2009 Education Tax changes
As I pointed out in my introduction post, the 2009 tax season is rapidly approaching and the busy men and women of the Internal Revenue Service have been hard at work trying to make things a little better for all of us. Last time, I pointed out that they have made some changes that allow you to keep a little more cash in your pockets this year by changing some of the rules regarding how children are treated on your return. This time I want to discuss how they are changing the rules about education expenses to help you recoup some of that monoy you spent to put your self and junior through school.
There are two education credits that are typically available for those who have to pay higher education expenses: the Hope Credit and the Lifetime Learning Credit. One of the exciting changes that has occurred this year is that the Hope Credit has been renamed the American Opportunity Tax Credit! Well, okay, there are more exciting changes than that, but it's good to know that you may see it listed differently on your tax return.
A Little Hope
The first question is who qualifies for the Hope credit? Well, obviously you have to be a student or be paying for a student. And that student must be enrolled at least half-time and enrolled in a degree seeking program. Does that mean that if they are an undecided student they don't qualify? No, as long as they are seeking a degree. What if I'm paying for my friends kid to go to school? Nope, it must be someone you can claim as a dependent on your taxes. One last point: they cannot have a felony drug charge on their record, that is an immediate disqualification!
Now, the changes: One of the big changes in the Hope credit is that it has been extended to apply to four years of college. In previous years, the credit was only available for the first two years of school, which I always thought was unfortunate because most students drop out in there first two years, so those of us who stayed with it didn't get a tax benefit for our education. That's changed now.
They have also changed the definition of "qualified tuition and related expenses". Before only tuition and fees directly related to the class were deductible. The definition has been expanded to include "course materials", including books, supplies and other materials needed for school. In prior years the thought has been that only those items that were required for you to attend class would qualify. Now, any thing you use to succeed in school can be added. Just make sure you keep your receipts!
The next important item is that the limit on the credit has been raised to $2,500 from $1,800 last year. And if you are a student in a "Midwestern disaster zone", that limit is raised to $3,600. And the credit is gradually reduced for filers with an adjusted gross income (AGI) between $80,000 and $90,000 and joint filers with AGI between $160,000 and $180,000. Once you're above those limits, you may not take the Hope credit.
Lastly, remember that 40% of the Hope credit is now a refundable credit, which means that you can receive up to $1,000 even if you owe no taxes. However, if you are caring for a child who is under age 18,or a student who is at least age 18 and under age 24 and whose earned income does not exceed one-half of his or her own support, who has at least one living parent, and who does not file a joint return, you cannot take the tax credit. In other words, if you are claiming a child that could be claimed by the child's parent, you cannot claim the credit. If this section sounds confusing, it is and you should talk with a tax professional to check your situation.
A Lifetime of Learning
What do you do if you have already used up your Hope credit? Or maybe you are going back to school less than half time and don't qualify for the Hope credit? Is there any tax credit available for you?
Yes, the federal government recognizes that learning is a lifelong process and for those of use who are continuing our education have the Lifetime Learning credit available to us. It isn't as large a credit as the Hope, capped at $2,000 in expenses per year. And the income cap is lower, with the credit being gradually reduced for those with an AGI of $50,000 to $60,000 for single filers and $100,000 to $120,000 for those filing jointly.
So what is the benefit? Well, for one, there is no limit on the number of years you can take this credit. Take it every year of your life, as long as you're in an eligible school. There's no requirement that you get a degree or anything, so if you want to take a class in literature, just for fun, take it, and use the lifetime credit for the deduction. You're also about to ask me why you should take the Lifetime credit over the tuition and fees deduction. If you fall under the income guidelines, the Lifetime credit is going to put more money in your pocket in the end. The deduction is there for when you creep over that income limit.
Are all education expenses covered, like the Hope credit? No, it is still limited to tuition and fees. Any other questions? Then let's move on.
Some Other Issues
For those of us who have made it through school on student loans, did you know that the interest you pay on those loans is deductible? Your loan servicer will send you a form annually stating how much interest you paid during the year. The only significant change this year is in the phase out limits.
In 2009, the amount of the student loan interest deduction is reduced if your filing status is married filing jointly and your modified adjusted gross income is between $120,000 and $150,000. You cannot take the deduction if your modified AGI is $150,000 or more. For everyone else, your student loan interest deduction is phased out if your modified AGI is between $60,000 and $75,000 and eliminated for those who make more.
A similar issue arises with holders of Education Savings Bonds. Typically the interest earned on these bonds is tax-free for those whose income is below a certain level. For 2009, the amount of that exclusion is phased out if your filing status is married filing jointly or qualifying widow(er) and your modified adjusted gross income (AGI) is between $104,900 and $134,900.
And that wraps up my discussion on education credits. Once again I want to remind you that I am not a tax professional and that this information is for informational purposes only. I always suggest talking with a tax professional in order to get the best advise for your tax situation. And as always, I welcome comments and questions .
Where to go for more information
- Northern Arizona University - My Alma Mater
Northern Arizona University is located in Flagstaff, Arizona and is a great school. I'm proud to have graduated there.
- College Tuition - education tax credits
College Board is a great place to find everything you need to know about getting into and paying for college. A great resource to look into.
- NASFAA - 2008 Federal Education Tax Benefits Guide
Another great source of information on all things related to education tax credits.
- IRS - Tax Incentives for Higher Education
The official guide from the IRS for higher education expenses.