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CCH can assist you with stories, including interviews with CCH subject experts. Also, the 2009
CCH Whole Ball of Tax
is available in print. Please contact:
 
Leslie Bonacum
(847) 267-7153
mediahelp@cch.com
 
Neil Allen
(847) 267-2179
neil.allen@wolterskluwer.com

Visit the CCH Whole Ball of Tax site often as new releases and other updates will be posted throughout the tax season.

CCH provides special CCH Tax Briefings on key topics at: CCHGroup.com/Legislation/Briefings.

 
2009 CCH Whole Ball of Tax
Release (25) | Back to WBOT

2009 CCH Whole Ball of Tax

Contact:
Leslie Bonacum
, 847-267-7153, mediahelp@cch.com
Neil Allen, 847-267-2179, neil.allen@wolterskluwer.com

Education Tax Breaks Worth Studying

Many taxpayers are looking more closely at all the possible options to help pay for college. For 2008 and 2009, a few additional benefits are available, including the return of the above-the-line deductions for higher education tuition and teachers’ classroom expenses. Students attending schools in the Midwestern flooding disaster area also may be eligible for double tax credits through the Hope and Lifetime Learning credits.

Below, CCH compares the more popular tax credits, deductions and exclusions as well as tax treatment for education savings plans, including 529s. (For a more detailed discussion of 529s see Release 14: With 529 Values Plummeting, Parents Review College-Saving Strategies.)  

Tax Credits  

For students attending an eligible college in the Midwestern disaster area during 2008 and 2009, the amount of the qualified tuition expense eligible for either the Hope or Lifetime Learning credit is doubled. For the Hope credit, this means a credit of up to $3,600 each year; for the Lifetime Learning credit, this means 40 percent of the first $10,000 in expenses is covered to a maximum of $4,000. States identified in the Midwestern disaster area are Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin.

 

Hope Credit

Lifetime Learning Credit

What it is:

For 2008, a credit of up to $1,800 (adjusted for inflation ) per student based on expenses in the first two years of post-secondary undergraduate education; the credit amount remains the same for 2009.

A credit of up to $2,000 per return based on expenses for post-secondary education or courses to improve job skills.

Credit amount:

For 2008: 100 percent of the first $1,200 in qualifying expenses plus 50 percent of the next $1,200 in qualifying expenses; the amount of tuition expenses eligible will remain the same for 2009. Use Form 8863.

20 percent of first $10,000 in qualifying expenses, to a maximum $2,000 credit. Use Form 8863.

Qualifying expenses:

Tuition, student activity fees and course-related fees paid directly to the educational institution.

Tuition, student activity fees and course-related fees paid directly to the educational institution.

Credit phaseout ranges:

For 2008: modified adjusted gross income (AGI): $48,000-$58,000 for single filers, $96,000-$116,000 for joint returns.

For 2009: modified AGI increases to $50,000-$60,000 for single filers, $100,000-$120,000 for joint returns.

Same as Hope credit.

Who can/can’t claim it:

Can’t be taken if married filing separately.

Can’t be taken by student claimed as dependent child on another person’s return, but parent can claim credit for paying dependent child’s expenses.

Student must be enrolled in program leading to degree or other recognized credential, studying at least half-time.

Can’t be used for graduate or professional level programs or by anyone with a felony conviction for a state or federal drug offense.

Can’t be taken if married filing separately.

Can’t be taken by a student if claimed as dependent child on another person’s return, but parent can claim credit for paying dependent child’s expenses.

What to watch out for:

Can’t be taken if Lifetime Learning credit or tuition and fees deduction is taken for the same student.

Can be taken in same year as a distribution from a Coverdell ESA or qualified tuition program but not for same expenses.

Can be taken for expenses paid for with student loan.

Credit applies per student.

Can’t be taken if Hope credit or tuition and fees deduction is taken for the same student.

Can be taken in same year as a distribution from a Coverdell ESA or qualified tuition program, but not for same expenses.

Can be taken for expenses paid for with student loan.

Credit applies per return.

 'Above-the-line' Deductions

As part of the Emergency Economic Stabilization Act of 2008, both tuition and fees deductions for higher education and the teachers’ classroom expense deduction have been extended for 2008 and 2009. Additionally, the government has increased the amount that students can borrow under the federal Stafford loan program by $2,000. This allows dependent students to borrow $5,500 as freshmen $6,500 as sophomores and $7,500 as juniors and seniors. However, the amount of student loan interest that is deductible remains unchanged.

