2%-of-adjusted-gross-income (AGI) limit. H&r block taxes See Publication 529 for more information on this limit. H&r block taxes However, you cannot deduct any of your employee business expenses that are allocable to tax-free income (discussed next). H&r block taxes Expenses Allocable to Tax-Free Income If you receive a rental or parsonage allowance that is exempt from income tax (tax free), you must allocate a portion of the expenses of operating your ministry to that tax-free income. H&r block taxes You cannot deduct the portion of your expenses that you allocate to your tax-free rental or parsonage allowance. H&r block taxes Exception. H&r block taxes   This rule does not apply to your deductions for home mortgage interest or real estate taxes on your home. H&r block taxes Figuring the allocation. H&r block taxes   Figure the portion of your otherwise deductible expenses that you cannot deduct (because you must allocate that portion to tax-free income) by multiplying the expenses by the following fraction:      Tax-free rental or parsonage allowance     All income (taxable and tax free) earned from your ministry           When figuring the allocation, include the income and expenses related to the ministerial duties you perform both as an employee and as a self-employed person. H&r block taxes    Reduce your otherwise deductible expenses only in figuring your income tax, not your SE tax. H&r block taxes Example. H&r block taxes Rev. H&r block taxes Charles Ashford received $40,000 in earnings for ministerial services consisting of a $28,000 salary for ministerial services performed as an employee, $2,000 for weddings and baptisms performed as a self-employed person, and a $10,000 tax-free parsonage allowance. H&r block taxes He incurred $4,000 of unreimbursed expenses connected with his earnings for ministerial services. H&r block taxes $3,500 of the $4,000 is for employee expenses related to his ministerial salary, and $500 is related to the weddings and baptisms he performed as a self-employed person. H&r block taxes Rev. H&r block taxes Ashford figures the nondeductible (tax-free) portion of expenses related to his ministerial salary as follows: ($10,000 ÷ $40,000) x $3,500 = $875   Rev. H&r block taxes Ashford figures the nondeductible (tax-free) portion of expenses related to his wedding and baptism income as follows: ($10,000 ÷ $40,000) x $500 = $125 Required statement. H&r block taxes   If you receive a tax-free rental or parsonage allowance and have ministerial expenses, attach a statement to your tax return. H&r block taxes The statement must contain all of the following information. H&r block taxes A list of each item of taxable ministerial income by source (such as wages, salary, weddings, baptisms, etc. H&r block taxes ) plus the amount. H&r block taxes A list of each item of tax-free ministerial income by source (parsonage allowance) plus the amount. H&r block taxes A list of each item of otherwise deductible ministerial expenses plus the amount. H&r block taxes How you figured the nondeductible part of your otherwise deductible expenses. H&r block taxes A statement that the other deductions claimed on your tax return are not allocable to your tax-free income. H&r block taxes   See the attachments prepared for the Comprehensive Example , later. H&r block taxes Following the example, you will find blank worksheets for your own use. H&r block taxes Health Insurance Costs of Self-Employed Ministers If you are self-employed, you may be able to deduct the amount you paid in 2013 for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents. H&r block taxes If you qualify, you can take this deduction as an adjustment to income on Form 1040, line 29. H&r block taxes See the Instructions for Form 1040 to figure your deduction. H&r block taxes The following special rules apply to the self-employed health insurance deduction. H&r block taxes You cannot take a medical expense deduction on Schedule A (Form 1040) for any expenses you claim for purposes of the self-employed health insurance deduction. H&r block taxes You cannot take the deduction for any month you are eligible to participate in a subsidized plan of your (or your spouse's) employer. H&r block taxes The deduction cannot exceed your net earnings from the business under which the insurance plan is established. H&r block taxes Your net earnings under this rule do not include the income you earned as a common-law employee (discussed earlier) of a church. H&r block taxes More information. H&r block taxes   For more information about the self-employed health insurance deduction, see chapter 6 in Publication 535. H&r block taxes Deduction for SE Tax You can deduct one-half of your SE tax in figuring adjusted gross income. H&r block taxes This is an income tax deduction only, on Form 1040, line 27. H&r block taxes Do not claim this deduction in figuring net earnings from self-employment subject to SE tax. H&r block taxes Income Tax Withholding and Estimated Tax The federal income tax is a pay-as-you-go tax. H&r block taxes You must pay the tax as you earn or receive income during the year. H&r block taxes An employee usually has income tax withheld from his or her wages or salary. H&r block taxes However, your salary is not subject to federal income tax withholding if both of the following conditions apply. H&r block taxes You are a duly ordained, commissioned, or licensed minister, a member of a religious order (who has not taken a vow of poverty), or a Christian Science practitioner or reader. H&r block taxes Your salary is for ministerial services (see Ministerial Services , earlier). H&r block taxes If your salary is not subject to withholding, or if you do not pay enough tax through withholding, you may need to make estimated tax payments to avoid penalties for not paying enough tax as you earn your income. H&r block taxes You generally must make estimated tax payments if you expect to owe taxes, including SE tax, of $1,000 or more, when you file your return. H&r block taxes Determine your estimated tax by using the worksheets in Publication 505, Tax Withholding and Estimated Tax. H&r block taxes Pay the entire estimated tax for 2014 or the first installment by April 15, 2014. H&r block taxes See Form 1040-ES for the different payment methods. H&r block taxes The April 15 date applies whether or not your tax home and your abode are outside the United States and Puerto Rico. H&r block taxes For more information, see chapter 2 of Publication 505. H&r block taxes If you perform your services as a common-law employee of the church and your salary is not subject to income tax withholding, you can enter into a voluntary withholding agreement with the church to cover any income and SE tax that may be due. H&r block taxes Filing Your Return You must file an income tax return for 2013 if your gross income was at least the amount shown in the third column of Table 4 above. H&r block taxes Table 4. H&r block taxes 2013 Filing Requirements for Most Taxpayers IF your filing status is . H&r block taxes . H&r block taxes . H&r block taxes AND at the end of 2013 you were* . H&r block taxes . H&r block taxes . H&r block taxes THEN file a return if your gross income** was at least . H&r block taxes . H&r block taxes . H&r block taxes single under age 65 65 or older   $10,000 $11,500   