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CCH can assist you with stories, including interviews with CCH subject experts. Also, the 2010
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.

 
2010 CCH Whole Ball of Tax
Release (27) | Back to WBOT

2010 CCH Whole Ball of Tax

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

New Education Tax Breaks Require Careful Reading

The American Recovery and Reinvestment Act of 2009 (ARRA) created a few additional benefits for 2009 and 2010, including the new American Opportunity Tax Credit and expanding the definition of qualified expenses under 529 plans. However, 2009 also marks the last year for certain above-the-line deductions, including the higher education tuition and teachers’ classroom expenses – unless they are later extended by Congress again. Additionally, 2009 is the last year students attending schools in the Midwestern disaster area will 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.

Tax Credits

The ARRA created a modified Hope Credit for 2009 and 2010 called the American Opportunity Credit, providing up to a $2,500 credit. However, parents with college students eligible for the Midwestern disaster area benefit, which doubles the Hope or Lifetime Learning Credits, need to evaluate their options closely. The following details qualifications and restrictions for each. (For a more detailed discussion, see Release 15.)

 

American Opportunity Credit

Hope Credit

Lifetime Learning Credit

What it is

An enhanced Hope Credit of up to $2,500 per student per year for the first four years of post-secondary qualified tuition and expenses. Available for 2009 and 2010 only.

For 2009, 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 will no longer be used in 2010 with taxpayers being directed to use the American Opportunity Credit.

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 2009: 100% of the first $2,000 of qualified tuition and related expenses plus 25% of the next $2,000. Use Form 8863, Education Credits.

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

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

Qualifying expenses

Qualified tuition and related expenses, including expenditures for course materials, such as books, supplies and equipment.

 

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.

Expansion for Schools Located in Midwestern Disaster Area

None. In fact, if the Hope or Lifetime Learning Credits are taken in conjunction with the Midwestern disaster relief area provision for one child. A taxpayer cannot claim the American Opportunity Credit for any additional college students.

 

Yes. The amount of the credit is doubled (from a maximum of $1,800 to a maximum of $3,600). Applies to 2008 and 2009.

Qualified expenses also expanded to include room and board.

States in the Midwestern disaster area are Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin.

Yes. The amount of the credit is doubled from 20% to 40% of eligible expenses for the eligible student; thus up to $4,000. Applies to 2008 and 2009.

Qualified expenses also expanded to include room and board.

States in the Midwestern disaster area are Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin.

Credit phaseout ranges

For 2009: Modified adjusted gross income (AGI): $80,000-$90,000 for single filers, $160,000-$180,000 for joint returns.

Up to 40% of the credit amount is refundable if the taxpayer’s tax liability is insufficient to offset the nonrefundable credit amount.

Same for 2010.

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

Applies the same requirements as Hope for who can and 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 Hope Credit, Lifetime Learning Credit or tuition and fees deduction is taken for the same student.

Applies the same requirements as Hope for who can and can’t claim it.

 

Can’t be taken if Lifetime Learning Credit, American Opportunity 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, American Opportunity 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

The Emergency Economic Stabilization Act of 2008 extended both tuition and fees deductions for higher education and the teachers’ classroom expense deduction for tax years 2008 and 2009. Barring any additional extensions, both are eliminated for 2010.

 

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

Deduction amount

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

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

100% 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 2009.

For 2009: Modified AGI: $60,000-$75,000 for a single filer, $120,000-$150,000 for joint filers. Same for 2010.

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 2% floor for taxpayers who itemize.

Deduction is not available on Form 1040EZ.

Savings Vehicles 

Under the ARRA, qualifying expenses under 529 plans have been expanded to include the cost of purchasing computer technology and equipment as well as Internet access. This applies for 2009 and 2010.

 

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.

Additionally for 2009 and 2010, qualifying expenses are expanded to include the cost of computer equipment or technology or for Internet access and related services. The technology must be used by the plan beneficiary or the beneficiary’s family during the years the beneficiary is enrolled at an eligible educational institution and purchased in 2009 or 2010. It excludes computer software games, sports or hobbies unless the software is primarily educational.

Contribution phaseout ranges

The phaseout ranges from modified 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 inflation 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; same for 2010) 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% 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% gain on the money you invested – even if the return 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; 2009 modified AGI eligibility phaseout ranges for 2009 are $69,950-$84,950 for single filers, $104,900-$134,900 for joint returns; and increase for 2010 to $70,100-$85,100 for single filers, $105,100-$135,100 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 un-served areas.  

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