Tax incentives
Soaring college costs. It is often said that you should prepare for expenses using the 529 plan, get as many financial aids as possible, and graduate as soon as possible. I have. Tax credits for education costs.
The size of tax credits
The amount of tax credit you will receive 100% of the first $ 2,000 of college expenses incurred that year and 25% of the next $ 2,000. In other words, up to $ 2,500 ($ 2,000×100% + $ 2,000×25%). Also, up to 40% of the credits you receive (up to $ 1,000) are refundable (you can use tax credits without having to pay taxes, which means you can get them instead of paying them). If you have a limited income for the year, such as a temporary loss of work, and you don’t have any taxes to pay, you can get paid by the government.
Who can use it
Students who meet the following conditions can use this tax credit:
- Enrolled in a Degree, certificate, or other accredited higher education credential program
- Have not completed the first four years of higher education (university or graduate school) at the beginning of the year
- At least one semester has taken at least half of the credits taken by the average full-time student in the course
- Not stipulated as a felony or drug violation
What are the income restrictions for use?
MAGI (Modified Adjusted Gross Income: regular AGI plus non-US income excluded by AGI calculation, income from US territory such as Puerto Rico) is $ 80,000 or less for singles and $ 160,000 or less for joints (couples) If, then the percentage of credits listed above is fully available. For more MAGIs, the available credits will be gradually reduced. If you spend $ 90,000 for a single and $ 180,000 for a joint (couple), you will have zero credits available.
You can use the credits allowed for each student. If you have more than one eligible student in your home, you can use each credit for that number of students.
Consideration after the introduction of the Trump tax system
American Opportunity Tax Credit is a credit that is difficult for high-income earners to use because MAGI has a phase-out of credit usage as described above. As an alternative, students themselves can apply for a tax return and receive an American Opportunity Tax Credit. If the student has income, he / she will reduce the tax to be paid, and even if he / she does not have income, he / she can receive credit as Refund.
Prior to the introduction of the Trump tax system, students would lose their parent’s dependent claim in order to receive the American Opportunity Tax Credit, which meant that parents would lose their children’s exemption. With the Trump tax system, this Exemption itself has been abolished, so there is no difference in Exemption whether or not you claim your child as dependent. However, the Trump tax system allows a $ 500 Dependent Credit for Qualifying Dependents (19 years old or younger, or full-time students under 24 years old). If you are no longer a parent’s Dependent, you will lose $ 500 in Credit.
Therefore, it is necessary to calculate whether it is advantageous for the parent to claim the student as a Qualifying Dependent and get a credit of $ 500, or for the parent not to claim as a Qualifying Dependent and the student to make a tax return and claim the American Opportunity Tax Credit. I have. Dependency claims also affect State returns as well as Federal returns. It is necessary to consider which is more advantageous, including the State tax.
What are the college costs?
The college fees covered to receive this tax credit are Tuition and Required Fees.
. For example, textbooks, equipment, and anything else you need to enroll or attendance can be included in the cost. Whether you buy textbooks, other teaching materials, equipment, equipment, etc. directly from the university or from others, if it is “required for enrollment and attendance”, it is a target cost. Computers are also eligible as long as this condition is met.
Of these costs, those that the institution can understand should be recorded in the From1098-T (Tuition Statement) and delivered to the student. If you do not receive it, contact your educational institution.
Not covered costs
The following costs that do not meet the “required for enrollment and attendance” requirements are not eligible.
- Room and board (dormitory and food expenses)
- Transportation
- Insurance
- Medical expense
- Student fees
When is the cut off period?
Of the above fees, the fees paid by the end of the year for the semester that began in that year and the semester that began by March of the following year will be applied to the tax credits for that year. This means that if you plan to use this American Opportunity Credit for your 2019 Tax Return, you will apply the costs paid by the end of 2019 for the semester that began between January 2019 and March 2020. can.
Advance plan is also important
In addition to this credit, there is another tax credit called Lifetime Learning Credit. College fees can also be deducted instead of tax credits. Tax credits are usually better than deductions, but tax software such as TurboTax will automatically calculate which one you get.
American Hope Credit, Education Expenses deduction (tax deduction) and Lifetime Leaning Credit cannot be used at the same time for the same cost, and you need to choose which one to use for the year. If you have more than one student in the same family, choose one for each student (they don’t have to be the same for siblings).
Another important condition is that in order to receive the above three tax incentives, the target costs have not already been paid from the tax incentive funds. Specifically, the above three incentives cannot be used for expenses paid from tax-friendly accounts such as the 529 Plan and Coverdell Savings Accounts. This is because they are not supposed to receive tax incentives.
As far as American Hope Credit is concerned, the $ 4,000 Tuition and Required Fees are paid in advance from non-529 and Coverdell funds (taxable investment accounts and income for the year) so that you can get the highest credit of $ 2,500. Planning is required. If you haven’t used up to the upper limit, it may be effective to pay the tuition fee in advance until the start of March of the following year. From 529 and Coverdell, it’s a good idea to pay for things that aren’t creditable, such as dormitory fees and transportation costs. Not only how to save college expenses, but also how to pay them is an important factor in financial planning. At the beginning of the year, you need to plan how much and how much it will cost and from what resources you will pay which.
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