married filing jointly*** under 65 (both spouses) 65 or older (one spouse) 65 or older (both spouses)   $20,000  $21,200  $22,400   married filing separately any age   $3,900   head of household under 65 65 or older   $12,850 $14,350   qualifying widow(er) with dependent child under 65 65 or older   $16,100  $17,300   * If you were born on January 1, 1949, you are considered to be age 65 at the end of 2013. H&r block taxes ** Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). H&r block taxes Do not include any social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time in 2013, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). H&r block taxes If (a) or (b) applies, see the instructions for Form 1040, lines 20a and 20b, to figure the taxable part of social security benefits you must include in gross income. H&r block taxes Gross income includes gains, but not losses, reported on Form 8949 or Schedule D (Form 1040). H&r block taxes Gross income from a business means, for example, the amount on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. H&r block taxes But, in figuring gross income, do not reduce your income by any losses, including any loss on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. H&r block taxes *** If you did not live with your spouse at the end of 2013 (or on the date your spouse died) and your gross income was at least $3,900, you must file a return regardless of your age. H&r block taxes Additional requirements. H&r block taxes   Even if your income was less than the amount shown in Table 4, you must file an income tax return on Form 1040, and attach a completed Schedule SE (Form 1040), if:    You are not exempt from SE tax, and you have net earnings from self-employment (discussed earlier under Self-Employment Tax: Figuring Net Earnings ) of $400 or more in the tax year, You are exempt from SE tax on earnings from ministerial services and you have $400 or more of other net earnings subject to SE tax, or You had wages of $108. H&r block taxes 28 or more from an electing church or church-controlled organization (see Coverage of Religious Workers (Church Employees) , earlier, under Social Security Coverage). H&r block taxes Self-employment tax. H&r block taxes   If you are liable for SE tax, you must file Schedule SE (Form 1040) with your return. H&r block taxes   If you filed Form 4361 and did not receive approval from the IRS, you must pay SE tax on your ministerial earnings, as explained earlier. H&r block taxes You should report ministerial earnings and expenses from nonemployee ministerial services on Schedule C or C-EZ (Form 1040). H&r block taxes You should then carry the net amount over to line 2 of Schedule SE (Form 1040), Section A or B. H&r block taxes However, if you were a duly ordained minister who was an employee of a church and you must pay SE tax on the wages you earned for those services, do not report those wages on Schedule C or C-EZ (Form 1040). H&r block taxes Instead, report those wages less any allowable expenses (including any unreimbursed employee business expenses), on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. H&r block taxes Note. H&r block taxes For income tax purposes, the unreimbursed employee business expenses that you incurred as an employee of the church and subtracted from your wages on line 2 of Schedule SE (Form 1040) are allowed only as an itemized deduction on Schedule A (Form 1040) if they exceed 2% of your adjusted gross income. H&r block taxes You cannot deduct these expenses on Schedule C or C-EZ (Form 1040) as a trade or business expense. H&r block taxes Exemption from SE tax. H&r block taxes   If you filed Form 4361 and received IRS approval not to be taxed on your ministerial earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). H&r block taxes Instead, enter “Exempt—Form 4361” on the dotted line next to Form 1040, line 56. H&r block taxes However, if you had net earnings from another trade or business of $400 or more subject to SE tax, see line A at the top of Schedule SE (Form 1040), Section B. H&r block taxes    If you filed Form 4029 and received IRS approval not to be taxed on those earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). H&r block taxes Instead, enter “Exempt—Form 4029” on the dotted line next to Form 1040, line 56. H&r block taxes More information. H&r block taxes   For more information on filing your return, including when and where to file it, see the Instructions for Form 1040. H&r block taxes Retirement Savings Arrangements Retirement savings arrangements are plans that offer you a tax-favored way to save for your retirement. H&r block taxes You generally can deduct your contributions to the plan. H&r block taxes Your contributions and the earnings on them are not taxed until they are distributed. H&r block taxes Retirement plans for the self-employed. H&r block taxes   To set up one of the following plans you must be self-employed. H&r block taxes SEP (simplified employee pension) plan. H&r block taxes SIMPLE (savings incentive match plan for employees) plan. H&r block taxes Qualified retirement plan (also called a Keogh or H. H&r block taxes R. H&r block taxes 10 plan). H&r block taxes   The common-law rules determine whether you are an employee or a self-employed person for purposes of setting up a retirement plan. H&r block taxes See Employment status for other tax purposes under Coverage of Members of the Clergy, earlier. H&r block taxes This result is true even if your compensation for ministerial services (defined earlier) is subject to SE tax. H&r block taxes   For example, if a congregation pays you a salary for performing ministerial services and you are subject to the congregation's control, you generally are a common-law employee. H&r block taxes You are not a self-employed person for purposes of setting up a retirement plan. H&r block taxes This result is true even if your salary is subject to SE tax. H&r block taxes   On the other hand, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services that you report on Schedule C or C-EZ (Form 1040), are earnings from self-employment for all tax purposes. H&r block taxes   For more information on establishing a SEP, SIMPLE, or qualified retirement plan, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). H&r block taxes Individual retirement arrangements (IRAs). H&r block taxes   The traditional IRA and the Roth IRA are two individual retirement arrangements you can use to save money for your retirement. H&r block taxes Generally, your maximum contribution for 2013 to either of these plans (or to a combination of the two) is the smaller of your taxable compensation or $5,500 ($6,500 if you are age 50 or older). H&r block taxes   However, your maximum contribution to a Roth IRA will be further reduced or eliminated if your adjusted gross income is above a certain amount. H&r block taxes You cannot deduct Roth IRA contributions, but if you satisfy certain requirements, all earnings in the Roth IRA are tax free and neither your nondeductible contributions nor any earnings on them are taxable when distributed. H&r block taxes   If you contribute to a traditional IRA, your contribution may be deductible. H&r block taxes However, your deduction may be reduced or eliminated if you or your spouse is covered by an employer retirement plan (including, but not limited to, a SEP, SIMPLE, or qualified retirement plan). H&r block taxes   For more information on IRAs, see Publication 590. H&r block taxes Tax-sheltered annuity plans. H&r block taxes   Church employees, members of religious orders, and duly ordained, commissioned, or licensed ministers working as ministers or chaplains can participate in tax-sheltered annuity (403(b)) plans. H&r block taxes For more
