Hope & Lifetime Credit Changes, '09 - '10

Paying for College
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<p>From a newsletter our tax gal sends out:</p>

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<p>For tax years beginning in 2009 and 2010, the Stimulus Act includes taxpayer-friendly modifications to the Hope Scholarship higher education tax credit (Hope Credit).The Hope Credit is also temporarily renamed the American Opportunity Credit (Opportunity Credit). Under the revamped rules, the Opportunity Credit equals 100% of the first $2,000 of qualified post-secondary education expenses paid during the year plus 25% of the next $2,000. So the maximum annual credit is now $2,500. Under prior law, the maximum Hope Credit for 2009 was only $1,800, and it probably would be about the same for 2010.</p>

<p>The Opportunity Credit covers the cost of tuition, fees, and course materials (but not room and board) for the first four years of post-secondary education in a degree or certificate program. It is unavailable if the student has already completed four years worth of academic hours as of the beginning of that year. Under prior law, the Hope Credit was only allowed for the first two years of post-secondary study, and the cost of course materials did not count as a qualified expense.</p>

<p>The Opportunity Credit is only allowed for a year when the student carries at least half of a full-time load for at least one academic period beginning in that year (same as under the prior-law Hope Credit rules). Also, as under the prior law, married individuals who file separately are ineligible.</p>

<p>The Opportunity Credit is subject to phase-out rules, but they are considerably more lenient than the prior-law Hope Credit rules. The Opportunity Credit phase-out range for unmarried individuals is between modified adjusted gross income (MAGI) of $80,000 and $90,000. The phase-out range for married joint filers is between MAGI of $160,000 and $180,000. These ranges will also apply for 2010 without any inflation adjustments. Under the prior-law Hope Credit rules, the phase-out ranges for 2009 would have been $50,000–$60,000 and $100,000–$120,000, and the ranges for 2010 would probably remain the same. For this purpose, MAGI is defined as regular adjusted gross income (AGI) increased by income from outside the U.S. that was excluded from taxable income.</p>

<p>The Opportunity Credit is allowed to offset the taxpayer’s entire federal income tax liability, including any AMT. In addition, up to 40% of the Opportunity Credit can be refundable, meaning you can receive a refund even if you did not have taxes withheld or make any estimated payments. However, the refundability privilege is not allowed to taxpayers who fall under the dreaded Kiddie Tax rules (which can potentially hit students who are up to 23 years old as of year-end). Finally, special refundability limitations apply to residents of U.S. possessions (including the Commonwealths of Puerto Rico and the Northern Mariana Islands).</p>

<p>The new law doesn’t make any changes in the Lifetime Learning higher education tax credit (Lifetime Credit) rules. As you may know, the Lifetime Credit can be as much as $2,000 (based on 20% of up to $10,000 of qualified tuition and fees). As before, the Lifetime Credit can help offset graduate school tuition costs and tuition for non-degreed education such as professional education and certification courses.</p>

<p>Note that for 2009, the Lifetime Credit is phased out between MAGI of $50,000 and $60,000 for unmarried taxpayers and between MAGI of $100,000 and $120,000 for married joint-filing couples. Obviously, the phase-out ranges for the Opportunity Credit are considerably higher.</p>

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<p>Thanks sblake!</p>

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<p>Good info and I bet often overlooked! There’s also a pretty good explanation of each and a comparison/coordination of the various education tax benefits (see link in 1st para.) here:</p>

<p>[FinAid</a> | Other Types of Aid | Education Tax Benefits](<a href=“Your Guide for College Financial Aid - Finaid”>Taxability of Scholarships - Finaid)</p>

<p>I found the chart in the comparison tables very helpful as it breaks out which college costs are eligible for which program and includes 529’s, savings bonds, tax deductions and credits, etc.</p>

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<p>OK, that’s great, thanks very much! Does anyone have further details on the “QTP”?
Which may allow us something on the purchase of computer technology in 2009 & 2010. QTP= Qualified Tuition Program. The IRS website did not have a detailed explanation of this as to whether or not it was an itemized deduction on your Schedule A or not. </p>

<p>The termininology used was “Qualified education expenses under a qualified tuition program.” QTP.</p>

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<p>QTP = college savings account such as 529 accounts. For the next 2 years certain computer expenses for college students can be paid for with their 529 account funds. Previously computers were not a qualified education expense for 529 account withdrawals.</p>