 

Higher Education Tuition Deduction

Student Loan Interest Deduction

Teachers’ Classroom Expense Deduction

What it is:

A deduction from gross income (an above-the-line deduction) of up to $4,000 ($2,000 if modified AGI exceeds $65,000) based on expenses for post-secondary education for 2008 and 2009.

A deduction from gross income of up to $2,500 based on interest paid on a student loan for post-secondary education.

The ability of teachers to take an above-the-line deduction based on amounts they spend for unreimbursed classroom expenses in 2008 and 2009.

 

Deduction amount:

100 percent of the first $4,000 in qualifying expenses. Taken on Form 1040A or 1040.

100 percent of the first $2,500 in qualifying expenses. Taken on Form 1040A or 1040.

100 percent of the first $250 in qualifying expenses ($500 for joint filers who are both qualified educators). Taken on Form 1040A or 1040.

Qualifying expenses:

Tuition, student activity fees and course-related fees paid directly to the educational institution.

Loan may cover books, supplies, equipment, room and board, transportation and other necessary expenses in addition to tuition, student activity fees and course-related fees paid directly to the educational institution. Interest payments are deductible for the entire period of the loan.

Unreimbursed expenses in connection with books, supplies, computer equipment and supplementary materials used in the classroom.

Deduction phaseout ranges:

Full deduction is only allowed if modified AGI is not greater than $65,000 for a single filer, $130,000 for joint filers.

Taxpayers whose income exceeds that limit but does not exceed $80,000 for a single filer or $160,000 for joint filers may deduct up to $2,000 in qualified expenses in 2008.

For 2008: modified AGI: $55,000-$70,000 for a single filer, $115,000-$145,000 for a joint filer

For 2009: modified AGI: $60,000-$75,000 for a single filer, $120,000-$150,000 for a joint filer.

No income limitations.

Who can/can’t claim it:

Can be taken by qualifying individuals including themselves, a spouse or a dependent.

Can’t be taken if married filing separately.

Can’t be taken if claimed as dependent on another person’s return, but parent can claim credit for child’s expenses.

Must have been in degree program and at least half-time student to take the deduction.

Can’t be taken if married filing separately.

Can’t be taken if claimed as dependent on another person’s return.

Can be taken only by the person who is responsible for the loan and who actually makes the payments.

Can be taken only by teachers, instructors, counselors, principals and aides who work for at least 900 hours during a school year in a school that provides elementary or secondary education as determined by state law.

What to watch out for:

Can’t be taken if Hope or Lifetime Learning credit is taken for the same student.

Can be taken in same year as a distribution from a Coverdell ESA or qualified tuition program but not for same expenses.

Can be taken for expenses paid for with student loan.

Deduction is not available on Form 1040EZ.

Must reduce qualified educational expenses by the total amount paid through tax-free sources such as tax-free withdrawals from Coverdell ESAs.

Deduction is not available on Form 1040EZ.

Non-athletic supplies for courses in health or physical education do not qualify.

 

Expenses that exceed $250 and non-classroom supplies may be deducted as an employment-related miscellaneous itemized deduction subject to the two-percent floor for taxpayers who itemize.

Deduction is not available on Form 1040EZ.

 Savings Vehicles

 

Coverdell Education Savings Account (ESA)

Qualified Tuition Program (529 Plans)

What it is:

A savings account for educational expenses in which earnings grow tax-free. Withdrawals also are tax-free if used to pay for qualified educational expenses.

Three general types of 529 plans exist:

  • Pre-paid tuition plans – generally guaranteeing future tuition coverage at a state university.
  • State 529 college savings plans – generally sponsored by a state, allowing you to use saving plan proceeds to attend a state or private university.
  • Independent 529 plans – sponsored by a consortium of private colleges, whereby you can lock in current tuition rates for future years at participating schools.

In each savings program, investment earnings are not taxed if withdrawals are used for qualified expenses.

Contributions to state-sponsored programs are partially or fully deductible on some state tax returns.

Contribution limits:

$2,000 maximum annual contribution per year per beneficiary. As with IRAs, contribution can be made up to April 15 of following year.