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H&r block taxes 2. H&r block taxes   American Opportunity Credit Table of Contents Introduction Can You Claim the CreditWho Can Claim the Credit Who Cannot Claim the Credit What Expenses QualifyQualified Education Expenses No Double Benefit Allowed Expenses That Do Not Qualify Who Is an Eligible StudentException. H&r block taxes Who Can Claim a Dependent's Expenses Figuring the CreditEffect of the Amount of Your Income on the Amount of Your Credit Refundable Part of Credit Claiming the Credit Introduction For 2013, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. H&r block taxes They are the American opportunity credit (this chapter) and the lifetime learning credit ( chapter 3 ). H&r block taxes This chapter explains: Who can claim the American opportunity credit, What expenses qualify for the credit, Who is an eligible student, Who can claim a dependent's expenses, How to figure the credit, How to claim the credit, and When the credit must be repaid. H&r block taxes What is the tax benefit of the American opportunity credit. H&r block taxes   For the tax year, you may be able to claim an American opportunity credit of up to $2,500 for qualified education expenses paid for each eligible student. H&r block taxes   A tax credit reduces the amount of income tax you may have to pay. H&r block taxes Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. H&r block taxes Forty percent of the American opportunity credit may be refundable. H&r block taxes This means that if the refundable portion of your credit is more than your tax, the excess will be refunded to you. H&r block taxes   Your allowable American opportunity credit may be limited by the amount of your income. H&r block taxes Also, the nonrefundable part of the credit may be limited by the amount of your tax. H&r block taxes Overview of the American opportunity credit. H&r block taxes   See Table 2-1, Overview of the American Opportunity Credit , for the basics of this credit. H&r block taxes The details are discussed in this chapter. H&r block taxes Can you claim more than one education credit this year. H&r block taxes   For each student, you can elect for any year only one of the credits. H&r block taxes For example, if you elect to take the American opportunity credit for a child on your 2013 tax return, you cannot use that same child's qualified education expenses to figure the lifetime learning credit for 2013. H&r block taxes   If you pay qualified education expenses for more than one student in the same year, you can choose to take the American opportunity credit on a per-student, per-year basis. H&r block taxes If you pay qualified education expenses for a student (or students) for whom you do not claim the American opportunity credit, you can use the adjusted qualified education expenses of that student (or those students) in figuring your lifetime learning credit. H&r block taxes This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. H&r block taxes Differences between the American opportunity and lifetime learning credits. H&r block taxes   There are several differences between these two credits. H&r block taxes For example, you can claim the American opportunity credit based on the same student's expenses for no more than 4 tax years, which includes any tax years you claimed the Hope Scholarship Credit for that student. H&r block taxes However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. H&r block taxes The differences between these credits are shown in Appendix B, Highlights of Education Tax Benefits for Tax Year 2013 near the end of this publication. H&r block taxes If you claim the American opportunity credit for any student, you can choose between using that student's adjusted qualified education expenses for the American opportunity credit or the lifetime learning credit. H&r block taxes If you have the choice, the American opportunity credit will always be greater than the lifetime learning credit. H&r block taxes Table 2-1. H&r block taxes Overview of the American Opportunity Credit Maximum credit Up to $2,500 credit per eligible student Limit on modified adjusted gross income (MAGI) $180,000 if married filing jointly; $90,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable 40% of credit may be refundable; the rest is nonrefundable Number of years of postsecondary education Available ONLY if the student had not completed the first 4 years of postsecondary education before 2013 Number of tax years credit available Available ONLY for 4 tax years per eligible student (including any year(s) Hope Scholarship Credit was claimed) Type of program required Student must be pursuing a program leading to a degree or other recognized education credential Number of courses Student must be enrolled at least half time for at least one academic period that begins during the tax year Felony drug conviction As of the end of 2013, the student had not been convicted of a felony for possessing or distributing a controlled substance Qualified expenses Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Can You Claim the Credit The following rules will help you determine if you are eligible to claim the American opportunity credit on your tax return. H&r block taxes Who Can Claim the Credit Generally, you can claim the American opportunity credit if all three of the following requirements are met. H&r block taxes You pay qualified education expenses of higher education. H&r block taxes You pay the education expenses for an eligible student. H&r block taxes The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. H&r block taxes Student qualifications. H&r block taxes   Generally, you can take the American opportunity credit for a student only if all of the following four requirements are met. H&r block taxes As of the beginning of 2013, the student had not completed the first four years of postsecondary education (generally, the freshman through senior years of college), as determined by the eligible educational institution. H&r block taxes For this purpose, do not include academic credit awarded solely because of the student's performance on proficiency examinations. H&r block taxes Neither the American opportunity credit nor the Hope Scholarship Credit has been claimed (by you or anyone else) for this student for any four tax years before 2013. H&r block taxes If the American opportunity credit (and Hope Scholarship Credit) has been claimed for this student for any three or fewer tax years before 2013, this requirement is met. H&r block taxes For at least one academic period beginning (or treated as beginning) in 2013, the student both: Was enrolled in a program that leads to a degree, certificate, or other recognized educational credential; and Carried at least one-half the normal full-time workload for his or her course of study. H&r block taxes The standard for what is half of the