<p>Current qualified expenses are not reported as itemized deductions on the tax return, the withdrawals from the 529 account used to pay for qualified expenses are simply not reported. I am assuming it will be the same for the computer expenses (though my thought logic is not necessarily the same as a government agency.</p>

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<p>From Sk8mom’s link above:</p>

<p>"The taxpayer must list the student as an exemption on their income tax return and the expenses must have been paid by the taxpayer or by the student. (Any qualified tuition and related expenses paid by the dependent are treated as though they were paid by the taxpayer, per 26 CFR 25A(g)(3).) Scholarships and financial aid do not count as qualified tuition and related expenses paid by the taxpayer. Only out-of-pocket expenses count. Gifts, bequests and inheritances do count as though paid by the taxpayer. "</p>

<p>The sentence “Scholarships and financial aid do not count as qualified tuition and related expenses paid by the taxpayer” seems unclear as to student loans included in a financial aid package that are used to pay a qualified expense. I seem to recall that student loans used for this purpose qualify, correct?</p>

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<p>Yes qualified expenses payed for by loans do count for the Hope and Lifetime learning credits. It specifically mentions that in IRS 970.</p>

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<p>Note: The third chart on FinAid’s coordination of benefits page has not been updated for the allowable computer expenses. This is from the ARRA:</p>

<p>SEC. 1005. COMPUTER TECHNOLOGY AND EQUIPMENT ALLOWED AS A QUALIFIED HIGHER EDUCATION EXPENSE FOR SECTION 529 ACCOUNTS IN 2009 AND 2010. (a) IN GENERAL.—Section 529(e)(3)(A) is amended by striking ‘‘and’’ at the end of clause (i), by striking the period at the end of clause (ii), and by adding at the end the following: ‘‘(iii) expenses paid or incurred in 2009 or 2010 for the purchase of any computer technology or equipment (as defined in section 170(e)(6)(F)(i)) or Internet access and related services, if such technology, equipment, or services are to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is enrolled at an eligible educational institution. Clause (iii) shall not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature.’’. (b) EFFECTIVE DATE.—The amendments made by this section</p>

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<p>I need some clarification regarding the changes. Everything I see says that the max credit for 2009 - 2010 is $2500 and it also says that you can use the credit in all four years. So does that mean you can get a credit of $2500 for 2009 and 2010 plus 2011 and 2012 or is it that you get the $2500 credit in 2009, 2010, but you can get an $1800 credit in 2011 and 2012(the prior max credit amount) which would be years 3 and 4 of college?</p>

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<p>As far as I can tell - Previously the Hope credit of $1800 was only available for the first 2 years of college. The opportunity credit changes this and makes it available for 4 years but, so far, just for tax years 2009-2010. It does not address whether the 4 year credit will continue to be available after the 2009 2010 tax years. At this point there is no way of telling if the change will be made permanent and that the 3rd and 4th year credits will still be available. This is the same for several of the education related changes in the stimulus bill (for instance the computers being eligible expenses for 520 account is just 2009 and 2009 tax years also). We can hope.</p>

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<p>Now that the tax year is upon us, I’d like to summarize the credits to make sure we all understand.</p>

<p>The only difference between the Hope Credit and the American Opportunity Credit is that Hope is for first two years and AOC is for four. So from what I see on form 8863, the only reason to use Hope is when the student is in a Midwestern Relief Area.</p>

<p>Lifetime Learning credit remains the same.</p>

<p>Any comments?</p>

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<p>Well there are a few more differences than that. </p>

<p>The maximum Hope is $1800 ($3600 if student attends an eligible institution in a Midwestern disaster area). The maximum AO is $2500.</p>

<p>Hope is non refundable. AO is partially refundable (up to $1000).</p>

<p>Hope does not allow books as Qualified expenses unless required by all students and paid to the institution. AO allows books and they do not have to be purchased from the institution. </p>

<p>Hope 2 years. AO 4 years. (as you mentioned).</p>

<p>Income cut offs are higher for AO than for Hope.</p>

<p>You can only claim the Hope in 2009 if you are claiming at least one student who is attending an institution in a Midwestern disaster area, and then you can not to claim the American opportunity credit for any student in 2009.</p>

<p>I was wondering why the Hope was even still there. Didn’t think about the Midwestern disaster area thing. So if you have 2 students and one is in a mid western disaster area it might be beneficial to claim Hope for both ($3600 and $1800 = $5400) rather than the AO for both ($5000).</p>

