Whether you have a high school student who is still debating the merits of Clemson or South Carolina, or you have a child that is working eagerly for his or her degree at Winthrop or another university, the question of how to pay for these college expenses certainly on everyone’s mind. Luckily, there are a few tax credits that can be utilized to offset at least a portion of these expenses.

Typically, these benefits apply to you, your spouse, or a dependent you claim as an exemption on your tax return:

1. American Opportunity Credit – This credit has been extended for an additional two years: 2011 and 2012. The credit is valued at up to $2,500 per eligible student and is available for the first four years of post-secondary education. Forty percent of this credit is refundable in most cases. This means that you may be able to receive a tax refund from the government of up to $1,000, even if you owe no taxes. Qualified expenses include tuition and fees, course related books, supplies, and equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income is below $80,000 ($160,000 if married filing jointly).

2. Lifetime Learning Credit – In 2011, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled at an eligible educational institution. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student, so graduate-level and professional degree courses qualify, but to claim the credit, your modified adjusted gross income must be below $61,000 ($122,000 if married filing jointly). The $2,000 cap applies per return, not per student.

3. Tuition and Fees Deduction – This deduction can reduce the amount of your income subject to tax by up to $4,000 for 2011 even if you do not itemize your deductions. Generally, you can claim a tuition and fees deduction of up to $2,000 for qualified higher education expenses for an eligible student if your modified adjusted gross income is below $80,000 ($160,000 if married filing jointly). The deduction can be as much as $4,000 if your modified AGI is under $65,000 ($80,000 if married filing jointly).

4. Student loan interest deduction – Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, if your modified adjusted gross income is less than $75,000 ($150,000 if married filing jointly), you may be able to deduct interest paid during the year on a qualified student loan used for higher education regardless of when you obtained the loan. It can reduce the amount of your income subject to tax by up to $2,500, even if you don’t itemize deductions.

For each student, you can choose to claim only one of the credits in a single tax year. However, if you pay college expenses for two or more students in the same year, you can choose to claim credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.

Remember that the education credits are claimed by the individual who claims the exemption for the student, not necessarily the person who pays the tuition. Also, the tuition expenses qualifying for the education credits can be pre-paid for the first three months of the subsequent year if you have not paid enough to take advantage of the full credit in 2011.

You cannot claim the tuition and fees deduction in the same year that you claim the American Opportunity Credit or the Lifetime Learning Credit for the same student. You must choose to take either the credit or the deduction and should consider which is more beneficial for you.

Our Charlotte CPA firm has recently announced the addition of the Coach4College planning service. We utilize your information to provide you with a personalized plan on how to take advantage of all funding sources, make the right tax decisions, and reduce the overall cost of education. If you have questions or would like to schedule an appointment to discuss how best to finance and pay for education expenses and maximize tax benefits, please give us a call.

Over the past week, starting with the State of the Union Address last Wednesday, President Obama has been speaking a lot about doing more to help the nation’s small business owners.  The question is whether or not the President is proposing real relief or more of the same lip service that small business owners have been getting over the past year.

Small Business Tax Credit. One of the big highlights of the Presidents speech was where he proposed a new small business tax credit that would go to small businesses who hire new workers or raise wages.  Generally speaking, small business owners would get a portion of the new worker’s salary or existing worker’s raise back as a tax credit – effectively allowing the government to subsidize a portion of this person’s salary.    As general policy goes, I hate the idea of the government subsidizing anything.  However, if they are going to help someone with subsidies to help create jobs, small businesses are where it should be.    After all, its better than spending $533,000 to create each temporary job, as we did with the Stimulus Bill.

Elimination of All Capital Gains Taxes on Small Business Investment. Wow!  This sounds great!  Except for one thing.  When someone invests in a small business, they typically invest for the long-term.  While this policy would mean well, will it really create a flood of investment into the small business market?  After all, these investments could indeed be subject to capital gains taxes again when they are sold 5, 10, or 20 years down the road.  Don’t get me wrong – I like the idea of lowering the Capital Gains rates because it will allow great investment capital to those people who are likely to invest in the first place.

Therein is the underlying problem that I have seen with using Capital Gains rates to encourage investment all along.  Altering the tax rate in the short-term does little to spur on long-term investment.  The problem is that the tax rate is determine based on when an investment is sold – not when the investment is made.  If I invest $100,000 into a new business venture today, what will the tax policy be 15 years from now when I sale the small business?    If the President and Congress want to spur investment, they need to allow taxpayers to “lock-in” a zero-percent capital gains rate at the time they make the investment – not years later when it is sold.  Investors like certainty.  Little certainty equals little investment.  Greater certainty equals greater investment.

I do like the idea of lowering the Capital Gains rates because it will allow great investment capital to those people who are likely to invest in the first place.  I applaud the President for this proposal.  I just happen to like it for slightly different reasons than he does.

Small Business Lending Fund. President Obama is now promoting a $30 billion fund that will be specifically designed for the nearly 8,000 small community banks (those with assets of $10 billion or less) to loan money to small businesses in hopes that it will spur job growth.   Interestingly, many in the banking industry say that the extra funds will not help lending.  They say that banks with plenty of money to lend are having trouble finding credit worthy borrowers and that small business owners are holding off on expansion and improvements due to the sluggish economy.

If a business participates in the loan program, does it subject that business to more regulation and government control?  If so, the loan may not be worth it.

Much of the success of the program will revolve around how much control the federal government wants to exercise over the program participants (the banks) and what kind of regulations the government places on the banks.    An easy example of this are the underwriting guidelines for these loans.

