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Tax Benefits for college costs set to expire!

September 17, 2010

I have two daughters and the youngest one, Lace, turned 25 in December. She is a college graduate with a degree in Anthropology, that she received from the UofA. She wasn’t sure what to do with her degree (unlike my parents that said “accounting or law, that is what college is for!,” I said “have a great time in college, just get any degree in 4 years”) so she took a few years off, traveled and did odd jobs. She, now, has decided to become a children’s therapist (she was always great with kids) and needed to get a degree in psychology in order to begin the process of grad school, to further that career. She mythodically chose the school, moved to that city in thaqt different state, got a job, established residency by changing her drivers license etc. But when it came to financial aid she learned that she would be considered “out of state” for tuition purposes simply because she had not filed a tax return there and lived thru a season. So that fact doubled her tuition. She began the process of financial aid and that was as daunting as the paperwork to buy a house. Sadly she will be paying for college without aid. Luckily there are tax credits for situations like this; but to her it is one more of life’s lessons that she is not happy about!

Meanhwile some of the tax benefits for college costs are set to expire Dec 31, 2010…unless congress steps in…we we’ll see…
The American Opportunity Credit, included in last year’s economic stimuloous package, provides a tax credit of up to $2,500. per student in 2010. You can claim the credit for up to 100% of the first $2,000 in qualified college costs and 25% of the next $2,000. To get the full credit, you’ll need to spend at least $4,000 on qualified expenses; very easy to do! Fourty percent of the credit is refundable, so low-income families that do not owe federal taxes could receive a check from the government for up to $1,000. In addition, the income limits on this credit are broader limits than on the Hope and Lifetime Learning Credits, which have been around for many years. Married couples with modified adjusted gross income of up to $160,000 can claim the full credit.
The Coverdell Education Savings Accounts have allowed families to save up to $2,000 a year in a portfolio of various investments. Contributions are after-tax, but withdrawls are tax free as long as the money is used for qualified expenses. Along with college related costs, the money can be used for tuition at a primary or secondary school. Sadly, depending on what congress does, these accounts will become much less appealing after Dec 31, 2010 as the annual contributions will shrink to $500 and tuition to primary and secondary schools will no longer be qualified expenses.

The tax code constantly changes and can have huge effects on us all. Stop by or give us a calll and we can talk about how this effects you. You can always reach us though our website at http://www.gunwel.com or call me at 212-979-6830.

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