Archive for Education Expense

American Opportunity Credit

June 20, 2011 John R. Dundon II Education Expense, Tax Credit

Under the American Recovery and Reinvestment Act (ARRA), more parents and students will qualify over the next two years for a tax credit, the American opportunity credit, to pay for college expenses.

The American opportunity credit is not available on the 2008 returns taxpayers are filing during 2009. The new credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.

Special rules apply to a student attending college in a Midwestern disaster area. For tax-year 2009, only, taxpayers can choose to claim either a special expanded Hope credit of up to $3,600 for the student or the regular American opportunity credit.

If you have questions about the American opportunity credit, these questions and answers might help. For more information, see American opportunity credit.

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Charitable Deduction of Parochial School Tuition

September 9, 2010 John R. Dundon II Charitable Contribution, Child Tax, Education Expense, Family, Student Loan, Tax Deductible Expenses, Tax Problems & Requests, Tax Relief

Meir Katz (J.D. 2010, Georgetown) has posted The Economics of § 170: A Case for the Charitable Deduction of Parochial School Tuition on SSRN. It is fascinating.

Here is the abstract:

That payments for parochial school tuition are not deductible under § 170 is a foregone conclusion in the eyes of many tax policy scholars. Tuition provides an easy case because the donor receives something of great value in return for his donation: the education of his children. This Article questions that conclusion. By taking a close look at the economics behind these tuition payments in the context of a discrete population, the religious Jewish community, I show that traditional economic assumptions are inappropriate for analysis of those payments. Rather than a traditional economic exchange for economically valuable services, tuition payments should be characterized as payments made for unique and vital religious services-payments in exchange for an intangible religious benefit. The benefit of education, so characterized, is not different from many other intangible religious benefits for which corresponding payments are fully deductible. With that observation, I apply traditional tax policy analysis and the policy justifications for § 170 to payments for parochial school tuition and present an argument for the deduction of tuition payments.

John R. Dundon, EA – 720-234-1177 – www.1040.com/jd – jddundon@comcast.net – Enrolled with the United States Department of Treasury to Practice before the IRS – Enrolled Agent # 85353. Under contract with the IRS as a Certified Individual Taxpayer Identification Number (ITIN) Acceptance Agent – I am a Federally Authorized Tax Practitioner (USC 31 Section 330 + IRC 7525a.3.A) regulated under US Treasury Cir. 230.

http://prep.1040.com/jd

http://johndundon.taxtutor.com

jddundon@comcast.net
720-234-1177

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American Opportunity Tax Credit

August 27, 2010 John R. Dundon II Education Expense, Family, Tax Credit

There is still time left to take advantage of the American Opportunity Tax Credit, a credit that will help many parents and college students offset the cost of college. This tax credit is part of the American Recovery and Reinvestment Act of 2009 and is available through December 31, 2010. It can be claimed by eligible taxpayers for college expenses paid in 2009 and 2010.

  1. This credit, which expands and renames the existing Hope Credit, can be claimed for qualified tuition and related expenses that you pay for higher education in 2009 and 2010. Qualified tuition and related expenses include tuition, related fees, books and other required course materials.

  2. The credit is equal to 100 percent of the first $2,000 spent per student each year and 25 percent of the next $2,000. Therefore, the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualifying expenses for an eligible student.

  3. The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return. The credit is gradually reduced, however, for taxpayers with incomes above these levels.

  4. Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back.

  5. The credit can be claimed for qualified expenses paid for any of the first four years of post-secondary education.

  6. You cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.

    Links:

    Tax Benefits for Education: Information Center

    Publication 970, Tax Benefits for Education

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Health Care and Education Reconciliation Act

April 5, 2010 John R. Dundon II Education Expense, FICA, Health Care Tax Credit

As widely anticipated, President Obama signed the Health Care and Education Reconciliation Act (HR 4872) into law earlier this week. The new law makes material changes to the tax law elements of the new health care legislation signed into law last week and also ends—at least for a time—legislative wrangling on health care. Moving forward, several federal agencies, including IRS, will step in to implement health care reform and issue regulations.

