Newletter (continued) Tips for Students and Parents Paying College Expenses
Whether you’re a recent high school graduate going to college for thefirst time or a returning student, paying for college can be a dauntingfinancial task. The following are some tips about education tax benefits thatcan help offset some college costs for students and parents.
American Opportunity Credit - In many cases,this credit offers greater tax savings than other existing education taxbreaks. Here are some key features of the credit:
Some post-secondary education expenses do not qualify for the AmericanOpportunity Credit. These include the expenses of a student who, as of thebeginning of the tax year, has already completed the first four years ofcollege, as this credit is only granted for the first four years ofpost-secondary education.
Lifetime LearningCredit- If a student does not qualify for the American Opportunity Credit, he or shemay still qualify for the Lifetime Learning Credit. Key features of the creditinclude the following:
The credit is claimed on the return of the individual who claims the student’sexemption. For example, if a student’s parents are divorced and the father paysthe tuition but the mother claims the student’s exemption, the mother wouldreceive the credit, even though the father made the payments.
Student loan interestdeduction - Other than certain home mortgage interest, personal interest thatyou pay is generally not deductible. However, you may be able to deductinterest paid on a qualified student loan during the year. It can reduce theamount of your income subject to tax by up to $2,500, even without itemizingdeductions. However, if your MAGI
exceeds $75,000($155,000 if married filing a joint return), the student loan interestdeduction is not allowed. If you’re married and filing separately, thededuction is not permitted, regardless of income level.
Determining the most beneficial education tax credit and applying othereducation expense strategies can be complicated and requires planning inadvance. For assistance with these and other tax planning issues, please givethis office a call.
Convert Unused Property Into a Tax Deduction
When you give away items like clothing, appliances, vehicles, and othergoods to a qualified charity, your generosity can add up to a tax write-off ifyou itemize your deductions. The amount of your deduction is generally thedonated property's “fair market value.” The IRS definition offair market value (FMV) is “the price a willing buyer would pay and a willingseller would accept for an item, when neither party is compelled to buy or selland both parties have reasonable knowledge of the relevant facts.”
Below are guidelines to help determine FMV for the most common types of noncashdonations (miscellaneous personal items) that have decreased in value sincethey were acquired:
Noncash contributions must be properly documented with a contemporaneouswritten acknowledgment from the charity if the total deduction claimed for adonation is valued at $250 or more. The acknowledgment must be obtained on orbefore the earlier of the date the tax return is filed, or the extended duedate for the return. It must include the name of the charity, a description(but not value) of the donation, and one of the following:
If the FMV of the donation claimed is greater than $5,000, a writtenappraisal must be made by a qualified appraiser no more than 60 days before avehicle or other similar property is contributed. The appraisal must bereceived before the extended due date of the return on which the deduction isclaimed. In addition, Section B of IRS Form 8283 mustbe completed, including the signature of an authorized official of the charity.
If you have questions about how this tax provision might apply to your specifictax situation, please give this office a call.
[h=1]Franklin Katz, ATP, PA, PB[/h]
[h=1]Frank's Tax & Business Service[/h]
[h=1]315 E. King St.[/h]
[h=1]Kings Mountain, NC 28086[/h]
[h=1]704-739-4039 [/h]
[h=1]E-Mail: [email protected])[/h]
[h=1]Web: www.prep.1040.com/frankstax[/h]
[h=1] [/h]
[h=1]IRS Circular 230 Notice: Unless expressly stated otherwise inthis
transmission, any tax advice contained herein, forwarded with or attached to
this message was not and is not intended to be used, nor may it be relied
upon or used, by any taxpayer for the purpose of (1) the avoidance of any
tax-related penalties under the Internal Revenue Code or applicable state or
local tax law provisions, or (2) promoting, marketing or recommending to
another party any tax transaction or tax-related matters that may be
addressed herein.
[/h]
[h=1] [/h]
Whether you’re a recent high school graduate going to college for thefirst time or a returning student, paying for college can be a dauntingfinancial task. The following are some tips about education tax benefits thatcan help offset some college costs for students and parents.
American Opportunity Credit - In many cases,this credit offers greater tax savings than other existing education taxbreaks. Here are some key features of the credit:
- Tuition, related fees, books, and other required course materials generally qualify.
- The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000, which means that the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
- You may qualify for this credit even if you have previously taken the Hope or Lifetime Learning credit.
- The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less (for married couples filing a joint return, the limit is $160,000). The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than those under the Lifetime Learning credit.
- Forty percent of the American Opportunity Credit is refundable, which means that even people who owe no tax can receive an annual payment of up to $1,000 for each eligible student. Other existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed at the parents’ rate, which is commonly referred to as the kiddie tax.
Some post-secondary education expenses do not qualify for the AmericanOpportunity Credit. These include the expenses of a student who, as of thebeginning of the tax year, has already completed the first four years ofcollege, as this credit is only granted for the first four years ofpost-secondary education.
Lifetime LearningCredit- If a student does not qualify for the American Opportunity Credit, he or shemay still qualify for the Lifetime Learning Credit. Key features of the creditinclude the following:
- The credit is available for all years of post-secondary education and for courses taken to acquire or improve job skills.
