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TUITION and TAXES

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TUITION and TAXES [#permalink] New post 27 Jan 2007, 18:29
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Ok, lots of questions on this so I thought I would start a thread. I train volunteers to prepare taxes for free for LMI families -- including those who are claiming education expenses. I'll give you a brief run-down, based on the assumption that you are a pursuing an MBA (or other advanced degree) and that you are claiming your own personal exemption (your parents aren't claiming you as a dependent).

There are three possible tax benefits for those who are paying graduate expenses: the Lifetime Learning Credit, the tuition and fees deduction, and the Schedule A deduction. We'll start with the LLC.

Lifetime Learning Credit

The LLC can be used to limit your tax liability if you pay qualified education expenses. Given the above assumptions, there isn't much to understanding this credit. First, the credit only applies to qualified expenses. Qualified expenses are necessary for enrollment and paid to the school. Tuition obviously counts, but a parking pass would not. Second, these expenses must be paid with cash or student loans. (In other words, it can't be from scholarships, grants, or paid by your employer. Also, the funds can't be from a pre-tax account, such as a 529.) If your rich grandmother pays your tuition, you still get to claim the credit. Two other rules: you can't be filing as a nonresident alien or filing married filing separately.

This credit phases out for incomes between $45k and $55k for single filers or between $90k and $110k for married filers. The LLC is worth up to $2000 per return, or 20% of the first $10,000 in qualified expenses.

Yeah, I know it doesn't mean much, considering that we're already paying 2 to 5 times that in tuition each year, and considering the phase-outs. But on the other hand, the academic year straddles the calendar year, so we'll be in school during 3 tax years.

See Pub 970 for more info on tax credits or page 224 of Pub 17 for more info. Both publications are available at http://www.irs.gov.

Last edited by aaudetat on 01 Feb 2007, 07:52, edited 1 time in total.
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The Tuition and Fees Deduction [#permalink] New post 27 Jan 2007, 19:09
Tuition and Fees Deduction

The definition of a qualified expense for the TFD is the same as that of the LLC. Ditto for the means of payment rules.

Taxpayers filing as single, head of household, or qualifying widow(er) must have MAGIs below $80k to take the deduction. (We’ll refer to these three statuses as single for the remainder of the discussion.) The MAGI of a married couple must be less than $160,000.

If your MAGI is less than $65k ($130k for MFJ), the maximum deduction is $4000. If it’s between $65k and $80k ($130k and $160k for MFJ), the maximum is $2000.

Again, this isn’t super-hot money, but it’s what is available. I should point out that this info comes from 2005 as there were some very last-minute changes to the tax code. The limits may be higher for 2006. More info in Pub 970 (2005 edition) or Pub 17. New pub 970s and 17s should be out shortly.

Please note: The same student can’t take both the LLC and the TFD in a single tax year. You need to try both and see which one offers the greater tax benefit.

Last edited by aaudetat on 27 Jan 2007, 19:27, edited 1 time in total.
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 [#permalink] New post 27 Jan 2007, 19:26
Schedule A or C Expenses

I decided not to go into either of these too much. The rules are somewhat restrictive, and less likely to be useful to us, and somewhat of a stretch. For more info, check out the Pub 970.
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And Student Loan Interest [#permalink] New post 27 Jan 2007, 19:50
Student Loan Interest

In the interest of completeness, I thought I should mention the student loan interest deduction.

You can deduct the interest you pay on your student loans, provided:

1. Your filing status is not Married Filing Separately.
2. The loan is used soley for the qualifying expenses, such as tuition and fees; room and board; books, supplies, and equipment; and other necessary expenses. (Please note that room and board is generally limited to the amount that the school includes in the student budget.)
3. The loan cannot be from a relative or part of an employer-sponsored plan.

The maximum deduction is $2500 (in 2005). The phase-out is between MAGIs of $50k and $65k for singles ($105k and $135k for MFJ).

You should get a 1098-E from your lender, stating the amount of your interest paid in a given tax year.
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 [#permalink] New post 27 Jan 2007, 20:28
I have a question - does tuition paid before enrollment count? I'm going to Columbia and sent in my $5K in November...so can I claim a tuition deduction on my 2006 return or do I have to wait til I actually attend school to claim it for 2007?

