Ed Bove's College Planning Blog

Education Credits Expanded This Year

As tax season approaches, you should be aware of some significant changes that have been made to Edication Credits as a result of the American Recovery and Reinvestment Act of 2009.  Here's a quick overview:

·         American Opportunity Credit (AOC) – This credit modifies the existing Hope Credit for tax years 2009 and 2010, making the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. Taxpayers may be able to take a credit of up to $2,500 for qualified education expenses paid for each student who qualifies for the American opportunity credit.  Additionally, up to 40% of this credit may be refundable.

·         Hope Credit – The Hope Credit is for the payment of the first two years of tuition and related expenses for an eligible student. This credit may be more advantageous only if at least one student attended an educational institution located in the Midwestern disaster area.  For qualifying education institutions located in a Midwestern disaster area there is an expanded definition of qualifying expense and a credit of up to $3,600.  However, both the American Opportunity Credit and Hope Credit cannot be claimed on the same tax return.  If claiming the Hope credit for one student that attended an educational institution in a Midwestern disaster area, the Hope Credit must be claimed for all students that qualify.   

·         Lifetime Learning Credit – For the tax year, taxpayers may be able to claim a lifetime learning credit of up to $2,000 ($4,000 for students in Midwestern disaster areas) for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student. However, a taxpayer cannot claim the Hope, American Opportunity and the Lifetime Learning credit for the same student in one year.

Revamped Tax Credit Helps People Who Are Paying For College

Many people will be able to offset their college expenses over the next two years under the new American Opportunity Tax Credit. This tax credit is part of the American Recovery and Reinvestment Act of 2009.

Here are six important facts to know about the new American Opportunity Tax Credit:

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% of the first $2,000 spent and 25% of the next $2,000 per student each year. 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. 40% 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, which ever is more beneficial for you.

Education Credit Expansion Will Help At Tax Time

I think my brain is ready to burst after having a ton of tax info crammed into it at today's IRS Nationwide Tax Forum in New York City.  And there's more to come tomorrow.

A multitude of tax law changes take effect that will benefit many taxpayers this year.  I'll be posting much more about all that on my tax blog in the coming days.

But before I rest my aching head for the night, I wanted to at least give a quick mention to one specific tax law change that should be of great interest to all of you reading this college planning blog.

There has been a major revamp and expansion of the Education Credit, which will result in many more taxpayers with children in college qualifying for bigger tax credits this coming tax season.

I have to get to be because I have to get up bright and early to head back to the city for Day 2 of the IRS Forum.

But keep checking back here over the next few days and I'll give you all the details on the expanded program.

This will be very welcome news for many of you!

6 Tips for saving on your taxes before the year ends

Can you believe 2008 is almost over? And although most people don’t like to think about their taxes until April, NOW is the perfect time to review your situation to make sure that you are paying the lowest amount allowed by law. With that in mind, here are 6 things to consider doing before the year is out to help you save big money on your taxes.

1. Sell Some of Your Stocks

First of all, if you have any money in the stock market, you’ve probably lost plenty with the current economic situation. If you have after-tax stocks or mutual funds (meaning they’re not inside a retirement plan like an IRA or 401(k) that are down in value, you can sell them, and you are allowed to write off $3,000 of the loss against your current earned income. If you are in the 25% tax bracket, that means that you will save $750 on your federal taxes come April 15th. And, if you really like the stock, you are allowed to buy it back 31 days later, and still take the write off.

2. Invest for Retirement

I know, I know…this sounds like exactly the opposite of the previous tip, but if you have any extra cash around, now is the time to put it into an IRA or your 401(k) at work. You will get the double benefit of a tax write off for this year (if you qualify), and you’ll be buying when the market is down, or on sale. So each dollar invested will purchase more stock or mutual fund shares than it would if the market was high.

3. Get any Medical Tests or Work Done

Again, you have a double benefit here if you spend a lot of money on medical bills. First, if you’ve already met your health plan’s deductible, you will get your care covered versus if you waited until after the first of the year when you might have to pay a new deductible. Also, if you have medical bills that exceed 7.5% of your adjusted gross income and you itemize, you are allowed to write off anything in excess of that, thus saving the taxes on that money as well.

4. Prepay Expenses

Certain expenses, like your January mortgage payment, can be paid in December, and you’re allowed to take the deduction for this calendar year. Other expenses in this category include state or property taxes. Also, if you own a business, you can buy equipment that you’ll need next year and take the write off  for that as well.

5. Defer Income

Technically, you only have to pay tax on income received by the end of the year, so if you have any leeway on how or when you get paid, you can choose to have that money pushed into the upcoming year. If you own a business, that may mean sending your invoices in late December, so the income doesn’t actually hit until January. However, keep in mind, you’ll still have to pay the taxes on the income next year.

6. Get Married

Even if you get married on December 31^st at 11:59 p.m. by an Elvis impersonator in Las Vegas, the government considers you married for the entire year, and allows you to take the appropriate (often higher) credits and deductions. So, if you’ve been thinking about tying the knot, what more romantic reason could you think of for doing it this year than saving money on your taxes!

These tips should give you some things to review and think about. Remember that a little bit of planning now can save you a bunch of money come April 15^th.

Also, don't listen to the media that keep talking about how no one is going to be able to afford college this year, and for the next few years. There's still plenty of money available if you know where to look for it. So, be sure to check out my website if you've got a student getting ready to go to college for a complete list of my workshops on How to Pay for College Without Going Broke.'  www.BeaconCollegePlanning.com