As Congress has finally passed an “extender” bill, reinstating expired tax breaks, I thought this would be a good time to review the “top three” tax breaks affecting 1040s that were extended.
1) EDUCATOR EXPENSES:
Teachers, instructors, counselors, principals and aides who work at least 900 hours during an academic fiscal year in Kindergarten through 12th Grade can deduct up to $250.00 of the “out-of-pocket” cost of classroom supplies (paper, pens, glue, scissors, etc), books, computer software and hardware, and other equipment and materials used in the classroom. For educators in health and physical education the supplies must be related to athletics.
Educators who spend more than $250.00 on such items can deduct the difference as “Employee Business Expenses” under “Job Expenses and Certain Miscellaneous Deductions” on Schedule A, subject to the 2% of Adjusted Gross Income (AGI) exclusion.
This deduction will, on average, put about $63.00 in your pocket. It’s not much – but, hey, better in your pocket! Because the deduction is allowed “above-the-line”, reducing your AGI, it could also provide additional tax savings by increasing or permitting deductions and credits that are affected by AGI.
CCH reports that in 2005 this deduction was claimed by over 3 Million taxpayers.
2) TUITION AND FEES
You can deduct tuition and fees required for enrollment or attendance at any accredited college, university, vocational school or other accredited post-secondary education institution.
Fees paid for books, supplies and equipment qualify for the deduction only if these items must be paid to the qualified education institution as a condition of enrollment or a condition of attendance.
The cost of room and board, transportation, medical insurance or similar personal living expenses associated with the education are not deductible.
You must reduce the amount of qualifying tuition and fees by any scholarships, fellowships, Pell grants, employer-provided assistance, or veterans’ assistance received as well as by any interest from US Savings Bonds that has been excluded from federal income tax and any tax-free distributions from an Education Savings Account or Section 529 Qualified Tuition Program.
As I have pointed out in earlier postings, 100% of all scholarships, grants, awards and reimbursements received by the student must be applied first to tuition and fees when calculating the deduction, or an education credit. You cannot allocate such amounts between qualified tuition and fee expenses and non-qualified charges for books and supplies and room and board.
If the total qualified tuition and fees paid for the year is $8,000.00 and the student received a $3,000.00 scholarship and $2,000.00 from his father's employer, leaving a net personal payment of $3,000.00, the deduction, or credit, is based on $3,000.00, even though the student also paid $1,000.00 for books and supplies and $6,000.00 for room and board.
You can deduct up to $4,000.00 if your “Modified” Adjusted Gross Income (MAGI) is less than $130,000.00 for Married Filing Joint or $65,000.00 for Single, Head of Household or Qualifying Widow(er), or up to $2,000.00 if your MAGI is between $130,001.00 and $160,000.00 for Married Filing Joint and between $65,001.00 and $80,000.00 for Single, Head of Household or Qualifying Widow(er). Married taxpayers filing separately cannot claim the deduction.
As with the Educator Expenses, this deduction is “above-the-line” and will reduce your AGI.
You cannot claim a deduction for tuition and fees if you also claim a HOPE or Lifetime Learning Credit for the same student, or it you deduct the costs elsewhere on the return, such as an “Employee Business Expense” on Schedule A or a business expense on Schedule C.
If your AGI is such that you have the option of claiming either the deduction for tuition and fees or an education credit you should do calculations for all your options and see which way provides the most tax savings. The Lifetime Learning Credit is 20% of the first $10,000.00 of qualified tuition and fees – but the deduction could provide a 25% savings. Plus, as mentioned above, the deduction will reduce your AGI and in doing so could provide additional tax benefits.
This is just one example where the Tax Code provides choices on how to treat a certain situation or item (i.e joint or separate, credit or deduction, depreciate or Section 179). When faced with choices you should do separate tax calculations to determine which option will result in the lowest tax. Also consider how the various federal options affect your resident and non-resident state and local tax returns.