Thanks!
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 [#permalink] New post 27 Jan 2007, 22:18
Great thing about the Life Long Learning credit is that it can be taken for professional continuing ed type courses as well... pretty broad definition of what is a qualifying expense. Definately going to come in handy for me with the CFA this year.
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 [#permalink] New post 28 Jan 2007, 07:40
This is great info, thanks aaudetat. Good luck on your Monday interview!
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Q&A [#permalink] New post 29 Jan 2007, 18:14
If I paid my brother's tuition, how can I claim it when filing taxes? Is it claimable? Can I claim him as my dependent? This is the first year I am filing taxes. Appreciate it

You're in luck - when I train volunteers I use a handy mantra that you can also learn and recite:

WHO CLAIMS THE KID CLAIMS THE CREDIT. (Or deduction.)

In other words, if you're paying your tuition, but your parents claim you as a dependent, then they get the tax benefits for those payments. Therefore, in order to claim the tax benefits for the tuition payments you are making for your brother, you will need to claim him as a dependent (as long as no one can claim YOU as a dependent).

There are two ways that he can qualify as your dependent: he can be considered a qualifying child or a qualifying relative.

A Qualifying Child:
* Can be your brother
* Must live in the US, be a citizen, national or resident alien, or a resident of Canada or Mexico for some part of the year
* Can't be married (If he is, let me know. There are exceptions.)
* Must be under 19 OR under 24 AND a full-time student OR any age AND disabled
* Must live with you for at least 6 months of the year (note: college is considered a temporary absence that counts as living with you, provided your address is what he would call his permanent address).
* Cannot provide over half of his own support (basically any money - frivolous or essential - that is spent on your brother counts as support).
* Does not qualify as a qualifying child for anyone else (if he does, there are tie-breaker rules).

A Qualifying Relative:
* Can still be your brother
* Has the same residency requirements as a qualifying child
* Cannot be the qualifying child of anyone else
* Cannot be married (exceptions also apply)
* Must make less than $3300
* Must receive at least 50% of his support from you
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 [#permalink] New post 29 Jan 2007, 18:21
Oh, and if you can claim your brother and he's an undergrad, then you need to consider one other option:

In addition to the LLC and the TFD mentioned above, there is also something called the Hope Credit. This credit is similar to the LLC, except for 4 key differences:

1. This credit is for students in their first two years of schooling (freshmen and sophomores).
2. This credit can only be claimed twice in a student's lifetime.
3. Students must be enrolled at least half-time and also pursuing a degree program.
4. The student may not have a felony drug conviction. If so, he must claim the LLC or the TFD. (Isn't that idiotic? I included it for comic relief.)

Generally speaking, the Hope packs a bigger punch than the LLC....maybe even always. Try out all three and see which one is best for you - you can only take one per student. The education credits may be claimed on form 8863, and show up in the nonrefundables section of the 1040 on page 2. The deduction will be in the adjustments section on page 1 of the 1040.

Last edited by aaudetat on 29 Jan 2007, 18:32, edited 1 time in total.
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 [#permalink] New post 29 Jan 2007, 18:31
ap663 wrote:
I have a question - does tuition paid before enrollment count? I'm going to Columbia and sent in my $5K in November...so can I claim a tuition deduction on my 2006 return or do I have to wait til I actually attend school to claim it for 2007?

Thanks!


Good question - and one that will likely affect many of us (well, those of us who aren't total late-round slackers). I wasn't sure, so had to consult my friend Pub 17, and it doesn't sound good:

Generally, a credit is allowed for qualified education expenses paid in 2006 for an academic period beginning in 2006 or in the first 3 months of 2007. For example, if you paid $1,500 in December 2006 for qualified tuition for the Spring 2007 beginning in January 2007, you may be able to use that $1,500 in figuring your 2006 for those amounts.


In other words, if you are starting your studies after April 1, 2007, those 2006 payments can't be claimed in 2006. They will be considered for the 2007 tax year. Considering how much we'll pay and how limited the credit is, it's really too bad that we can't split it into two years!
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 [#permalink] New post 29 Jan 2007, 18:34
Mark4124 wrote:
Great thing about the Life Long Learning credit is that it can be taken for professional continuing ed type courses as well... pretty broad definition of what is a qualifying expense. Definately going to come in handy for me with the CFA this year.