Speaking of administration, IRS will find itself on the hook to oversee a substantial chunk of the health care program, including taxes (and penalties) on both individuals and employers as well as exemptions to those taxes and information reporting requirements. Commissioner Shulman has indicated the Service plans to focus immediately on providing guidance on the newly-created health insurance coverage small business tax credit.

Generally, qualified small employers (those with 25 or fewer employees and average annual wages of $50,000 or less) must contribute at least half of the cost of participating employees’ health insurance premiums. However, from 2010 until 2013, the qualified small businesses may be eligible for a tax credit of up to 35 percent of the business’ contribution. More details on the small employer credit is available on IRS’ website.

Now that both pieces of health care legislation have been passed into law, we know that roughly $438 billion of tax changes will occur over the next eight years. More specifically, the timeframe looks like this:

2010

  • Ten percent excise tax on indoor tanning services begins July 1.

  • Adoption tax credit is made refundable, effective Jan. 1, 2010; the thresholds for qualifying expenses are increased; and the adoption credit is extended through 2011.

  • §833 is modified to reduce the value of deductions from revenues to put additional pressure on Blue Cross and Blue Shield organizations to increase their share of spending on medical reimbursements or lose special tax breaks granted to them in the 1986 tax reform.

  • Forgiven student debts for medical professionals that have participated in a program to bring medical care to underserved areas are excluded from taxable income beginning in the 2009 tax year.

2011

  • Employers are no longer allowed to deduct from their taxes the value of benefits bought for retirees with government subsidies in order to provide retiree prescription drug coverage under Medicare Part D.

  • Businesses must begin reporting the value of health care benefits on employees’ W-2 statements.

  • Money in flexible spending arrangements, health savings accounts, and other health reimbursement arrangements cannot be used for over-the-counter medicines unless they are prescribed by a doctor.

  • The penalty for using health savings account funds for non-qualified uses will rise to 20 percent from 10 percent.

2012

  • New information reporting is required for businesses making payments to corporations in excess of $600 over the course of a calendar year.

2013

  • A new 0.9 percent surtax will be tacked onto the 1.45 percent Hospital Insurance (HI) payroll taxes paid by individuals earning more than $200,000 per year or joint filers earning more than $250,000 per year. The thresholds are not indexed for inflation.

  • A 3.8 percent tax will be imposed on unearned income of individuals earning more than $200,000 per year ($250,000 for joint filers).

  • The threshold for claiming medical expense deductions rises from 7.5 percent of adjusted gross income to 10 percent. The threshold for deductions will remain at 7.5 percent of income for individuals 65 or older until 2016.

  • Contributions to health care flexible spending arrangements will be limited to $2,500 as of Jan. 1, 2013. The cap would be indexed to consumer price inflation beginning in 2014.

    2018

  • A 40 percent excise tax on high-cost (aka “Cadillac”) health insurance plans goes into effect. The tax, paid by insurers or self-insured firms, is on the amount in excess of $10,200 for individuals and $27,500 for families.

Collectively, these are significant tax changes, both for enrolled agents, who will need to interpret the new law and advise clients, and for IRS, which will be required to oversee, administer, and provide a new regulatory and compliance framework. We’ll continue to revisit the changes and what they mean for EAs, taxpayers, and tax administration.

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Tax Credits for Education Expenses

February 15, 2010 John R. Dundon II Dependent, Education Expense, Student Loan, Tax Credit

College can be very expensive. To help students and their parents, the IRS offers the following five ways to offset education costs.

  1. The American Opportunity Credit This credit can help parents and students pay part of the cost of the first four years of college. The American Recovery and Reinvestment Act modifies the existing Hope Credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Eligible taxpayers may qualify for the maximum annual credit of $2,500 per student. Generally, 40 percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.

