Archive for Education Expense
January 2, 2013 John R. Dundon II Capital Gain, Charitable Contribution, Children, Earned Income Tax Credit, Education Expense, Estate Tax, Paying Taxes, Payroll Tax Problems, Self Employ, Small Business, Social Security Tax, Tax Filing Status, Tax Guidance & Preparation, Tax Preparer, Tax Problems & Requests, Tax Relief, Taxable Income Our esteemed President has proven to me to be extraordinarily disingenuous with his statements about the middle class and their purported tax obligations as pretty much everyone’s taxes will go up in 2013 as a direct result of the cumulative efforts of our ‘elected officials’ over the last few days. Please don’t get me wrong as I find the man’s leadership in most regards to be much more stoic than any other President in my life time.
What I find particularly galling however is that everyone it seems from pundits to established economists speak about the need to create jobs in America as the best way to reduce the deficit. I believe as a matter of principal that the best way to create jobs from a policy or legislative perspective is to drastically reduce employment tax and to completely eliminate self employment tax as these are some of the biggest costs and risks associated with being an employer or job creator.
Either way if you would like to read the actual legislation a pdf version can be found here at the US Government Printing Office and summaries can be found here at the Library of Congress. The following are some highlights of what to expect:
Starting in 2013, there will be a new 39.6% rate placed on these thresholds:
Married Filing Jointly: $450,000 of taxable income
Qualifying Widow(er): $450,000 of taxable income
Head of Household: $425,000 of taxable income
Single: $400,000 of taxable income
Married Filing Separately: $225,000 of taxable income
Starting in 2013 the tax rates on long-term gains would be:
0% if income falls below the 25% tax bracket
15% if income falls at or above the 25% tax bracket but below the new 39.6% rate
20% if income falls in the 39.6% tax bracket
The Senate proposes the following AMT exemption amounts for 2012 indexed for inflation starting after 2012:
Married Filing Jointly: $78,750
Qualifying Widow(er): $78,750
Single: $50,600
Head of Household: $50,600
Married Filing Separately: $39,375
The proposed threshold amounts at which itemized deductions would start to be limited are:
Married Filing Jointly: $300,000 of AGI
Qualifying Widow(er): $300,000 of AGI
Head of Household: $275,000 of AGI
Single: $250,000 of AGI
Married Filing Separately: $150,000 of AGI
The Senate proposes to re-instate the personal exemption phase-out starting in 2013. Taxpayers would see their total personal exemptions reduced by two percent for each $2,500 by which adjusted gross income exceeds the threshold. The proposed threshold amounts for 2013:
Married Filing Jointly: $300,000 of AGI
Qualifying Widow(er): $300,000 of AGI
Head of Household: $275,000 of AGI
Single: $250,000 of AGI
Married Filing Separately: $150,000 of AGI
The Senate proposes that the following tax provisions be extended through the end of the year 2017:
American Opportunity Credit
Child Tax Credit at $1,000 maximum and partially refundable
Earned Income Credit for 3 or more dependents
The following provisions would be extended through 2013:
Educator expenses deduction
Exclusion for cancellation of debt on primary residences
Mass transit and parking benefits excluded from income set at maximum of $175 per month.
Mortgage insurance premium deduction
Deduction for state and local sales taxes
Charitable deduction for donating real property for conservation purposes
Tuition and fees deduction
Exclusion for charitable distributions from individual retirement accounts
A new client came to me this week – husband/wife – filing a joint tax return. Their son a full time 21 year old student with some earned income but not enough to provide for over one half of his own support. The son meets all the requirements to qualify for the American Opportunity Credit.
The question posed to me was would it be better for the parents to not claim the dependency exemption for their son on their return because their income exceeds the threshold to receive a benefit from the education expenses incurred by the son. And the follow up question was if the son can claim the American Opportunity Credit for the education expenses incurred, would he also qualify for the refundable portion of the credit?
To answer this I referred to the instructions on IRS Form 8863, where I learned a taxpayer who is under age 24 does not qualify for the refundable portion of the American Opportunity Credit if the taxpayer was: Under age 18 at the end of 2011, or Age 18 at the end of 2011 and earned income was less than one-half of required support, or Over age 18 and under age 24 at the end of 2011 and a full-time student and earned income was less than one-half your support. At least one parent was alive at the end of 2011. And for tax year 2011, a joint return is not filed.
The answer then is it is better for the parents to take the son as the dependent as they were in a higher tax bracket. The son would not qualify for the refundable portion of the credit.
According to IRS Publication 970 the modified version of the Hope Credit is now referred to as the American Opportunity Tax Credit (AOTC) and extended through 2012. The AOTC is available for the first four years of post-secondary education. It has been expanded so that qualified tuition and related expenses now include expenses for course books, supplies, and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance. Additionally:
• The credit is equal to 100% of the first $2,000 spent and twenty-five percent of the next $2,000 per student each year. The full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualifying expenses for an eligible student.
• 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.
• You cannot claim the tuition and fees tax deduction in the same year that you claim the AOTC or the Lifetime Learning Credit. You must choose to either take the credit or the deduction, whichever is more beneficial.
The Lifetime Learning Credit helps parents and students pay for post-secondary education. The Lifetime Learning Credit is a tax credit for any person who takes college classes. It provides a tax credit of up to $2,000 on the first $10,000 of college tuition and fees. You can claim the Lifetime Learning Credit on your tax return if you, your spouse, or your dependents are enrolled at an eligible educational institution and you were responsible for paying college expenses. Unlike the Hope Credit, the person need not be enrolled at least half-time. Even if you took only one class, you may take advantage of the Lifetime Learning Credit.
There is no limit on the number of years the Lifetime Learning Credit can be claimed for each student. However, you cannot claim the AOTC and Lifetime Learning Credit for the same student in one year. The Lifetime Learning Credit in my opinion may be particularly helpful to graduate students, students who are only taking one course, and those who are not pursuing a degree.
Generally, you can claim the Lifetime Learning Credit if all three of the following requirements are met:
1. You pay qualified education expenses of higher education.
2. You pay the education expenses for an eligible student. The eligible student is yourself, your spouse, or a dependent for which you claim an exemption on your tax return.
3. If you are eligible to claim the Lifetime Learning Credit and also eligible to claim the AOTC for the same student in the same year, you can choose to claim either credit, but not both.
If you pay qualified education expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. This means that you can claim the AOTC for one student and the Lifetime Learning Credit for another student in the same year. Both Credits are claimed on IRS Form 8863 and answers to additional questions can be found here.
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.
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.
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.
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.
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.
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.
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.
The credit can be claimed for qualified expenses paid for any of the first four years of post-secondary education.
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:
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.
College can be very expensive. To help students and their parents, the IRS offers the following five ways to offset education costs.
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.
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.
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.
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.
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)
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