normal full-time work load is determined by each eligible educational institution. H&r block taxes However, the standard may not be lower than any of those established by the U. H&r block taxes S. H&r block taxes Department of Education under the Higher Education Act of 1965. H&r block taxes For purposes of whether the student satisfies this third requirement for 2013, treat an academic period beginning in the first three months of 2014 as if it began in 2013 if qualified education expenses for the student were paid in 2013 for that academic period. H&r block taxes See Prepaid expenses, later. H&r block taxes As of the end of 2013, the student had not been convicted of a federal or state felony for possessing or distributing a controlled substance. H&r block taxes Example 1. H&r block taxes Sharon was eligible for the Hope Scholarship Credit for 2007 and 2008 and for the American opportunity credit for 2010 and 2012. H&r block taxes Her parents claimed the Hope Scholarship Credit for Sharon on their tax returns for 2007 and 2008 and claimed the American opportunity credit for Sharon on their 2010 tax return. H&r block taxes Sharon claimed the American opportunity credit on her 2012 tax return. H&r block taxes The American opportunity credit and Hope Scholarship Credit have been claimed for Sharon for four tax years before 2013. H&r block taxes Therefore, the American opportunity credit cannot be claimed by Sharon for 2013. H&r block taxes If Sharon were to file Form 8863 for 2013, she would check “Yes” for Part III, line 23, and would be eligible to claim only the lifetime learning credit. H&r block taxes Example 2. H&r block taxes Wilbert was eligible for the American opportunity credit for 2009, 2010, 2011, and 2013. H&r block taxes His parents claimed the American opportunity credit for Wilbert on their tax returns for 2009, 2010, and 2011. H&r block taxes No one claimed an American opportunity credit or Hope Scholarship Credit for Wilbert for any other tax year. H&r block taxes The American opportunity credit and Hope Scholarship Credit have been claimed for Wilbert for only three tax years before 2013. H&r block taxes Therefore, Wilbert meets the second requirement to be eligible for the American opportunity credit. H&r block taxes If Wilbert were to file Form 8863 for 2013, he would check “No” for Part III, line 23. H&r block taxes If Wilbert meets all of the other requirements, he is eligible for the American opportunity credit. H&r block taxes Example 3. H&r block taxes Glenda enrolls on a full-time basis in a degree program for the 2014 Spring semester, which begins in January 2014. H&r block taxes Glenda pays her tuition for the 2014 Spring semester in December 2013. H&r block taxes Because the tuition Glenda paid in 2013 relates to an academic period that begins in the first 3 months of 2014, her eligibility to claim an American opportunity credit in 2013 is determined as if the 2014 Spring semester began in 2013. H&r block taxes If the requirements above are not met for any student, you cannot take the American opportunity credit for that student. H&r block taxes You may be able to take the lifetime learning credit for part or all of that student's qualified education expenses instead. H&r block taxes Note. H&r block taxes Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you. H&r block taxes “Qualified education expenses” are defined later under Qualified Education Expenses . H&r block taxes “Eligible students” are defined later under Who Is an Eligible Student . H&r block taxes A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . H&r block taxes You may find Figure 2-1, Can You Claim the American Opportunity Credit for 2013 , later, helpful in determining if you can claim an American opportunity credit on your tax return. H&r block taxes This image is too large to be displayed in the current screen. H&r block taxes Please click the link to view the image. H&r block taxes Figure 2-1 Can you claim the American opportunity credit for 2012? Who Cannot Claim the Credit You cannot claim the American opportunity credit for 2013 if any of the following apply. H&r block taxes Your filing status is married filing separately. H&r block taxes You are listed as a dependent on another person's tax return (such as your parents'). H&r block taxes See Who Can Claim a Dependent's Expenses , later. H&r block taxes Your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more in the case of a joint return). H&r block taxes MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . H&r block taxes You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. H&r block taxes More information on nonresident aliens can be found in Publication 519, U. H&r block taxes S. H&r block taxes Tax Guide for Aliens. H&r block taxes What Expenses Qualify The American opportunity credit is based on adjusted qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. H&r block taxes Generally, the credit is allowed for adjusted qualified education expenses paid in 2013 for an academic period beginning in 2013 or beginning in the first three months of 2014. H&r block taxes For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning January 2014, you can use that $1,500 in figuring your 2013 credit. H&r block taxes Academic period. H&r block taxes   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. H&r block taxes In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. H&r block taxes Paid with borrowed funds. H&r block taxes   You can claim an American opportunity credit for qualified education expenses paid with the proceeds of a loan. H&r block taxes Use the expenses to figure the American opportunity credit for the year in which the expenses are paid, not the year in which the loan is repaid. H&r block taxes Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account. H&r block taxes Student withdraws from class(es). H&r block taxes   You can claim an American opportunity credit for qualified education expenses not refunded when a student withdraws. H&r block taxes Qualified Education Expenses For purposes of the American opportunity credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. H&r block taxes Eligible educational institution. H&r block taxes   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. H&r block taxes S. H&r block taxes Department of Education. H&r block taxes It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. H&r block taxes The educational institution should be able to tell you if it is an eligible educational institution. H&r block taxes   Certain educational institutions located outside the United States also participate in the U. H&r block taxes S. H&r block taxes Department of Education's Federal Student Aid (FSA) programs. H&r block taxes Related expenses. H&r block taxes   Student-activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. H&r block taxes   However, expenses for books, supplies, and equipment needed for a course of study are included in qualified education expenses whether or not the materials are purchased from the educational institution. H&r block taxes Prepaid expenses. H&r block taxes   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring an education credit for 2013 only. H&r block taxes See Academic period, earlier. H&r block taxes For example, if you pay $2,000 in December 