  2. The Hope Credit The credit can help students and parents pay part of the cost of the first two years of college. This credit generally applies to 2008 and earlier tax years. However, for tax year 2009 a special expanded Hope Credit of up to $3,600 may be claimed for a student attending college in a Midwestern disaster area as long as you do not claim an American Opportunity Tax Credit for any other student in 2009.

  3. The Lifetime Learning Credit This credit can help pay for undergraduate, graduate and professional degree courses – including courses to improve job skills – regardless of the number of years in the program. Eligible taxpayers may qualify for up to $2,000 – $4,000 if a student in a Midwestern disaster area – per tax return.

  4. Enhanced benefits for 529 college savings plans Certain computer technology purchases are now added to the list of college expenses that can be paid for by a qualified tuition program, commonly referred to as a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services.

  5. Tuition and fees deduction Students and their parents may be able to deduct qualified college tuition and related expenses of up to $4,000. This deduction is an adjustment to income, which means the deduction will reduce the amount of your income subject to tax. The Tuition and Fees Deduction may be beneficial to you if you do not qualify for the American opportunity, Hope, or lifetime learning credits.

Important Notes

  • You cannot claim the American Opportunity and the Hope and Lifetime Learning Credits for the same student in the same year.

  • You also cannot claim any of the credits if you claim a tuition and fees deduction for the same student in the same year.

  • To qualify for an education credit, you must pay post-secondary tuition and certain related expenses for yourself, your spouse or your dependent.

  • The credit may be claimed by the parent or the student, but not by both.

  • Students who are claimed as a dependent cannot claim the credit.

See Also at http://www.irs.gov/
Form 8863, Education Credits (PDF 82K)
Publication 970, Tax Benefits for Education (PDF 368K)

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Tax Credit for Higher Education Expenses

January 20, 2010 John R. Dundon II Education Expense, Tax Credit, Tax Guidance & Preparation

The American Recovery and Reinvestment Act was passed in early 2009 and created the American Opportunity Credit. This educational tax credit – which expanded the existing Hope credit – helps parents and students pay for college and college-related expenses.
Here are facts the Internal Revenue Service wants you to know about this valuable credit and how you can benefit from it when you file your 2009 taxes.

  • The credit can be claimed for tuition and certain fees paid for higher education in 2009 and 2010.

  • The American Opportunity Credit can be claimed for expenses paid for any of the first four years of post-secondary education.

  • The credit is worth up to $2,500 and is based on a percentage of the cost of qualified tuition and related expenses paid during the taxable year for each eligible student. This is a $700 increase from the Hope Credit.

  • The term “qualified tuition and related expenses” has been expanded to include expenditures for required course materials. For this purpose, the term “course materials” means books, supplies and equipment required for a course of study.

  • Taxpayers will receive a tax credit based on 100 percent of the first $2,000 of tuition, fees and course materials paid during the taxable year, plus 25 percent of the next $2,000 of tuition, fees and course materials paid during the taxable year.

  • Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back.

  • To be eligible for the full credit, your modified adjusted gross income must be $80,000 or less — $160,000 or less for joint filers.

  • The credit begins to decrease for individuals with incomes above $80,000 or $160,000 for joint filers and is not available for individuals who make more than $90,000 or $180,000 for joint filers.

  • The credit is claimed using Form 8863, Education Credits, (American Opportunity, Hope, and Lifetime Learning Credits), and is attached to Form 1040 or 1040A.

  • For more information about the American Opportunity Tax Credit visit the IRS Web site at IRS.gov/recovery.

Links
The American Recovery and Reinvestment Act of 2009: Information Center
American Opportunity Credit
Form 8863, Education Credits

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Tax treatment for your children

January 13, 2010 John R. Dundon II Adoption, Child Tax, Children, Earned Income Tax Credit, Education Expense, Estimated Taxes, Gift Tax, Refundable Tax Credit, Student Loan, Tax Credit, Tax Deductible Expenses, Tax Guidance & Preparation, Tax Relief, Uncategorized

Got Kids? They may have an impact on your tax situation. Listed below are the top 10 things the IRS wants you to consider if you have children.