Can contribute to both a Coverdell ESA and a qualified tuition plan in the same year.

Contributions cannot be more than is necessary to provide for the higher education expenses of the beneficiary. These amounts are set by the state or educational institutions sponsoring the plan and may be in excess of $300,000. In the case of many 529s, accounts can be opened with as little as $25 and contributions as little as $15 per pay period.

There are no other specific annual contribution limits for the plans.

Qualifying expenses:

Can be used to pay for tuition, fees, books, supplies and equipment for both K-12 and post-secondary.

For K-12, can also pay for uniforms, transportation, supplementary items and services such as extended day programs, room and board, and purchase of computer technology and Internet access (but cannot be used for sports, games or hobby software unless it is predominantly educational).

For post-secondary education, can cover expenses for room and board if the student is enrolled at least half-time and the amount meets certain guidelines. Can also be used to fund a qualified tuition program.

Distributions can be used for accredited post-secondary books, supplies, equipment, room and board, transportation and other necessary expenses in addition to tuition, and student activity fees and course-related fees paid directly to the accredited post-secondary educational institution.

Contribution phaseout ranges:

The phaseout ranges from modified adjusted gross income (AGI) of $95,000-$110,000 for single filers, $190,000-$220,000 for joint returns; no phaseout for corporation or other entities, including tax-exempt organizations.
* Phaseout is not income adjusted and reverts to 2001 levels after 2010.

No income limitations.

Who can/can’t claim it:

Beneficiary must be younger than 18 years old or be a special needs beneficiary in the year contributions are made.

Anyone can set up an account for a beneficiary as long as the annual contribution limits for that beneficiary are not exceeded.

Someone funding a qualified tuition program for another individual can use the annual gift tax exclusion ($13,000 for single filers or $26,000 for joint filers for 2009 ($12,000 and $24,000 for 2008) or combine five years’ worth of exclusions in a single year. The beneficiary can exclude funds withdrawn from the qualified program from income if they are used for qualified expenses.

What to watch out for:

Beneficiary is taxed on any withdrawals not used to pay for qualified educational expenses. (Penalty-free withdrawals can be made in connection with service academy appointments, such as Annapolis or West Point.)

All funds must be withdrawn by the time beneficiary reaches age 30 (except if special needs individual), but an account can be transferred from one beneficiary to another.

All contributions must be made in cash.

As with a conventional IRA, owner of the account can exercise wide discretion as to investments. The funds, however, cannot be used to reimburse the taxpayer for home schooling.

Check tax treatment of contributions for state income tax purposes.

Limited ability to change investment options.

Possible 10-percent penalty if distributions are not used for qualified expenses.

Beneficiary can be changed if new beneficiary is a member of the same family.

In the case of the Independent 529 plans, if your child does not attend a member college and you either withdraw the money or transfer it to a state-run plan, you won’t be able to collect more than a 2-percent gain on the money you invested – even if the return you realized was in excess of this.

Penalty-free withdrawals can be made in connection with service academy appointments, such as Annapolis or West Point.

Exclusions

Several exclusions also are available for taxpayers related to education including:

  • Bond interest: All or part of the interest on proceeds of qualified savings bonds (specifically, Series I bonds or qualified Series EE bonds issued after 1989) cashed to pay education expenses; 2008 modified AGI eligibility phaseout ranges are $67,100-$82,100 for single filers, $100,650-$130,650 for joint returns; and increase for 2009 to $69,950-$84,950 for single filers, $104,900-$134,900 for joint returns.
  • Employer assistance: Employer-provided educational assistance (up to $5,250 annually) from income for undergraduate or graduate level coursework and expenses.
  • Scholarship funds: Scholarship money or tuition reduction from income up to the amount spent on qualified expenses; generally cannot claim exclusion if scholarship or tuition reduction represents payment for teaching, research or other services, but exclusion can be applied to Armed Forces and National Health Service Corps scholarship programs even though future service obligation is connected to them.
  • Student loans: The amount of a cancelled student loan from income. (Normally, a cancellation of indebtedness counts as income.) The discharge must be made under the terms of a loan agreement and made because the person works for a specified period in certain professions for certain kinds of employers – for example, as a doctor or nurse in a rural area.  

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