Thursday, January 21, 2010

Are Computers Eligible Education Expenses?

Q My daughter was required to buy a laptop computer when she started college last fall? Can I include that as an eligible expense for the Education Tax Credits?

A The American Recovery and Reinvestment Act was passed last year and created the American Opportunity Credit, which expanded the existing Hope credit. And, when the credit was expanded, the definition of qualified expenses was also expanded.

The credit can be claimed for tuition and certain other qualified expenses paid for yourself, your spouse, or your dependant for higher education in 2009. The term "qualified tuition and related expenses" now includes expenditures for required course materials, including books, supplies and equipment required for a course of study. Those additional costs need not be paid directly to the institution and do not have to be a condition of enrollment.

So, if the computer is required by the higher education institution, the cost would be a “qualified education expense” for the American Opportunity Credit.

The American Opportunity Credit can be claimed for expenses paid for any of the first four years of post-secondary education at an “eligible educational institution.” (Any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. The educational institution should be able to tell you if it is an eligible educational institution.)

Taxpayers will receive a tax credit based on 100 percent of the first $2,000 of tuition, fees and course materials paid during the taxable year, plus 25 percent of the next $2,000 of tuition, fees and course materials paid during the taxable year. Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back.

The credit begins to decrease for individuals with incomes above $80,000 or $160,000 for joint filers and is not available for individuals who make more than $90,000 or $180,000 for joint filers.

Computers can also be eligible education expenses for 529 plans. If, however, you take the above-the-line deduction instead of the credit, the old definition of qualified expenses apparently applies, and you can only deduct payments made directly to the education institution.

New Real Estate Tax Deduction for Non-itemizers

Much like the ‘New Car Tax Deduction’ (see below), there is a new standard tax deduction for those who don’t qualify to itemize their tax deductions, but pay real estate taxes. The deduction amount is equal to the amount of real estate taxes paid up to $500 for single filers or up to $1,000 for joint filers. This property tax deduction is in addition to the standard deduction used by filers.

This option especially benefits older homeowners and others who have paid off or paid down their mortgage and no longer have the big interest deductions that usually are the major reason for itemizing.

New Car Sales Tax Deduction

For 2009, individuals can deduct sales tax paid on the purchase of a new vehicle. The deduction is available for cars, trucks, motorcycles, motor homes and recreational vehicles purchased after February 16, 2009, and before January 1, 2010. And, the vehicle must be new (not used).

The deduction is limited to the taxes and fees paid on up to $49,500 of the purchase price of an eligible vehicle. The deduction is reduced for joint filers with modified adjusted gross incomes (MAGI) between $250,000 and $260,000 and other taxpayers with MAGI between $125,000 and $135,000. Taxpayers with higher incomes do not qualify.

People won't need to itemize to take this deduction. Instead, the deduction will be added to a person's standard deduction. Itemizers will take this deduction in addition to the deduction for state and local income taxes. If you elect to deduct sales taxes instead of state and local income taxes, then the taxes paid on the car will be added to the other sales taxes you paid.