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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 https://www.irs.gov.
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 https://www.irs.gov.
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.
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.
27 Jan 2007, 20:26
Kudos
Bookmarks
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.
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.