  1. Dependents In most cases, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

  2. Child Tax Credit You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may give you a refund even if you do not owe any tax. For more information see IRS Publication 972, Child Tax Credit.

  3. Child and Dependent Care Credit You may be able to claim the credit if you pay someone to care for your child under age 13 so that you can work or look for work. For more information see IRS Publication 503, Child and Dependent Care Expenses.

  4. Earned Income Tax Credit The EITC is a benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund. For more information see IRS Publication 596, Earned Income Credit.

  5. Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. For more information see the instructions for IRS Form 8839, Qualified Adoption Expenses.

  6. Children with Earned Income If your child has income earned from working they may be required to file a tax return. For more information see IRS Publication 501.

  7. Children with Investment Income Under certain circumstances a child’s investment income may be taxed at the parent’s tax rate. For more information see IRS Publication 929, Tax Rules for Children and Dependents.

  8. Coverdell Education Savings Account This savings account is used to pay qualified educational expenses at an eligible educational institution. Contributions are not deductible, however, qualified distributions generally are tax-free. For more information see IRS Publication 970, Tax Benefits for Education.

  9. Higher Education Credits Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar-for-dollar, unlike a deduction, which reduces your taxable income. For more information see IRS Publication 970.

  10. Student Loan Interest You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions. For more information see IRS Publication 970.

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New Tax Court Ruling on Deducting Cost of an MBA

December 4, 2009 John R. Dundon II Education Expense, Tax Court

The Tax Court yesterday allowed a nurse to deduct the cost of an M.B.A. degree from the University of Phoenix. Singleton-Clarke v. Commissioner, T.C. Summ. Op. 2009-182 (Dec. 2, 2009) (citations omitted):

Petitioner began taking courses at the University of Phoenix in March 2005, graduating in April 2008 with an MBA/HCM. She chose the University of Phoenix because the institution allowed students to complete the program via online courses, which was a major priority for petitioner.
Petitioner enrolled in the program to become more effective in her then-present duties. She realized that nursing had evolved greatly in the 24 years since she earned her bachelor’s degree, and she felt disadvantaged working with highly educated doctors. Petitioner believed that although an MBA was not required for her job, the degree would give her greater credibility and the courses would make her more effective in her present and future role as a quality control coordinator.

The University of Phoenix MBA/HCM provides students “with the business management skills needed to manage successfully in today’s health care delivery systems.” …
An MBA degree is different from a degree that serves as foundational qualification to attain a professional license. For instance, this Court had denied deductions for law school expenses, because a law degree qualifies a taxpayer for the new trade or business of being a lawyer.
An MBA is a more general course of study that does not lead to a professional license or certification. This Court has had differing outcomes when deciding whether a taxpayer may deduct education expenses related to pursing an MBA, depending on the facts and circumstances of each case. The decisive factor generally is whether the taxpayer was already established in their trade or business. …

Analyzing petitioner’s situation, her facts and circumstances far more closely resemble the cases that allowed a deduction for pursuing an MBA. Petitioner is unlike the student in Link, who went straight from his undergraduate degree into an MBA program, and the officer in Schneider, who went straight from the Army into an MBA program. Petitioner is considerably closer in circumstance to the taxpayers in Sherman, Allemeier, and Blair, who had 2 years, 3 years, and 1 year, respectively, of experience performing tasks and activities in their chosen professions before beginning their MBA programs. The facts in favor of petitioner are even stronger than those in the three cases above where the taxpayers prevailed. Petitioner worked for 1 year as a quality control coordinator and had more than 20 years of directly related work experience, gaining vast clinical and managerial knowledge in acute and subacute health care settings, before beginning the University of Phoenix MBA/HCM program.

In summary, the MBA/HCM may have improved petitioner’s preexisting skill set, but objectively, she was already performing the tasks and activities of her trade or business before commencing the MBA. For all of the above reasons, we find that petitioner’s MBA/HCM did not qualify her for a new trade or business, and we hold, therefore that petitioner may deduct her education expenses for 2005.

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