The federal government will have to change drastically from the ARC Loan program for small businesses if they want it to succeed.  (See prior posts, ARC Loans are Ready to Go – If You Can Find A Lender and What Ever Happened to ARC Loans?)  The ARC Loan program was a complete failure by any measure.  It was amazing to me how many SBA Lenders had never even heard of it.   A big reason for its failure was the stringent underwriting guidelines placed on the banks for a very low-profit loan for them.  They had no interest in underwriting a loan that was simply not profitable for them – even with little or no risk.

While the above three proposals are a step in the right direction, they ultimately do not solve the underlying issue.  Small business owners rarely make decisions based solely on tax results.  Regardless of whether there is a credit available, most small business owners are gong to be reluctant to hire or borrow money until they see their business moving in the right direction.

In excerpts of a speech from today that were released by the White House early, President Obama states that “Jobs will be our No. 1 focus in 2010. “  Well, that sounds spectacular, Mr. President.  I am not sure why it was such a back burner item in 2009, but at least we can look forward to 2010.  Or, are you just paying us lip service again?  Only time will tell.  In the meantime, kudos to the President for at least proposing some small business relief.

If you have been excluded from the education tax credits in the past, the new credits may now change that.  The new American opportunity credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

The American opportunity credit, in many cases, offers greater tax savings than existing education tax breaks. Here are some key features of the credit:

• Tuition, related fees, books and other required course materials generally qualify. In the past, books usually were not eligible for education-related credits and deductions.

• The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.

• The full credit is available for taxpayers whose modified adjusted gross income is $80,000 or less (for married couples filing a joint return, the limit is $160,000 or less). The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.

• Forty percent of the American opportunity credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed at the parent’s rate, commonly referred to as the kiddie tax. See Publication 929, Tax Rules for Children and Dependents, for details.

Tax planning may be in order to see how this credit change effects your tax liability.  As we have discussed in the past, we do not recomend overpaying your taxes this year in case federal or state governments decide they may repay with I.O.U.’s.  With tax planning and coaching, we can help you adjust your withholdings to increase your net pay now instead of being at the mercy of the taxing authorities to grant you your own money back in the form of a “refund”.

Well, I am back to discuss the third of a four part series on the Obama Policy Agenda Proposals that I began last week. If you missed the former posts, you can find them here:

Obama Policy Agenda Proposals Part I
Obama Policy Agenda Proposals Part II

And now, Part III:

American Jobs Tax Credit. This proposal would create a new temporary tax credit that would be available in 2009 and 2010. Existing businesses would receive a $3,000 refundable tax credit for each new full-time employee that they hire in the United States. This is one that actually sounds promising. I am undecided on the refundable portion of the credit, since I am not a big fan of refundable tax credits. At least in this instance, the funds are going to a job creator instead someone who is doing little with the money to help drive economic growth.

Extension of Unemployment Benefits and temporary suspension of taxes on these benefits. Ultimately, somone will have to pay for this (aka taxpayers.) As far as the suspension of taxes on these benefits – why is now any different than 5 years ago? In both situations, you have someone out of a job that is down on their luck. Why now do we propose that these benefits should not be taxable, yet 5 years ago the same people wanted to tax them. Why is it different now?

Automatic pension plan enrollment. Under this proposal, employers would automatically enroll employees in workplace pension plans unless the employee opted out. If an employer does not already hav a plan, it would be required to enroll employees in a direct-deposit IRA account compatible with existing direct deposit payroll systems. I agree and disagree with this one. First of all, EVERYONE should be participating in a retirement plan. I just am not sure that the government should mandate it. I would not mind it if they would funnel all of the Social Security withholding in there and let the employees and their advisors decide how to invest it – instead of the government. This can definately turn into a burden for small businesses. We will have to wait and see the rules surrounding this one if it passes. Can you, as a small business owner, imagine wearing one more hat?

Penalty-free hardship withdrawals from IRAs and 401(k) plans. This would allow people to withdraw up to 15% (a maximum of $10,000) of the funds from their retirement accounts without paying a penalty in 2008 (retroactively) and in 2009. Not a bad idea, but not a great one either. It is always a terrible idea to sacrifice your retirement funds (most of which are protected from a legal perspective) for current day needs. It will help some people get over the hump though. Unfortunately, most of them will not be as dilligent about building the funds back up as they were in jumping on the band wagon to pull them out.

Retirement Savings Incentives. Personally, I find it sad that in America we have to be incentivized to plan for our futures. Shouldn’t this be something that responsible people just do?
While I think it is ridiculous that we have to do this, I beleive that we have seen evidence over the past 100 years that proves that the majority of Americans will do little or nothing to plan for their retirement. So, go for it. At least we are rewarding responsibile savings instead of giving the $1,000 away to be spent on junk.

Increase Immigration Quotas. Supposedly, this Obama proposal is going to increase the number of “legal” immigrants in order to meet the demand for jobs. I am confused about this one. Isn’t President Obama always on TV saying that we need to create jobs, and we are losing jobs, and there are many Americans without jobs? Perhaps I am reading this wrong, but wouldn’t these new “legal” immigrants be competing with the Americans that are without jobs for the jobs?

Remove Incentives to Enter the United States Illegally. This Obama proposal is supposed to relate around a crack down on employers that hire illegal aliens. There were significant law changes within the past couple of years that will help on this front. I am not sure what else Obama has up his sleeve on this one. This sort of conflicts with the last proposal. Is the plan to crack down on Illegal immigration simple to make the illegal immigration legal? This way, they could say they solved two problems at once – although, not really.

If you have read all of this, congratulations! The good news is that Part IV only has one proposal in it. The bad news is that it may be the one that destroys your small business – as it has the potential to do to millions nationwide. Stay turned for Part IV…