2013, for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). H&r block taxes    You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). H&r block taxes   In the following examples, assume that each student is an eligible student at an eligible educational institution. H&r block taxes Example 1. H&r block taxes Jefferson is a sophomore in University V's degree program in dentistry. H&r block taxes This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. H&r block taxes Because the equipment rental is needed for his course of study, Jefferson's equipment rental fee is a qualified expense. H&r block taxes Example 2. H&r block taxes Grace and William, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. H&r block taxes The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. H&r block taxes William bought his books from a friend; Grace bought hers at College W's bookstore. H&r block taxes Both are qualified education expenses for the American opportunity credit. H&r block taxes Example 3. H&r block taxes When Kelly enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. H&r block taxes This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and the student government. H&r block taxes No portion of the fee covers personal expenses. H&r block taxes Although labeled as a student activity fee, the fee is required for Kelly's enrollment and attendance at College X and is a qualified expense. H&r block taxes No Double Benefit Allowed You cannot do any of the following. H&r block taxes Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an American opportunity credit based on those same expenses. H&r block taxes Claim an American opportunity credit in the same year that you are claiming a tuition and fees deduction for the same student. H&r block taxes Claim an American opportunity credit for any student and use any of that student's expenses in figuring your lifetime learning credit. H&r block taxes Figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP) using the same expenses you used to figure the American opportunity credit. H&r block taxes See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program. H&r block taxes Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. H&r block taxes See Adjustments to Qualified Education Expenses, next. H&r block taxes Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. H&r block taxes The result is the amount of adjusted qualified education expenses for each student. H&r block taxes Tax-free educational assistance. H&r block taxes   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. H&r block taxes See Academic period, earlier. H&r block taxes   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. H&r block taxes This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). H&r block taxes   If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed, later. H&r block taxes If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed, later. H&r block taxes   Tax-free educational assistance includes: The tax-free parts of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions). H&r block taxes Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. H&r block taxes Generally, any scholarship or fellowship is treated as tax free. H&r block taxes However, a scholarship or fellowship is not treated as tax free to the extent the student includes it in gross income (if the student is required to file a tax return for the year the scholarship or fellowship is received) and either of the following is true. H&r block taxes The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. H&r block taxes The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. H&r block taxes You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. H&r block taxes For examples, see Coordination with Pell grants and other scholarships, later. H&r block taxes Refunds. H&r block taxes   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. H&r block taxes Some tax-free educational assistance received after 2013 may be treated as a refund. H&r block taxes See Tax-free educational assistance, earlier. H&r block taxes Refunds received in 2013. H&r block taxes   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses for 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. H&r block taxes Refunds received after 2013 but before your income tax return is filed. H&r block taxes   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid before you file an income tax return for 2013, the amount of qualified education expenses for 2013 is reduced by the amount of the refund. H&r block taxes Refunds received after 2013 and after your income tax return is filed. H&r block taxes   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid after you file an income tax return for 2013, you may need to repay some or all of the credit. H&r block taxes See Credit recapture, next. H&r block taxes Credit recapture. H&r block taxes    If any tax-free educational assistance for the qualified education expenses paid in 2013, or any refund of your qualified education expenses paid in 2013, is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. H&r block taxes You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. H&r block taxes You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you claimed the refigured credit(s). H&r block taxes Include that amount as an additional tax for the year the refund or tax-free assistance was received. H&r block taxes Example. H&r block taxes   You paid $7,000 tuition and fees in August 2013, and your child began college in September 2013. H&r block taxes You filed your 2013 tax return on February 17, 2014, and claimed an American opportunity credit of $2,500. H&r block taxes After you filed your return, you received a refund of $4,000. H&r block taxes You must refigure your 2013 American opportunity credit using $3,000 of qualified education expenses instead of $7,000. H&r block taxes The refigured credit is $2,250. H&r block taxes The increase to your tax liability is also $250. H&r block taxes Include the difference of $250 as additional tax on your 2014 tax return. H&r block taxes See the instructions for your 2014 income tax return to determine where to include this tax. H&r block taxes If you pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. H&r block taxes Amounts that do not reduce qualified education expenses. H&r block taxes   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. H&r block taxes   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. H&r block taxes The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. H&r block taxes The use of the money is not restricted. H&r block taxes Example 1. H&r block taxes Joan paid $3,000 for tuition and $5,000 for room and board at University X. H&r block taxes The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. H&r block taxes To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. H&r block taxes The terms of the scholarship state that it can be used to pay any of Joan's college expenses. H&r block taxes University X applies the $2,000 scholarship against Joan's $8,000 total bill, and Joan pays the $6,000 balance of her bill from University X with a combination of her student loan and her savings. H&r block taxes Joan does not report any portion of the scholarship as income on her tax return. H&r block taxes In figuring the amount