- There is no limit on the number of years that the Lifetime Learning Credit can be claimed for an eligible student.
- The credit amounts to $2,000 maximum per eligible student.
- The credit is non-refundable; thus, the maximum amount credited is limited to the amount of tax that must be paid on your return.
- The student does not need to be pursuing a degree or other recognized education credential to qualify for this credit.
- Qualified expenses include tuition and fees, course-related books, supplies, and equipment.
- The full credit is generally available to eligible taxpayers, in 2013, whose MAGI is less than $53,000, or $107,000 for married couples filing a joint return. Above these amounts, the credit quickly begins to phase out.
The credit is claimed on the return of the individual who claims the student’sexemption. For example, if a student’s parents are divorced and the father paysthe tuition but the mother claims the student’s exemption, the mother wouldreceive the credit, even though the father made the payments.
Student loan interestdeduction - Other than certain home mortgage interest, personal interest thatyou pay is generally not deductible. However, you may be able to deductinterest paid on a qualified student loan during the year. It can reduce theamount of your income subject to tax by up to $2,500, even without itemizingdeductions. However, if your MAGI
exceeds $75,000($155,000 if married filing a joint return), the student loan interestdeduction is not allowed. If you’re married and filing separately, thededuction is not permitted, regardless of income level.
Determining the most beneficial education tax credit and applying othereducation expense strategies can be complicated and requires planning inadvance. For assistance with these and other tax planning issues, please givethis office a call.
Convert Unused Property Into a Tax Deduction
When you give away items like clothing, appliances, vehicles, and othergoods to a qualified charity, your generosity can add up to a tax write-off ifyou itemize your deductions. The amount of your deduction is generally thedonated property's “fair market value.” The IRS definition offair market value (FMV) is “the price a willing buyer would pay and a willingseller would accept for an item, when neither party is compelled to buy or selland both parties have reasonable knowledge of the relevant facts.”
Below are guidelines to help determine FMV for the most common types of noncashdonations (miscellaneous personal items) that have decreased in value sincethey were acquired:
- Used Clothing: The IRS provides no set formula for valuing clothing items. However, keep in mind that the FMV of used clothing and other personal items is usually much less than what you paid for them.
- Household Goods: The value of used household goods (e.g., furniture and appliances) is also much less than their original cost. If the property is worn, inoperable, or out of style, it may have little or no market value. However, photographs, purchase receipts, and newspaper ads describing similar property should help support a valuation.
- Cars and Other Vehicles: The deduction is limited for motor vehicles (as well as for boats and airplanes) contributed to a charity for which the claimed value exceeds $500 by making it dependent upon the charity's use of the vehicle and imposing higher substantiation requirements.
If the charity sells the vehicle without any “significant intervening use” (actual, significant use of the vehicle to substantially further the organization's regularly conducted activities) or “material improvement” (e.g., major repairs), the donor's charitable deduction cannot exceed the gross proceeds from the charity's sale. The charity will issue form 1098-C which includes details of the sale.
Where significant intervening use occurs, the deductible amount is the FMV of the vehicle. The “Blue Book” value is a good place to start in determining the vehicle’s FMV. However, Blue Book values generally assume the car to be in good condition and allowances must be made for the actual condition of the vehicle.
Noncash contributions must be properly documented with a contemporaneouswritten acknowledgment from the charity if the total deduction claimed for adonation is valued at $250 or more. The acknowledgment must be obtained on orbefore the earlier of the date the tax return is filed, or the extended duedate for the return. It must include the name of the charity, a description(but not value) of the donation, and one of the following:
- A statement that no goods or services were provided by the charity in return for the contribution, if that is the case;
- A description and good faith estimate of the value of goods or services, if any, that the charity provided in return for the contribution; or
- A statement that goods or services that the charity provided in return for the contribution consisted entirely of intangible religious benefits, if that is the case.
If the FMV of the donation claimed is greater than $5,000, a writtenappraisal must be made by a qualified appraiser no more than 60 days before avehicle or other similar property is contributed. The appraisal must bereceived before the extended due date of the return on which the deduction isclaimed. In addition, Section B of IRS Form 8283 mustbe completed, including the signature of an authorized official of the charity.
If you have questions about how this tax provision might apply to your specifictax situation, please give this office a call.
[h=1]Franklin Katz, ATP, PA, PB[/h]
[h=1]Frank's Tax & Business Service[/h]
[h=1]315 E. King St.[/h]
[h=1]Kings Mountain, NC 28086[/h]
[h=1]704-739-4039 [/h]
[h=1]E-Mail: [email protected])[/h]
[h=1]Web: www.prep.1040.com/frankstax[/h]
[h=1] [/h]
[h=1]IRS Circular 230 Notice: Unless expressly stated otherwise inthis
transmission, any tax advice contained herein, forwarded with or attached to
this message was not and is not intended to be used, nor may it be relied
upon or used, by any taxpayer for the purpose of (1) the avoidance of any
tax-related penalties under the Internal Revenue Code or applicable state or
local tax law provisions, or (2) promoting, marketing or recommending to
another party any tax transaction or tax-related matters that may be
addressed herein.
[/h]
[h=1] [/h]