Since the IRS had already “gone to press” with the 2006 forms and instructions before Congress decided to pass the extender bill, it is unclear just where you will report these two deductions on your 2006 Form 1040 or 1040A. As soon as I find out I will pass the information along to you.
to be continued…
1) EDUCATOR EXPENSES:
Teachers, instructors, counselors, principals and aides who work at least 900 hours during an academic fiscal year in Kindergarten through 12th Grade can deduct up to $250.00 of the “out-of-pocket” cost of classroom supplies (paper, pens, glue, scissors, etc), books, computer software and hardware, and other equipment and materials used in the classroom. For educators in health and physical education the supplies must be related to athletics.
Educators who spend more than $250.00 on such items can deduct the difference as “Employee Business Expenses” under “Job Expenses and Certain Miscellaneous Deductions” on Schedule A, subject to the 2% of Adjusted Gross Income (AGI) exclusion.
This deduction will, on average, put about $63.00 in your pocket. It’s not much – but, hey, better in your pocket! Because the deduction is allowed “above-the-line”, reducing your AGI, it could also provide additional tax savings by increasing or permitting deductions and credits that are affected by AGI.
CCH reports that in 2005 this deduction was claimed by over 3 Million taxpayers.
2) TUITION AND FEES
You can deduct tuition and fees required for enrollment or attendance at any accredited college, university, vocational school or other accredited post-secondary education institution.
Fees paid for books, supplies and equipment qualify for the deduction only if these items must be paid to the qualified education institution as a condition of enrollment or a condition of attendance.
The cost of room and board, transportation, medical insurance or similar personal living expenses associated with the education are not deductible.
You must reduce the amount of qualifying tuition and fees by any scholarships, fellowships, Pell grants, employer-provided assistance, or veterans’ assistance received as well as by any interest from US Savings Bonds that has been excluded from federal income tax and any tax-free distributions from an Education Savings Account or Section 529 Qualified Tuition Program.
As I have pointed out in earlier postings, 100% of all scholarships, grants, awards and reimbursements received by the student must be applied first to tuition and fees when calculating the deduction, or an education credit. You cannot allocate such amounts between qualified tuition and fee expenses and non-qualified charges for books and supplies and room and board.
If the total qualified tuition and fees paid for the year is $8,000.00 and the student received a $3,000.00 scholarship and $2,000.00 from his father's employer, leaving a net personal payment of $3,000.00, the deduction, or credit, is based on $3,000.00, even though the student also paid $1,000.00 for books and supplies and $6,000.00 for room and board.
You can deduct up to $4,000.00 if your “Modified” Adjusted Gross Income (MAGI) is less than $130,000.00 for Married Filing Joint or $65,000.00 for Single, Head of Household or Qualifying Widow(er), or up to $2,000.00 if your MAGI is between $130,001.00 and $160,000.00 for Married Filing Joint and between $65,001.00 and $80,000.00 for Single, Head of Household or Qualifying Widow(er). Married taxpayers filing separately cannot claim the deduction.
As with the Educator Expenses, this deduction is “above-the-line” and will reduce your AGI.
You cannot claim a deduction for tuition and fees if you also claim a HOPE or Lifetime Learning Credit for the same student, or it you deduct the costs elsewhere on the return, such as an “Employee Business Expense” on Schedule A or a business expense on Schedule C.
If your AGI is such that you have the option of claiming either the deduction for tuition and fees or an education credit you should do calculations for all your options and see which way provides the most tax savings. The Lifetime Learning Credit is 20% of the first $10,000.00 of qualified tuition and fees – but the deduction could provide a 25% savings. Plus, as mentioned above, the deduction will reduce your AGI and in doing so could provide additional tax benefits.
This is just one example where the Tax Code provides choices on how to treat a certain situation or item (i.e joint or separate, credit or deduction, depreciate or Section 179). When faced with choices you should do separate tax calculations to determine which option will result in the lowest tax. Also consider how the various federal options affect your resident and non-resident state and local tax returns.
Since the IRS had already “gone to press” with the 2006 forms and instructions before Congress decided to pass the extender bill, it is unclear just where you will report these two deductions on your 2006 Form 1040 or 1040A. As soon as I find out I will pass the information along to you.
to be continued…
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