of either education credit (American opportunity or lifetime learning), Joan must reduce her qualified education expenses by the amount of the scholarship ($2,000) because she excluded the entire scholarship from her income. H&r block taxes The student loan is not tax-free educational assistance, so she does not need to reduce her qualified expenses by any part of the loan proceeds. H&r block taxes Joan is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship). H&r block taxes Example 2. H&r block taxes The facts are the same as in Example 1, except that Joan reports her entire scholarship as income on her tax return. H&r block taxes Because Joan reported the entire $2,000 scholarship in her income, she does not need to reduce her qualified education expenses. H&r block taxes Joan is treated as having paid $3,000 in qualified education expenses. H&r block taxes Coordination with Pell grants and other scholarships. H&r block taxes   In some cases, you may be able to reduce your tax liability by including scholarships in income. H&r block taxes If you are claiming an education credit for a claimed dependent who received a scholarship, you may be able to reduce your tax liability if the student includes the scholarship in income. H&r block taxes The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. H&r block taxes Example 1—No scholarship. H&r block taxes Bill Pass, age 28 and unmarried, enrolled full-time in 2013 as a first-year student at a local college to earn a degree in law enforcement. H&r block taxes This was his first year of postsecondary education. H&r block taxes During 2013, he paid $5,600 for his qualified education expenses and $4,400 for his room and board for the fall 2013 semester. H&r block taxes He and the college meet all the requirements for the American opportunity credit. H&r block taxes Bill's AGI and his MAGI, for purposes of figuring his credit, are $30,000. H&r block taxes Bill takes the standard deduction of $5,950 and personal exemption of $3,800, reducing his AGI to taxable income of $20,250. H&r block taxes His income tax liability, before credits, is $2,599 and Bill claims no credits other than the American opportunity credit. H&r block taxes He figures his American opportunity credit based on qualified education expenses of $4,000, which results in a credit of $2,500 and tax after credits of $99. H&r block taxes Example 2—Scholarship excluded from income. H&r block taxes The facts are the same as in Example 1—No scholarship, except that Bill was awarded a $5,600 scholarship. H&r block taxes Under the terms of his scholarship, it may be used to pay any educational expenses, including room and board. H&r block taxes If Bill excludes the scholarship from income, he will be deemed (for purposes of computing his education credit) to have used the scholarship to pay for tuition, required fees, and course materials. H&r block taxes His adjusted qualified education expenses will be zero and he will not have an education credit. H&r block taxes Therefore, Bill's tax after credits would be $2,599. H&r block taxes Example 3—Scholarship partially included in income. H&r block taxes The facts are the same as in Example 2—Scholarship excluded from income. H&r block taxes If, unlike Example 2, Bill includes $4,000 of the scholarship in income, he will be deemed to have used that amount to pay for room and board. H&r block taxes The remaining $1,600 of the $5,600 scholarship will reduce his qualified education expenses and his adjusted qualified education expenses will be $4,000. H&r block taxes Bill's AGI will increase to $34,000, his taxable income will increase to $24,250, and his tax before credits will increase to $3,199. H&r block taxes Based on his adjusted qualified education expenses of $4,000, Bill would be able to claim an American opportunity tax credit of $2,500 and his tax after credits would be $699. H&r block taxes Expenses That Do Not Qualify Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. H&r block taxes This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. H&r block taxes Sports, games, hobbies, and noncredit courses. H&r block taxes   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. H&r block taxes However, if the course of instruction or other education is part of the student's degree program, these expenses can qualify. H&r block taxes Comprehensive or bundled fees. H&r block taxes   Some eligible educational institutions combine all of their fees for an academic period into one amount. H&r block taxes If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed earlier, contact the institution. H&r block taxes The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T, Tuition Statement. H&r block taxes See Figuring the Credit , later, for more information about Form 1098-T. H&r block taxes Who Is an Eligible Student To claim the American opportunity credit, the student for whom you pay qualified education expenses must be an eligible student. H&r block taxes This is a student who meets all of the following requirements. H&r block taxes The student did not have expenses that were used to figure an American opportunity credit in any 4 earlier tax years. H&r block taxes This includes any tax year(s) in which you claimed the Hope Scholarship Credit for the same student. H&r block taxes The student had not completed the first 4 years of postsecondary education (generally, the freshman, sophomore, junior, and senior years of college) before 2013. H&r block taxes For at least one academic period beginning in 2013, the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. H&r block taxes The student has not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of 2013. H&r block taxes These requirements are also shown in Figure 2-2, Who is an Eligible Student for the American Opportunity Credit , later. H&r block taxes Completion of first 4 years. H&r block taxes   A student has completed the first 4 years of postsecondary education if the institution at which the student is enrolled awards the student 4 years of academic credit at that institution for coursework completed by the student before 2013. H&r block taxes This student generally would not be an eligible student for purposes of the American opportunity credit. H&r block taxes Exception. H&r block taxes   Any academic credit awarded solely on the basis of the student's performance on proficiency examinations is disregarded in determining whether the student has completed 4 years of postsecondary education. H&r block taxes Enrolled at least half-time. H&r block taxes   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study. H&r block taxes   The standard for what is half of the normal full-time work load is determined by each eligible educational institution. H&r block taxes However, the standard may not be lower than any of those established by the U. H&r block taxes S. H&r block taxes Department of Education under the Higher Education Act of 1965. H&r block taxes Please click here for the text description of the image. H&r block taxes Figure 2-2 Example 1. H&r block taxes Mack graduated from high school in June 2012. H&r block taxes In September, he enrolled in an undergraduate degree program at College U, and attended full-time for both the 2012 fall and 2013 spring semesters. H&r block taxes For the 2013 fall