Education Planning Flashcards
Equals 100% of first $2000 of qualified expenses paid in tax year, plus 25% of the next $2000.
Maximum credit allowed in a given year is $2500 per student, if there are $4000 of qualified expenses.
American Opportunity Tax Credit
- Provides annual taxpayer reimbursement for qualified tuition and related expenses per family - $2,000 per year
- The taxpayer must spend $10,000 annually on qualified expenses to get full credit - a partial credit can be obtained at lower levels
- Credit is based on a 20% factor: $10,000 x 20% is $2,000.
Lifetime Learning Credit Benefits
- Tax credit is available for tuition and enrollment fees for undergraduate, graduate, or professional degree program
- Does not require enrollment in a degree program, nor does it necessitate at least half time enrollment
- Can be claimed for unlimited number of years
- Subject to phaseout based on AGI:
- $110 - $130K MFJ
- $ 55 - $ 65K Others
Requirements for Lifetime Learning Credit
- If two or more children in the same household incur qualified expenses in the same year, the parents may claim:
a) Lifetime Learning Credit for the family;
b) American Opportunity Tax Credit for each child; or
c) Lifetime Learning Credit for one child and an American Opportunity Tax Credit for the other. - Only one credit is allowed per child per year.
Coordination of the American Opportunity Tax Credit and the Lifetime Learning Credit
a. Allowed to student (or parent if a PLUS loan) for interest paid on loans incurred solely to pay qualified higher education expenses at eligible educational institutions
b. Interest is deductible as an adjustment to reach AGI
c. Maximum: $2,500 per year
d. 2015 Phaseout Limits
1) $130 - $160K MFJ mod AGI
2) $. 65 - $. 80K Single mod AGI
e. Borrowers are allowed to deduct interest over the term of their loan
Deduction for Student Loan Interest
- Allow contributors (usually parents) to prepay tuition today at a particular school for an individual in the future
- The plan will lock in today’s prices but subjects the participant to many risks
a. The beneficiary may choose a school different from the one named in the plan
b. The beneficiary may not be accepted into the school named in the plan
Section 529 Plan (Prepaid Tuition Plan)
- This plan allows an individual to make contributions today into a savings fund
- The earnings grow tax deferred
- If the proceeds are used for higher education expenses, the distributions are tax free
Section 529 Plan (College savings plan)
a. Contributions must be made in cash
1) Cash, check, money order, and credit cards are acceptable
2) A contribution of property is not allowed
b. Plans must use separate accounting for each beneficiary
c. Direction of investments
1) Permits the contributor to select among different strategies when the initial contribution is made to establish the account
a) Investment options include stock mutual funds, bond mutual funds, and money market mutual funds
b) Some plans offer age-based portfolios that shift automatically as beneficiary gets closer to college age
d. The account cannot be pledged as security for a loan
Section 529 Plan Rules
a. Tax-deferred growth
b. Tax-free distributions if used for education
c. Generally, removes assets from estate
d. Generally, low commission and management fees
e. Many states offer state income tax deductions for contributions
f. The owner can change the beneficiary at any time
g. The owner decides when and how expenses are paid
h. The amount deposited varies by state; most vary from $100,000 to $250,000
i. For gift tax purposes, contributions can be treated as though they were made ratably over a five-year period
j. Contributions are NOT phased out, even at higher AGI levels
k. Can be coordinated with other education plans but no double dipping is allowed
Section 529 Plan Advantages
What is the benefit of the American Opportunity Tax Credit?
Credit reduces the amount of tax you must pay.
What is the annual limit of the American Opportunity Tax Credit?
Up to $2500 per student
What expenses qualify besides tuition and enrollment fees for the American Opportunity Tax Credit?
Course materials, computers, and internet access used for education.
What education qualifies for the American Opportunity Tax Credit?
First 4 years of undergraduate.
What are some of the other conditions that apply to the American Opportunity Tax Credit?
- Can be claimed for 4 years.
2. Must be enrolled at least half-time in a degree program.
In what income range do benefits phase out for the American Opportunity Tax Credit?
Single: $80,000 - 90,0000
MFJ: $160,000 - 180,000
What is the benefit of the Lifetime Learning Credit?
Credits can reduce the amount of tax you must pay.
What is the annual limit for the Lifetime Learning Credit?
Up to $2,000 per family
What education qualifies for the Lifetime Learning Credit?
All undergraduate and graduate education.
In what income range do benefits phase out for the Lifetime Learning Credit?
Single: $55,000 - $65,000
MFJ: $110,000 - 130,000
What is the benefit of the Coverdell Education Savings Account?
Earnings are not taxed.
What is the annual limit for the Coverdell Education Savings Account?
$2,000 contribution per beneficiary
