Your friends, Randy and Karen Smith live in Atlanta, Georgia and have two children, Jill and Jack. In the fall of 2017, Jack (age 19) began his freshman year at Clemson University and lives in on-campus housing. Randys parents (Jacks grandparents) paid the tuition and other required fees of $34,000 for the 2017-2018 academic year directly to the school in 2017. A total of $17,000 was paid in August, 2017 (for fall semester) and another $17,000 was paid in December, 2017 (for spring 2018 semester). Randy and Karen Smith paid for Jacks room and board in the amount of $11,000 while Jack paid for his own books and supplies amounting to $1,600. For the upcoming 2018-2019 academic year, Jack has obtained a student loan that covers approximately 30% of the projected $35,000 tuition cost (for both fall and spring semesters). Randy has borrowed funds from a home equity line of credit that he will use to pay the remainder of the tuition and any other fees directly to the school, as well as the room and board. Jack is expected to pay for his own books. Jack is a full-time student and is properly claimed as a dependent by Randy and Karen.

Jill began college a few years ago, but did not complete a degree. This past spring (2018), Jill began attending Kennesaw State University. Because she works, Jill enrolled for only 2 classes (6 credit hours) for that semester. KSU allowed her to transfer enough credits from her other school to qualify her as a first semester sophomore. This fall (2018), Jill has enrolled full-time at KSU taking 15 hours. The Smiths have paid a total of $10,500 that includes her spring 2018 and fall 2018 tuition, and $700 for books and supplies. Randy will continue to pay all of Jills tuition, books, and other required fees to attend KSU. Jill lives at home and the Smiths have provided over half of her support since 2014. Jill is 27 years old and makes $6,500 from a part-time job.

The Smiths have not yet filed their tax return for 2017 (because it is on extension) and they have asked you what, if any, of the education related costs for both children can be claimed on their 2017 as well as their 2018 income tax returns. The Smiths AGI for 2017 was $130,000 before any tuition costs, and their expected AGI for 2018 is $140,000 before any tuition expenses.

Required:

Using the RIA Checkpoint Electronic Tax Research Database, locate the appropriate code sections and accompanying regulations and write a client letter to the Smiths to address the following questions. Your client letter should be single spaced and follow the format outlined in class and in the textbook.

On a separate page, provide support of your analysis in the tax file memo by listing the appropriate authorities that you used a reference.

What are the amounts, and the types of education credits that may be available in 2017 and 2018 to the Smiths?

What is the distinction between the education credits and the tuition deduction for 2017?

Who is entitled to the credits or deductions in 2017 and 2018?

What tax benefits (if any) are available to the grandparents for their tuition payments in 2017?

Is there any additional information that you should obtain from the Smiths that would assist you in your research? (If so, include that request in your letter to the Smiths).