semester, Mack was enrolled less than half-time. H&r block taxes Because Mack was enrolled in an undergraduate degree program on at least a half-time basis for at least one academic period that began during 2012 and at least one academic period that began during 2013, he is an eligible student for tax years 2012 and 2013 (including the 2013 fall semester when he enrolled at College U on less than a half-time basis). H&r block taxes Example 2. H&r block taxes After taking classes at College V on a part-time basis for a few years, Shelly became a full-time student for the 2013 spring semester. H&r block taxes College V classified Shelly as a second-semester senior (fourth year) for the 2013 spring semester and as a first-semester graduate student (fifth year) for the 2013 fall semester. H&r block taxes Because College V did not classify Shelly as having completed the first 4 years of postsecondary education as of the beginning of 2013, Shelly is an eligible student for tax year 2013. H&r block taxes Therefore, the qualified education expenses paid for the 2013 spring semester and the 2013 fall semester are taken into account in calculating the American opportunity credit for 2013. H&r block taxes Example 3. H&r block taxes During the 2012 fall semester, Larry was a high school student who took classes on a half-time basis at College X. H&r block taxes Larry was not enrolled as part of a degree program at College X because College X only admits students to a degree program if they have a high school diploma or equivalent. H&r block taxes Because Larry was not enrolled in a degree program at College X during 2012, Larry was not an eligible student for tax year 2012. H&r block taxes Example 4. H&r block taxes The facts are the same as in Example 3. H&r block taxes During the 2013 spring semester, Larry again attended College X but not as part of a degree program. H&r block taxes Larry graduated from high school in June 2013. H&r block taxes For the 2013 fall semester, Larry enrolled as a full-time student in College X as part of a degree program, and College X awarded Larry credit for his prior coursework at College X. H&r block taxes Because Larry was enrolled in a degree program at College X for the 2013 fall term on at least a half-time basis, Larry is an eligible student for all of tax year 2013. H&r block taxes Therefore, the qualified education expenses paid for classes taken at College X during both the 2013 spring semester (during which Larry was not enrolled in a degree program) and the 2013 fall semester are taken into account in computing any American opportunity credit. H&r block taxes Example 5. H&r block taxes Dee graduated from high school in June 2012. H&r block taxes In January 2013, Dee enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a travel agent. H&r block taxes Dee completed the program in December 2013, and was awarded a certificate. H&r block taxes In January 2014, she enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a computer programmer. H&r block taxes Dee is an eligible student for both tax years 2013 and 2014 because she meets the degree requirement, the work load requirement, and the year of study requirement for those years. H&r block taxes Who Can Claim a Dependent's Expenses If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim an American opportunity credit for your dependent's expenses for that year. H&r block taxes For you to claim an American opportunity credit for your dependent's expenses, you must also claim an exemption for your dependent. H&r block taxes You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. H&r block taxes IF you. H&r block taxes . H&r block taxes . H&r block taxes THEN only. H&r block taxes . H&r block taxes . H&r block taxes claim an exemption on  your tax return for a  dependent who is an  eligible student you can claim the American opportunity credit based on that dependent's expenses. H&r block taxes The dependent cannot claim the credit. H&r block taxes do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the American opportunity credit. H&r block taxes You cannot claim the credit based on this dependent's expenses. H&r block taxes Expenses paid by dependent. H&r block taxes   If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. H&r block taxes Include these expenses when figuring the amount of your American opportunity credit. H&r block taxes    Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent. H&r block taxes Expenses paid by you. H&r block taxes   If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the American opportunity credit. H&r block taxes If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the American opportunity credit. H&r block taxes Expenses paid by others. H&r block taxes   Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. H&r block taxes In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. H&r block taxes If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. H&r block taxes Example. H&r block taxes In 2013, Ms. H&r block taxes Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. H&r block taxes For purposes of claiming an American opportunity credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. H&r block taxes Unless an exemption for Todd is claimed on someone else's 2013 tax return, only Todd can use the payment to claim an American opportunity credit. H&r block taxes If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2013 tax return, whoever claims the exemption may be able to use the expenses to claim an American opportunity credit. H&r block taxes If anyone else claims an exemption for Todd, Todd cannot claim an American opportunity credit. H&r block taxes Tuition reduction. H&r block taxes    When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. H&r block taxes If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. H&r block taxes For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. H&r block taxes Figuring the Credit The amount of the American opportunity credit (per eligible student) is the sum of: 100% of the first $2,000 of qualified education expenses you paid for the eligible student, and 25% of the next $2,000 of qualified education expenses you paid for that student. H&r block taxes The maximum amount of American opportunity credit you can claim in 2013 is $2,500 multiplied by the number of eligible students. H&r block taxes You can claim the full $2,500 for each eligible student for whom you paid at least $4,000 of adjusted qualified education expenses. H&r block taxes However, the credit may be reduced based on your MAGI. H&r block taxes See Effect of the Amount of Your Income on the Amount of Your Credit , later. H&r block taxes Example. H&r block taxes Jack and Kay Ford are married and file a joint tax return. H&r block taxes For 2013, they claim an exemption for their dependent daughter on their tax return. H&r block taxes Their MAGI is $70,000. H&r block taxes Their daughter is in her junior (third) year of studies at the local university. H&r block taxes Jack and Kay paid qualified education expenses of $4,300 in 2013. H&r block taxes Jack and Kay, their daughter, and the local university meet all of the requirements for the American opportunity credit. H&r block taxes Jack and Kay can claim a $2,500 American opportunity credit in 2013. H&r block taxes This is 