Hello Detroit,
During the tax season it seems somewhat insincere to spill a lot of ink over the ups and downs of multi-million dollar corporations while America’s real economy goes unacknowledged. Considering the fact that taxpayer money is what’s keeping the government afloat right now, getting excited over the wealthy trading money with the wealthy feels hollow. Meanwhile very little discussion is given to the very process that, if the powers that be are to be believed, is intended to rescue us from ourselves.
I’m a tax preparer when taxes are in season, and in this work I find myself explaining to people things that should have been explained to them already. Employers are only concerned with the part of your income that pertains to their own tax liability and, if they are honest, will tell you to your face that your personal finances are your own concern. In short gentle reader, there is a vast amount of information regarding your money that isn’t being communicated to you.
In 2010, there are numerous changes to the way your income is being taxed. Many of these changes directly affect Detroit residents. While not a census taker, I have seen enough tax returns to know that many of Detroit’s residents are students, many of whom also have children under 13. The current recession has caused many workers to go back to school to retrain and many students to put off graduation to gain a competitive edge in the job market. That’s why this tax tip is aimed at my college students.
American Opportunity Credit
You may remember this as the Hope Credit if you bothered to pay that much attention last year. The Hope Credit was an $1800 tax credit that was available to college students in their first two years of school. In addition to only being available for two-years of a four-year education, the Hope Credit was nonrefundable, meaning that it didn’t count toward a refund if one was anticipated. Finally, the Hope Credit wasn’t available to anyone with over two years worth of course credits which made it a poor incentive for workers returning to school.
The American Opportunity Credit modifies the Hope Credit for 2009 and 2010, making it available to a broader range of taxpayers. The credit is equal to 100 percent of the first $2000 spent towards qualified education expenses and 25 percent of the next $2000. This is a complicated way of saying that spending $4000 on education expenses earns qualified students a tax credit of $2500. Also, the tax credit can be claimed by taxpayers earning less than $80,000 in modified adjusted gross income ($160,000 when filing jointly) which is an increase over the income limits on both the Hope Credit and the lifetime learning credit.
Finally, and this is the most significant change for most students, 40 percent of the American Opportunity Credit is refundable. This means that even people who owe nothing in taxes can get up to $1000 in additional refunds per eligible student. Existing education credits (with the obvious exception of this one) do not provide a refund to people who owe no tax.
The credit is not available to those who do not meet the income requirements, nor is it available to those who already have four years of postsecondary education credits in the filing year. Finally, the refundable portion of the credit is not available to any student whose investment income is, or may be, taxed at the parent’s rate. This is commonly referred to as the “kiddy tax” and intended to prevent wealthy taxpayers from sidestepping their tax burden by claiming a portion of their income as that of their dependents.
Obviously, talk to your tax professional about which, if any, of these credits can be claimed on your return and bookmark this site for more tax info throughout the season.
Video Tip…
Filers take note of the new Schedule M, Making Work Pay and Government Retiree Credits. These credits can amount to $1300 in tax relief. Watch the IRS video to learn more.
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