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According the the IRS instructions, AO is not refundable if the credit is on the student’s return and the student is under 24. Otherwise, I agree.</p>

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<p>^^ My understanding is that this is if the student is under 24 and their earned income is less than 50% of their own </p>

<p>I am still trying to quite figure it out. My son is 23 and his earned income is certainly >50% of his support. My daughter is 20 and we did not claim her as a dependent i 2008 because her earned income plus her loans were >50% of her support. But They are saying just earned income for the AO refundable credit. And her earned income for 2009 was quite a bit lower. </p>

<p>So I think my son will be eligible (his earned income was well over 1/2 his own support), but maybe not my daughter. I fact I think she is probably back to being our dependent this year. I will have to crunch her numbers and figure all this out.</p>

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<p>I hope my understanding is right. It will kind of suck if my son can not get it just because he earned too much to be our dependent on taxes.</p>

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<p>Do you think they could make this stuff any more complicated? Sheez.</p>

<p>I had to walk through the form, and the info sheet, instructions, and the form itself before I (think) I fully understood it.</p>

<p>Here’s the info sheet (with a flow chart or two):</p>

<p>[Publication</a> 970 (2009), Tax Benefits for Education](<a href=“http://www.irs.gov/publications/p970/ch02.html]Publication”>http://www.irs.gov/publications/p970/ch02.html)</p>

<p>Here’s the instructions for filling out the 8863 form:</p>

<p>[Instructions</a> for Form 8863 (2009)](<a href=“http://www.irs.gov/instructions/i8863/ch02.html]Instructions”>http://www.irs.gov/instructions/i8863/ch02.html)</p>

<p>And here is the form itself:</p>

<p><a href=“http://www.irs.gov/pub/irs-pdf/f8863.pdf[/url]”>http://www.irs.gov/pub/irs-pdf/f8863.pdf&lt;/a&gt;&lt;/p&gt;

<p>My specific concern was to what degree the Credit could offset self employment tax. The answer, I think, is that just the refundable portion can be used to offset self employment tax.</p>

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<p>Yes they sure make it complicated. I can understand it all (I think) except the refundable credit rules for students under 24. They have me a bit confused. Though I think it looks like my son can claim it on his return as he provided >50% of his support with earned income. But only we can claim it for my daughter if she qualifies as our dependent this time around. You would think it would be based just on whether they can or cannot be claimed as a dependent based.</p>

<p>Sigh.</p>

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<p>It’s kind of sticky too. My son attends Northwestern and we recieved the tax form from the school. I thought for sure we would have no problem with the AO credit but it turned out much closer than I thought. They billed (and these are very round numbers) about $24,500 in tuition for the 1st two quarters and my sons scholarship received was about $20,000. At first I was like "what?. I pay almost $20,000 out of pocket between my sons loans and my parent loans. But when they figured my sons scholarship it was on the whole amount to attend. Tuition, Room and Board, Books, Fees, and travel. So even though I am paying alot out of pocket, I just barely qualified for the AO Credit.</p>

<p>Hopefully I have explained that correctly.</p>

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<p>Yeah-- qualified expense for purposes of this credit doesn’t include room & board-- that’s where much of that $20K went.</p>

<p>But it does include required books, and required lab fees. These probably won’t be included in box 1 or 2 on the school’s 1098-T, so you have to add them in when you do the worksheet for the form 8863.</p>

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<p>And now I just realized my daughter will not qualify for the making work pay credit if she is our dependent this year. She didn’t earn that much this year but she worked for what she earned just the same as anyone who is not a dependent!!</p>

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<p>

That’s why I started this conversation. I’ve been reading this stuff for the last two days and trying to figure it out. From what I understand, the kid has to claim themselves on their return in order to get the credit, just like before. So most kids, just like before, probably won’t have enough income to take advantage of the credit. Which is why the REFUNDABLE part of the credit has its advantage. But from what I’ve read, they don’t qualify for the REFUNDABLE part if they are under 24. The rest of the credit they still qualify for.</p>

<p>The income increases will mean more parents get to take the credit, but they probably won’t need the refundable part, since most parents who can afford that kind of tuition, have enough tax liability to take it all.</p>

<p>And you’re right about the Making Work Pay Credit. Can’t take if if you’re a dependent and the parents don’t get it for the child either.</p>