Year-End Tax Planning (Part III)
12/8/2003
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5. For 2003, some taxpayers may deduct as an adjustment to income (that is, an above-the-line deduction) up to $3,000 of qualified higher education tuition and related expenses. A married couple filing jointly will be eligible for the full deduction if their modified adjusted gross income (MAGI) is under $130,000.
For taxpayers with MAGI exceeding $130,000 but not $160,000, a $2,000 deduction of education expense is allowed. The eligible MAGI dollar amount will be cut in half when the taxpayer is a single. (Married couple filing separate returns will not be eligible for the deduction regardless of income level).
If you are eligible for the deduction, consider make your 2004’s tuition and expense payment before the year-end to bring forward the deduction. But keep in mind that 2004’s allowable deduction will be $4,000 instead of $3,000.
So, depending on your particular situation (say, your MAGI and tax rates in both years as well as your expected education expenses), you can find out which way is better: pay before the end of 2003 or wait until after the New Year.
6. For education expenses incurred in 2003 for academic periods that began in 2003, you may be eligible for either the “Lifetime Learning Credit” (for tuitions and fees of any high education after the second year of college, including graduate studies) or the “Hope Scholarship Credit” (for tuition and fees of the first two years of credited colleges).
For 2003, the maximum “Lifetime” credit is $2,000 (calculated as 20% of qualified tuitions and expenses up to $10,000). 2003’s maximum “Hope” credit is $1,500 (that is 100% of first $1,000 and 50% of the next $1,000 of qualified tuitions and other expenses).
The MAGI limitation for you to be eligible for either Hope or lifetime credit is $83,000 for 2003 and $85,000 for 2004 for a married couple. Always find out which way will give you maximum tax savings if you are eligible for both the above-the-line deduction and the tuition credit. (Generally, you cannot take both in the same year).
This is not as obvious as you might think because the above-the-line deduction’s eligible expenses are not the same as that for tax credits. Also, on top of Federal tax rates, state tax rates vary widely (most states generally follow the Federal return’s MAGI but not the credits) so that you must look at completed picture to get where you want to be.
As can be seen above, if you run your own business or have stock options or in whatever position that gives you more control on your MAGI while incurring the education cost, a little planning could make you a lot of happier on the next April 15. Well, we’d love to make every April 15 more pleasant for you.
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