IRS Tax Credits: Education Tax Benefits Announced by the IRS
Announced tax credit and tax deductions will result in lowering the payable tax. Savings plans give taxpayers the opportunity of not paying tax on their interest income until disposal, or even not paying tax after that at all.
IRS Tax Credits
American Opportunity Tax Credit
A new tax credit by the IRS which renames and changes the previous Hope Credit. American Opportunity Tax Credit will be available in tax years 2009 and 2010 for taxpayers who doesn't owe any tax to the IRS. The new tax credit will be available for a wider spread of taxpayers, as well as taxpayers with greater income.
American Opportunity Tax Credit will be offered to single taxpayers with income not more than 80,000 US Dollars, and 160,000 US Dollars for married couples who are making a joint filing of tax return.
The main difference between the previous Hope Tax Credit and the new American Opportunity Tax Credit is that American Opportunity Tax Credit will give taxpayers chance for a claim for 4 years. Previous Hope Tax Credit was allowing only the first 2 years of expenses to be claimed.
One other difference of the new tax credit is refundability. If a taxpayer qualifies for the American Opportunity Tax Credit, and the amount of tax credit is higher than the tax that he/she has to pay, then the difference is refundable up to 40%.
Hope Tax Credit
Hope tax credit is available until 2008 tax returns which taxpayers are filing in 2009. This tax credit is changed with American Opportunity Tax Credit discussed above. The main difference between Hope Tax Credit and American Opportunity Tax Credit is that with Hope Tax Credit there is no refund, if your tax credit amount exceeds the tax you will pay. The second difference is that the Hope Tax Credit is available only for the first 2 years of education.
Lifetime Learning Tax Credit
The Lifetime Learning Tax Credit by IRS helps students (as individuals) or parents who are paying after-secondary education learning expenses.
Each student can only claim for only one credit during a year. This means, if you're qualified for both American Opportunity Tax Credit & Hope Tax Credit and Lifetime Learning Credit, then you have to choose one. You may not claim for more than one of those tax credits. You can claim Lifetime Learning Credit for up to 2,000 US Dollars a year. There is no limit on the number of years.
While it is not possible to claim both American Opportunity Tax Credit and Lifetime Learning Credit, parents with more than one child may claim separate tax credits for different children. They may claim American Opportunity Tax Credit for one child, and Lifetime Learning Credit for the other child for example.
IRS Tax Deductions for Education Purposes
Tuition and Fees Tax Deduction
Available only for high education, the Tuition and Fees Tax Deduction allows taxpayers and their spouse and dependents deduct their tax payments up to 4,000 US Dollars.
Taxpayers with income more than US$ 80,000 cannot claim for Tuition and Fees Deduction, so this tax deduction fits to taxpayers those with income less than US$ 80,000.
Student Loan Interest Tax Deduction
According to the IRS, only the mortgage interest is deductible on tax returns of the US taxpayers. There is an exception to this, which is you can deduct the interest payments of a student loan (education loan) if you earn not more than 70,000 US Dollars in a year.
Expenses like tuition and fees, transportation fees, books are the accepted expenses, and the loan must be used for high education.
Business Tax Deduction for Work Related Education of the Employees
A Business Tax Deduction is available by the IRS for those who are employees which have work related expenditures. Educations which are compulsory by the law, educations needed to retain a certain job or salary, educations for maintaining or improving talents are covered by this business tax deduction.
IRS Savings Plans
Change to the 529 Plans
Those are savings plans which allow parents saving on their child's education expenses. The plans are free of tax normally for education related expenses like tuition, fees and services.
The plans have been widened for 2009 and 2010 to cover also computer equipment and software, even also fees paid for accessing internet services. The necessity here is that all those expenses must be related to, or needed for education purposes. Therefore, a computer software game about car racing is not a qualified expense, because it's not education in nature.
Coverdell Education Savings Account
Coverdell Education Savings Accounts are special savings accounts which allows parents to save for educational purposes tax free until a certain time. The savings account covers an under 18 child's educational expenses until college. The monthly limit of contributions to a Coverdell Education Savings Account is 2,000 US Dollars.
Scholarships and Fellowships
Scholarship and fellowships are free of tax if the beneficiary is waiting for a possible degree at an approved school, and scholarship or fellowships will be used for educational expenses.
Income EXCLUSION
Educational income exclusions are those a taxpayer can exclude in their income, meaning the taxpayer will pay no tax on them. Educational supports received from an employer are that kind. Those supports are tax-free until 5,250 US Dollars in a year, and can be deducted from your wages by the employer. If you are using this income exclusion, you can not also use it for any of the tax credits and tax deductions explained above (i.e. American Opportunity Tax Credit, Lifetime Learning Credit, Hope Tax Credit).
Read more about IRS Tax.
TAX NEWS - SEPTEMber 2009
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