Yep, totally true! And I'm claiming it for the online stats class I am taking through Berekely. Only I am a total moron - should have paid for it in 2006 so I could claim it this year. But no - put it off and paid for it in 2007. Crud.
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Re: Q&A [#permalink] New post 30 Jan 2007, 10:28
aaudetat wrote:
If I paid my brother's tuition, how can I claim it when filing taxes? Is it claimable? Can I claim him as my dependent? This is the first year I am filing taxes. Appreciate it

* Can still be your brother
* Has the same residency requirements as a qualifying child
* Cannot be the qualifying child of anyone else
* Cannot be married (exceptions also apply)
* Must make less than $3300
* Must receive at least 50% of his support from you


Aau,

Tnx for the detailed response. Do I need special forms for deducting tuition? He is an ESL student, can I still count him as dependent? I also pay my own tuition, does that count?
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Re: Q&A [#permalink] New post 30 Jan 2007, 20:05
Tajik4GMAT wrote:
aaudetat wrote:
If I paid my brother's tuition, how can I claim it when filing taxes? Is it claimable? Can I claim him as my dependent? This is the first year I am filing taxes. Appreciate it

* Can still be your brother
* Has the same residency requirements as a qualifying child
* Cannot be the qualifying child of anyone else
* Cannot be married (exceptions also apply)
* Must make less than $3300
* Must receive at least 50% of his support from you


Aau,

Tnx for the detailed response. Do I need special forms for deducting tuition? He is an ESL student, can I still count him as dependent? I also pay my own tuition, does that count?


You need to look at the rules for claiming a dependent and see if your brother meets them for you to claim him. First, try the qualifying child rules - do those work? Then you can claim him, and his tuition credits. If they don't, try the qualifying relative rules. If those work, then you can claim him and the tax benefits.

To know if you can claim your own tuition expenses, look at the first two posts of this thread.

And here's the info on the forms, copied from above: The education credits may be claimed on form 8863, and show up in the nonrefundables section of the 1040 on page 2. The deduction will be in the adjustments section on page 1 of the 1040.
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 [#permalink] New post 31 Jan 2007, 22:16
A few quick points on the Lifetime Learning Credit.

- Payments from a tax free savings account (like a 529) don't count toward your qualified expenses.

- Room and board aren't qualified expenses.

- Finally, are you sure a CFA would not apply to this credit? The expenses have to be paid to a qualifying institution, like a university or community college. I'm not sure if the CFA Institute counts.
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 [#permalink] New post 01 Feb 2007, 08:06
naturallight wrote:
A few quick points on the Lifetime Learning Credit.

- Payments from a tax free savings account (like a 529) don't count toward your qualified expenses.


Yes, that is a good point. I went ahead and edited the original post to add that in there.

naturallight wrote:
- Room and board aren't qualified expenses.


Again, true. The original post points out that expenses must be required for enrollment. Obviously, you are not required to eat or not be homeless in order to attend. (This can get sticky for colleges that require on-campus residency, but none of this will apply to us.)

naturallight wrote:
- Finally, are you sure a CFA would not apply to this credit? The expenses have to be paid to a qualifying institution, like a university or community college. I'm not sure if the CFA Institute counts.


I don't know anything about CFA stuff. The credit applies to courses taken to aquire or improve job skills, but naturallight is right - the place that offers the credits does matter. Here's what the IRS has to say:

An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the Dept of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.
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DISCLAIMER [#permalink] New post 01 Feb 2007, 08:11
Naturallight's points have prompted me to add this:

Keep in mind that our tax code is incredibly complex. While the information I posted covers the basics of education credits, many taxpayers will need to consult Pub 17, Pub 990, or a paid tax preparer to be sure that the hordes of details and exceptions I haven't addressed in these posts are being applied correctly.

These posts aren't really about helping you grab a 1040 and file your stuff. The purpose was to answer general questions about the effect that paying for an MBA education might have on your tax situation.
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 [#permalink] New post 07 Mar 2007, 11:52
Can a cousine be a qualifying relative?
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 [#permalink] New post 07 Mar 2007, 18:50
Tajik4GMAT wrote:
Can a cousine be a qualifying relative?


Yes, as long as all the other rules are met: lived with you enough time, didn't make over $3300, you provided over half the support, etc etc.

ANYONE can be a qualifying relative, as long as the tests are met - if I quit my job, lived in your basement, and you supported me, we'd be good.
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 [#permalink] New post 08 Mar 2007, 07:33
Do I need like special forms to claim him? Tuition receipts and all that?
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Re: TUITION and TAXES [#permalink] New post 16 Nov 2008, 18:15
Guys, I decided to bump this. As folks start hearing about decisions, they start thinking about money....

Keep in mind, this info is from when i applied, but still a good place to start.
Re: TUITION and TAXES   [#permalink] 16 Nov 2008, 18:15
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