Final answer:
Marsha and Jeff can claim a $4,000 education credit for Josh's $5,000 State University tuition but cannot deduct the $1,000 for books. The American Opportunity Tax Credit reduces their tax liability by a maximum of $2,500, which they are eligible for due to their modified AGI being $135,000.
Step-by-step explanation:
Marsha and Jeff can deduct $4,000 for their son Josh's tuition at State University. They cannot deduct the cost of books unless they are a required part of the tuition fees and none of the material excerpts provided mention such a condition. The American Opportunity Tax Credit (AOTC) allows them to claim a credit for a portion of their son's tuition expenses. Given that their modified AGI is $135,000, they are under the threshold for a full credit.
The AOTC offers a credit for 100% of the first $2,000 and 25% of the next $2,000 in qualifying education expenses, maxing out at $2,500. Since the tuition was $5,000, which is more than the $4,000 needed to max out this credit, the full $2,500 AOTC can be claimed. But this is a credit rather than a deduction, meaning it is a dollar-for-dollar reduction in their tax bill rather than a reduction in taxable income.