Using Tax Credits to Help Offset Education Costs

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The current economic conditions in have put many Americans in a tough position. On the one hand, it is a fact that difficult times usually lead to an increase in the number of people pursuing degrees – or looking to gain various certifications. However, in a recession colleges and universities are often scrambling to find sources of revenue due to a reduction in donor support as well as State budget appropriations.  Also, since the government is usually strapped for cash, they are not able to increase support for students (through grants, loans, and federal work-study programs). All of these factors make it extremely difficult for parents and students alike to pay for higher education.

Thankfully, the IRS provides various ways for taxpayers to offset education costs. Here are five listed below taken directly from the IRS website:

  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.

There are other factors to consider when deciding between these options:

  • Note that you are not allowed to claim any of the credits if you claim a tuition and fees deduction for the same student in the same year.
  • Also, a taxpayer cannot claim the American Opportunity and the Hope and Lifetime Learning Credits for the same student in the same year.
  • The credit may be claimed by the parent or the student, but not by both.
  • If the student is being claimed as a dependent cannot claim the credit.

For more information, see Publication 970, Tax Benefits for Education

The IRS has also prepared a short video to help explain your options.

For more information on taxes click here.

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What Income Does the IRS Consider to be Taxable?

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A common tax question that we hear is whether certain income is taxable. Generally, most income that you receive will be considered taxable; however, there are a few types of income that are only partially taxable or not taxed at all. 

To ensure that taxpayers understand the difference between taxable and non-taxable income, the IRS released a list (read the full release here) of the most common examples of items that are not included in your income. You’ll find a few listed below:

  • Child support payments (which are also not deductible for the payer)
  • Gifts, bequests and inheritances
  • Workers’ compensation benefits
  •  Compensatory Damages awarded for physical injury or physical sickness
  • Welfare Benefits  

There are also other items that are taxable in certain situations, but not others. Some of these items include:

  • Life Insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are not taxable unless the policy was turned over to you for a price.
  • Scholarship or Fellowship Grant If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.
  • Non-cash Income Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

Of course there are more items that fit into these two categories. For more information on taxable and nontaxable income, please see IRS Publication 525.

For more information on taxes click here.

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Understanding the Making Work Pay Tax Credit

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The Making Work Pay tax credit is worth up to $400 for individuals and $800 for married couples filing jointly. It is a temporary credit that will only be in effect for tax years 2009 and 2010.

For 2009, the IRS implemented this credit by making an adjustment to the federal income tax withholding tables used by employers to calculate the amount of taxes withheld from your paycheck. Employers were required to implement the changes by April 1, 2009.

According to the IRS:

If you’re not eligible for the Making Work Pay tax credit, withholding changes could mean a smaller tax refund next spring. A limited number of people, including those who usually receive very small refunds, could in some situations owe a small amount rather than receiving a refund. Those who should pay particular attention to their withholding include:

  • Pensioners
  • Married couples with two incomes
  • Individuals with multiple jobs
  • Dependents
  • Some Social Security recipients who work
  • Workers without valid Social Security numbers

The Making Work Pay tax credit, normally a maximum of $400 for working individuals and $800 for working married couples, is reduced by the amount of any Economic Recovery Payment ($250 per eligible recipient of Social Security, Supplemental Security Income, Railroad Retirement or Veteran’s benefits) or Special Credit for Certain Government Retirees ($250 per eligible federal or state retiree) that you receive. If you are affected by this reduction, you should review your withholding to ensure that sufficient funds have been withheld to meet your tax obligation.

Those taxpayers listed above should consult the withholding calculator on the IRS website to ensure that the proper amount of taxes are being deducted from your paycheck.

Any taxpayer with earned income must claim the credit by completing Schedule M and attaching it to their 2009 return. This will ensure that the credit is calculated correctly according to your complete tax situation.

The IRS has created a “Questions & Answers” section on their website to assist taxpayers with the Making Work Pay tax credit.

If you are unsure if you received an Economic Recovery Payment, you should contact the appropriate agencies before completing your federal income tax return. The contact information is listed below:

Social Security Administration – Toll Free number 800.772.1213

Department of Veterans Affairs – Toll Free number 800.827.1000

Railroad Retirement Board – Toll Free number 877.772.5772

For more information on taxes click here.

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Understanding Tax Credits for Higher Education Expenses

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The American Opportunity Credit (part of the American Recovery and Reinvestment Act) allows more parents and students to qualify for a tax credit for college expenses.

To this end, the IRS has developed a brief fact sheet to assist you in completing your 2009 tax return. Here are a few highlights:

  • 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 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 regarding this tax credit, visit the IRS information center here: http://bit.ly/4pkkEl