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000. H&r block taxes Form 1098-T. H&r block taxes   To help you figure your American opportunity credit, the student should receive Form 1098-T, Tuition Statement. H&r block taxes Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2014. H&r block taxes An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. H&r block taxes However, the amounts in boxes 1 and 2 of Form 1098-T might be different than what you paid. H&r block taxes When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. H&r block taxes   In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student. H&r block taxes    The eligible educational institution may ask for a completed Form W-9S, Request for Student's or Borrower's Taxpayer Identification Number and Certification, or similar statement to obtain the student's name, address, and taxpayer identification number. H&r block taxes Effect of the Amount of Your Income on the Amount of Your Credit The amount of your American opportunity credit is phased out (gradually reduced) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). H&r block taxes You cannot claim an American opportunity credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return). H&r block taxes Modified adjusted gross income (MAGI). H&r block taxes   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. H&r block taxes MAGI when using Form 1040A. H&r block taxes   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. H&r block taxes MAGI when using Form 1040. H&r block taxes   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. H&r block taxes You can use Worksheet 2-1, next, to figure your MAGI. H&r block taxes    Worksheet 2-1. H&r block taxes MAGI for the American Opportunity Credit 1. H&r block taxes Enter your adjusted gross income  (Form 1040, line 38)   1. H&r block taxes   2. H&r block taxes Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. H&r block taxes       3. H&r block taxes Enter your foreign housing deduction (Form 2555, line 50)   3. H&r block taxes       4. H&r block taxes Enter the amount of income from Puerto Rico you are excluding   4. H&r block taxes       5. H&r block taxes Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. H&r block taxes       6. H&r block taxes Add the amounts on lines 2, 3, 4, and 5   6. H&r block taxes   7. H&r block taxes Add the amounts on lines 1 and 6. H&r block taxes  This is your modified adjusted  gross income. H&r block taxes Enter here and  on Form 8863, line 3   7. H&r block taxes   Phaseout. H&r block taxes   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 2-7, of Form 8863, Part I. H&r block taxes The same method is shown in the following example. H&r block taxes Example. H&r block taxes You are filing a joint return and your MAGI is $165,000. H&r block taxes In 2013, you paid $5,000 of qualified education expenses. H&r block taxes You figure a tentative American opportunity credit of $2,500 (100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000 of qualified education expenses). H&r block taxes Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($2,500) by a fraction. H&r block taxes The numerator of the fraction is $180,000 (the upper limit for those filing a joint return) minus your MAGI. H&r block taxes The denominator is $20,000, the range of incomes for the phaseout ($160,000 to $180,000). H&r block taxes The result is the amount of your phased out (reduced) American opportunity credit ($1,875). H&r block taxes      $2,500 × $180,000 − $165,000  $20,000 = $1,875   Refundable Part of Credit Forty percent of the American opportunity credit is refundable for most taxpayers. H&r block taxes However, if you were under age 24 at the end of 2013 and the conditions listed below apply to you, you cannot claim any part of the American opportunity credit as a refundable credit on your tax return. H&r block taxes Instead, your allowed credit (figured on Form 8863, Part II) will be used to reduce your tax as a nonrefundable credit only. H&r block taxes You do not qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you. H&r block taxes You were: Under age 18 at the end of 2013, or Age 18 at the end of 2013 and your earned income (defined below) was less than one-half of your support (defined below), or Over age 18 and under age 24 at the end of 2013 and a full-time student (defined below) and your earned income (defined below) was less than one-half of your support (defined below). H&r block taxes At least one of your parents was alive at the end of 2013. H&r block taxes You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2013. H&r block taxes Earned income. H&r block taxes   Earned income includes wages, salaries, professional fees, and other payments received for personal services actually performed. H&r block taxes Earned income includes the part of any scholarship or fellowship that represents payment for teaching, research, or other services performed by the student that are required as a condition for receiving the scholarship or fellowship. H&r block taxes Earned income does not include that part of the compensation for personal services rendered to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. H&r block taxes   If you are a sole proprietor or a partner in a trade or business in which both personal services and capital are material income-producing factors, earned income also includes a reasonable allowance for compensation for personal services, but not more than 30% of your share of the net profits from that trade or business (after subtracting the deduction for one-half of self-employment tax). H&r block taxes However, if capital is not an income-producing factor and your personal services produced the business income, the 30% limit does not apply. H&r block taxes Support. H&r block taxes   Your support includes food, shelter, clothing, medical and dental care, education, and the like. H&r block taxes Generally, the amount of the item of support will be the amount of expenses incurred by the one furnishing such item. H&r block taxes If the item of support is in the form of property or lodging, measure the amount of such item of support by its fair market value. H&r block taxes However, a scholarship received by you is not considered support if you are a full-time student. H&r block taxes See Publication 501 for details. H&r block taxes Full-time student. H&r block taxes   You are a full-time student for 2013 if during any part of any 5 calendar months during the year you were enrolled as a full-time student at an eligible educational institution (defined earlier), or took a full-time, on-farm training course given by such an institution or by a state, county, or local government agency. H&r block taxes Claiming the Credit You claim the American opportunity credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. H&r block taxes Enter the nonrefundable part of the credit on Form 1040, line 49, or on Form 1040A, line 31. H&r block taxes Enter the refundable part of the credit on Form 1040, line 66, or on Form 1040A, line 40. H&r block taxes A filled-in Form 8863 is shown at the end of this publication. H&r block taxes Note. H&r block taxes In Appendix A. H&r block taxes at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return. H&r block taxes Prev  Up  Next   Home   More Online Publications