With April 15, probably the most dreaded day of the year, fast approaching, nothing screams “It’s great to be a starving student” more than some tax breaks Uncle Sam is placing on the higher education supper table.
Part of President Barack Obama’s American Recovery and Reinvestment Act of 2009 — commonly known as the economic stimulus package — is the “American Opportunity Tax Credit.” The plan offers up to $4,000 in educational tax breaks for college students performing community service.
The break would cover up to two-thirds of tuition costs at most public colleges or universities, as well as making community college tuitions and fees completely free for most students. The plan won’t be in effect until the 2009-2010 academic year, though.
Part of the problem in publishing any type of break being directed at students is that others read them. This sets institutional and corporate greed in motion. As soon as they read it, university administrators, textbook publishers and sweatshirt manufacturers start spinning their wheels on how to grab any extra loot before it hits the student debit cards.
Nevertheless, students and families can still look forward to some of Uncle Sam’s crumbs hitting the dining room floor.
During the past few years, Congress has implemented other deductions and breaks for folks struggling with tuition and other college-related costs. Some of these might be tricky to figure out, however, so consulting with a tax expert might be a worthwhile investment.
Here’s some tips from Kathy M. Kristof, an author and syndicated personal finance columnist for the Los Angeles Times.
One of the breaks already available is the “Hope” tax credit. This one almost requires a mathematician to calculate, but can provide some much needed revenue relief. If you’re a freshman or sophomore attending at least half-time — six units or more at Cal State Long Beach — you can get a break of up to $1,800.
Kristof provides this formula for the Hope credit: “You calculate it by multiplying 100 [percent] by the first $1,200 in tuition costs paid and 50 [percent] by the next $1,200 in tuition expenses.
“If your adjusted gross income exceeds $48,000 on an individual return or $96,000 on a joint return, you can claim only part of the credit. The credit disappears entirely once your income tops $58,000 for an individual or $116,000 for a couple.”
She warns that the Hope credit doesn’t apply to such expenditures as books, fees, room and board, or food, and can’t be claimed by any student who has been convicted of a felony. The Hope credit will be replaced by the American Opportunity Tax Credit for 2009-2010, but will increase the break to $2,500.
“Income limits don’t kick in until your adjusted gross income exceeds $80,000 for an individual or $160,000 for a couple,” Kristof writes.
For juniors, seniors and grad students, Kristof suggests claiming the Lifetime Learning credit, which can equal 20 percent of tuition expenses up to $2,000. Income criteria for the Lifetime Learning credit is the same as the Hope credit.
You can also claim up to $4,000 of 2008 tuition as a taxable income deduction on the 1040 form, which allows the claim even “if you don’t itemize your deductions.” Kristof advises that if your employer pays for your books, fees or tuition, up to $5,250 is not taxable.
Other complexities surface in state-sponsored 529 savings plans that individuals or their parents should consult with a tax expert about, including what withdrawals are taxable and which are not.
This is increasingly important considering these savings plans shrank 21 percent in 2007 as a result of Wall Street sell-offs, according to Financial Research Corp. in Boston. While the savings plans aren’t flat-lining yet, they dropped from $111.9 billion to $88.5 billion by the end of 2007, a plummet of $23.4 billion nationally.
The silver lining, of course, is that there is strong potential to use individual 529 losses as tax deductions.
Although we can point out ways of protecting some of your college money from the IRS, we can’t protect you from the administrative wolves with designs for snatching those savings from you — insert Twilight Zone theme song. For that, there most likely is no break.