The IRS has several tax incentives regarding saving for college and paying tuition. The American Reinvestment and Recovery Act of 2009 (ARRA) expanded some education related tax incentives for 2009-2010. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended these tax incentives for 2011 and 2012. For additional information from the IRS on educations savings plans and other related tax credits and deductions, see here: http://www.irs.gov/newsroom/article/0,,id=213044,00.html
529 Plans
One notable change is the inclusion of computer technology and Internet access to the list of qualified expenses payable by 529 Plan distributions. Currently, distributions from 529 Plans are tax-free as long as they are used to pay for qualified higher education expenses for a designated beneficiary. These expenses include qualified tuition, required fees, books, supplies, equipment and special needs services. For students enrolled at least half-time, room and board also qualify. For 2009 and 2010, the ARRA change adds expenses for computer technology and equipment, Internet access, and related services to be used by the student while enrolled at an eligible educational institution. With computer ownership for incoming students becoming a requirement on more and more campuses every year, this inclusion is a welcome change to the current 529 Plan rules. In general, expenses for computer technology are not qualified expenses for the lifetime learning credit.
American Opportunity Credit
The 2009 Act also created the American Opportunity Tax Credit (AOTC), which modifies the Hope credit for the years 2009-2010, making it available to a broader range of taxpayers. Again, this has been extended for 2011 and 2012. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Here are some key features of the new credit:
- This credit is available for four years, unlike the old Hope credit, which was only available for two years. If you have already claimed the Hope credit for two years, you are now eligible to claim the AOTC for an additional two years.
- 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% of the first $2,000 spent and 25% 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. This is higher than the prior maximum Hope credit of $1,800.
- 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. However, 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.”
Students who have already completed four years of college still qualify for the lifetime learning credit and the tuition and fees deduction as in the past, even if they no longer qualify for the AOTC.
Phase Out
Like many other tax credits and deductions, the AOTC has some restrictions based on your income. For 2009 through 2012, the full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the income limit is $160,000. The credit is phased out for taxpayers with incomes above these levels and eliminated for single and head of household taxpayers when their MAGI reaches $90,000. For married taxpayers filing joint returns, the credit is eliminated when their MAGI reaches $180,000. Married taxpayers filing separate returns will not qualify for the credit at any income level. These income limits are higher than the limits under the existing Hope and lifetime learning credits.
If you would like further information regarding this issue as well as any other tax related issue, please contact Henssler Financial at 770-429-9166 or at experts@henssler.com
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
With the 2005 Terri Schiavo case, many individuals, regardless of age, became aware of the importance of communicating their healthcare wishes. Her case, which ensued after Schiavo suffered heart failure and subsequent brain damage at the age of 26, involved a seven-year battle between her husband and her parents over a healthcare decision. She had no written instruction—whether she would have wanted to live by being sustained through feeding tubes and life support. As Schiavo did not have a living Will, the courts were required to decide her fate, leaving speculation as to what she would have truly wanted.
Living Will
A living Will is also known as a “health care declaration.” This is a document in which you can express specific wishes with regard to what medical care you wish to receive in the event you are incapacitated or too ill to make decisions on your own.
This document allows you to make your wishes known in advance, regarding specific treatment methods, such as resuscitation, surgery, use of respirators, administration of drugs, food, water and pain relief. This document does not allow you to select someone to act on your behalf.
Healthcare Power of Attorney
To ensure that your wishes are met if you are unable to communicate, you can name a healthcare agent in addition to or as part of your living Will. A Healthcare Power of Attorney enables you to provide authority to a healthcare agent to make decisions regarding your healthcare needs in the event that you cannot. While we strongly suggest that you name a healthcare agent, it is not a requirement.
In some states, this person is called a “healthcare proxy” or “attorney in fact,” even though the person does not need to be an attorney. You are able to give as little or as much control to this person as you wish. For example, you can give this person the authority to make decisions based solely on the wishes stated in your living Will and/or make decisions as he or she deems necessary should unforeseen instances arise. While this responsibility usually ends at the time of your death, it is also possible to give your agent the authority to oversee issues relating to organ donations and body disposition after death.
In some states, the living Will and healthcare power of attorney can be combined into a single document—often called an “advance directive.” In most cases, these documents become effective as soon as your doctor, or other healthcare official, determines that you do not have the ability to understand the healthcare options available to you, and/or you are unable to physically communicate your wishes regarding your care. If there is ever doubt about the level of “incapacity,” then your doctor, in conjunction with your agent or close relatives, will decide the best time for the documents to become effective.
Choosing a Healthcare Agent
You should take into consideration the following factors when choosing an agent:
- Do you trust the person without a doubt?
- Is the person someone you know will assert your wishes, if conflict arises involving family members or your doctor?
- Where does the person reside? This is especially important in a case when you have a long illness, and the agent needs to stay close to you for a period of time to oversee your care.
- Will the person also oversee your finances in the event of your incapacity? If you have separate agents, disagreements could cause interference with medical decisions, especially when payment is needed to cover medical expenses.
It is also important, but not required, to select an alternate agent in the event that your first choice is not able to assume the responsibility. It is possible to have more than one agent.
You must be at least 18 years old to create a living Will or healthcare power of attorney. You must be of sound mind and be able to understand what the documents are and how they work. As with most legal documents, you must sign these documents and have them witnessed and notarized.
It is important to state your specific healthcare wishes in a living Will. Your doctor or medical institution will be required to follow these wishes. At the very least, you should communicate your wishes to those close to you—your family members and close friends. For more information on your options, talk to your estate-planning lawyer or contact
