Educational & Tax Benefits
The federal government grants to all
of us financial incentives to
continue one's education. Even if you
don't itemize, these
incentives may be available.
Education expenditures can be
taken either as a credit or a deduction.
Tax Credits:
Tax credits allow a dollar for dollar benefit, unlike
deductions. As such, they have
more value than deductions and are very attractive to
tax payers who might not
otherwise qualify for deductions, such as mortgage
interest, property taxes,
medical expenses, etc. Essentially, there are two types
of education tax credits: 1)
the Hope Credit and 2) the Lifetime Credit.
The Hope Credit is only available for
the first two years of post secondary
education. The Lifetime
Credit is available every year, graduate or under
graduate, subject to income limitations.
Typically, a parent's education expenditures are not
eligible for allowable credits
because their income is too high. In most cases the
solution is to give up the
dependency exemption, allowing the dependent to take the
credit.
Tax Deductions:
Also, there are two types of education deductions: 1)
Non-business education and 2)
Employment related.
The first type of deduction is non-business or personal.
Here all qualified tuition and
fees are deductible up to a maximum
of $4,000 and phase out for a single
person at $65,000 AGI; a married couple phases
out at $130,000 AGI. A person
claimed as another's dependent is not eligible for this
deduction. So, the person claiming
the dependency exemption must be considered - the parent
or the child.
The second type of deduction is an employment related
expenditure. For example, you
are a real estate lawyer and take a course on the
changes in real estate laws.
Or, you're a mechanic and your employer requires
you to take a course on auto
emissions. Both qualify because they maintain an
existing skill or is a job requirement. However, there
are some education
circumstances which do not qualify. A Facts and
Circumstance Test determines
deductibility and requires a
professional CPA to determine
whether or not one is entitled to the deduction.
Furthermore, even if you are entitled to the deduction,
your deductions may not total
enough to gain any benefit. Why? Because only amounts
over 2% of AGI are deductible.
There is no choice of how the deductions are taken.
Personal type expenditures are
used to calculate adjusted gross
income. Employment
type expenditures are used to calculate taxable income.
Summary:
One has either two types of credits or two types of
deductions to choose from.
First, decide whether a credit or deduction is
appropriate to your situation.
If a deduction, determine what type of expenditure it is
- personal or business.
Second, examine your income level to determine if
the credit or deduction will be of limited tax
benefit. It may mean a greater tax
savings to give your dependent the education benefit.
Many of these areas are too complex to discuss in this
forum, but I'd be happy to
discuss them or any tax problems and their solutions
with you.
Other Education Savings:
Education IRA's and section 529 plans
are examples of this category. My office will help you
decide if this item is beneficial for you.
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