Monthly Archives: August 2009

EPISODE IV: A NEW HOPE (CREDIT)

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The Hope Credit has been greatly expanded for 2009 and 2010 under the American Recovery Act of 2009. The Hope Credit is increased to the sum of:

  1. 100% of the first $2,000 of qualified tuition and related expenses
  2. 25% of the next $2,000 of qualified tuition and related expenses

The maximum amount of the credit is therefore $2,500.

Prior to 2009, the credit was only available for the first two years of college. For 2009 and 2010, the credit is now available for the first four years of college.

The definition of “related expenses” is now expanded to include the cost of books and other course materials (which were not allowed as qualifying expenses prior to 2009).

Forty percent of the Hope Credit is now refundable—meaning you can get a refund even if you have no tax liability.

Example: John and Joan pay for their son Jim’s college tuition. His tuition, fees, and books for the year cost $5,000. The credit is equal to:

  1. 100% of the first $2,000 of expenses = $2,000
  2. 25% of the next $2,000 of expenses = $500
  3. Total Hope Credit = $2,500

Let’s say John and Joan’s tax liability for the year is $1,300. Prior to 2009, the Hope Credit was not refundable, so the maximum Hope Credit they could take was limited to their tax liability ($1,300). They lost the extra $1,200 Hope Credit. Now that 40% of the Hope Credit is refundable, they are able to take more of the credit:

Refundable Portion: 40% times $2,500 = $1,000

Nonrefundable Portion: 60% times $2,500 = $1,500

The nonrefundable portion of the Hope Credit is still limited to their $1,300 tax liability (they lose $200 of the Hope Credit here), but they can now take a $1,000 refundable Hope Credit so their total Hope Credit is $2,300.

The Adjusted Gross Income (AGI) phaseouts have also been increased for 2009 and 2010. The phaseout range for a Single filer is $80,000 to $90,000, and the phaseout range for a Joint filer is $160,000 to $180,000.

A final note—the tuition and related expenses must be PAID in 2009 or 2010 for an academic period BEGINNING in 2009 or 2010. For example, if your child registers for a Winter 2009 course (which begins January 2009), but you pay the tuition bill in 2008, the tuition was not paid in 2009 and therefore will not qualify for the enhanced Hope Credit.

A final, final note—the Hope Credit will be known as the American Opportunity Credit for 2009 and 2010.

Fine Print: This posting contains general tax information that may or may not apply in your specific tax situation. Please consulteth a tax professional before thou relyest on any information contained in this post.

Important Tax Law Changes for 2009: If you like paying taxes, DO NOT read this.

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Here is an overview of some of the more relevant tax law changes taking effect in 2009.

The Make Work Pay Credit
This credit equals 6.2% of your earned income (e.g., wages, self-employment income). The maximum credit amount is $400 and $800 if married filing jointly. The credit is phased out if your Adjusted Gross Income is more than $95,000 ($190,000 if married filing jointly). You may have noticed an increase in your take home pay a few months ago. This is because the withholding tables were adjusted to reflect this credit.

Economic Recovery Credit
A $250 credit is available if you collect Social Security. If you are married, you and your spouse may each receive $250 if both are on Social Security. The purpose of this credit was to provide relief for people who are on Social Security but do not work. If you work and collect Social Security, the government feels you are double dipping by claiming both credits. Therefore, your Make Work Pay Credit is reduced by the $250 Economic Recovery Credit to prevent double dipping.

Hope Credit Greatly Expanded
The biggest change with this credit is that it is now allowed for the first four years of college. Prior to the law change, it could only be claimed for the first two years of college. The credit has been increased to $2,500 (100% of the first $2,000 of qualified expenses plus 25% of the next $2,000 of qualified expenses). Qualified expenses include tuition, fees, and course materials. Another change is that 40% of the credit is now refundable—which means you can receive up to $1,000 even if you owe no taxes. To add confusion, the Hope Credit is now being referred to as the American Opportunity Tax Credit.

Unemployment Compensation Tax Break
Unemployment compensation is taxable. Beginning in 2009, you can exclude up to $2,400 of unemployment compensation from your income.

Deduction for Sales Tax on Purchase of New Vehicle
If you buy a passenger automobile, light truck, or motorcycle between February 16, 2009 and December 31, 2009 you can deduct the sales tax you paid on the purchase. The deduction is limited to the sales tax on the first $49,500 of the purchase price. The deduction can be used to increase your standard deduction amount or you can take it as an itemized deduction (if you are not electing to take the state and local general sales tax deduction).

Residential Energy Credits

Nonbusiness Energy Property Credit
You may be able to claim a credit of 30% of the cost of certain energy efficient property or improvements you placed in service during 2009. This credit expired after 2007, but it has been reinstated and expanded. The total amount of credit you can claim in 2009 and 2010 is $1,500 (for both years combined, NOT for each year).

Residential Energy Efficient Property Credit
This credit is equal to 30% of the costs for qualified solar electric property, qualified solar water heating property, qualified small wind energy property, and qualified geothermal heat pump property. There is no dollar limitation on the amount of this credit.

Adoption Benefits Increased
For 2009, the maximum adoption credit and the exclusion from income under your employer’s adoption assistance program has increased to $12,150.

Social Security and Medicare Taxes
The maximum amount of wages subject to the social security tax for 2009 is $106,800. There is no limit on the amount of wages subject to Medicare.
This posting contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

This posting contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
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