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Is College Expenses Not Deductible ?

Written By Julianna Benson on Monday, April 8, 2013 | 12:13 PM

Is College Expenses Not Deductible ?Is College Expenses Not Deductible ? - With less than two weeks to go to file your 2012 tax return, you
Today's question:
probably have questions. Whether you prepare your own tax return or pay someone to do it for you, we are here to help. Every day until April 15, members of the American Institute of Certified Public Accountants have agreed to answer tax questions from USA TODAY readers. Submit your questions to taxadvice@usatoday.com.

Q: Our son is a freshman attending an out- of-state university. We are paying tuition, travel expenses, car expenses including insurance, books, dorm and meal fees and travel expenses for trips back and forth during holidays and other visits home. Tuition amounted to $25,000 for the fall 2012 semester, and with the additional expenses we easily spent $30,000 per semester for the 2012/2013 year. Can we claim the costs besides tuition as deductions on our taxes for 2012?

A: For purposes of the tuition and fees deduction, student activity fees and expenses for course-related books, supplies, and equipment can be considered qualified education expenses but only if they have to be paid to the institution as a condition of enrollment or attendance. For example, even if you buy your books directly from the institution, they will not be considered a qualified education expense unless they are required to be purchased directly from the institution.

Expenses for insurance, medical expenses (including student health fees), room and board, transportation, and personal living expenses are not considered qualified education expenses even if the amount has to be paid to the institution as a condition of enrollment or attendance.

It's also important to note that if you are married filing jointly and your Modified Adjusted Gross Income (MAGI) is $130,000 or less, your maximum tuition and fees deduction is $4,000. If your MAGI is $130,001-$160,000 your maximum deduction is $2,000, and if your MAGI is over $160,000 no deduction is allowed.

The Tuition and Fees Deduction section of IRS Publication 970 gives all the details of the tuition and fees deduction.

Clare Levison, CPA
Blacksburg, VA

Previous questions:
Q: Help! I didn't file taxes in 2011 or 2012, I make a modest wage in a factory and am losing my house to foreclosure. What's the best way to "get right" with the government?

A: I would like to encourage you to file your 2012 tax returns, federal and state, by April 15 or at least file extensions by that date and pay as much as you can with the extension. The IRS charges a penalty for the failure to timely file of 5% per month (maximizes at 25%) of the tax required to shown on the return, less credits for withholding and estimated taxes paid. The penalty for the failure to file timely adds a huge burden to what you will eventually owe the IRS. Each state has its own penalty structure so I will not be commenting on those penalties.

You should file your 2011 tax returns as soon as possible even if you do not have the funds to pay the tax liability in full. The IRS encourages taxpayers to "get into compliance" by filing delinquent tax returns by mailing them to the same Service Center that you mail your 2012 return. If you owe taxes with the return there will be a Failure to Pay penalty (1/2 of 1% per month up to 25%) and interest will run on the tax and the penalty.

It sounds like you might not have the money to pay the taxes owed with the return. If you have the ability to pay monthly on an Installment Agreement you can file a Form 9465, Installment Agreement Request, with your return or separately. Also, you can get an "Online Payment Agreement" application at www.IRS.gov. If you owe $50,000 or less, the IRS will allow up to 72 months to repay your tax, penalty and interest. There is a fee to establish an Installment Agreement of $105 if paid by check, money order or credit card but is reduced to $52 with electronic fund withdrawal. This user fee is reduced to $43 by filing Form 13844 for low income taxpayers.

There are other options, such as filing an Offer in Compromise, if you cannot repay your taxes over the 10-year collection statute of limitations. Also, for taxpayers owing greater than $50,000 financial information is required when establishing an Installment Agreement. These are topics for another day.

Mary Lou Gervie, CPA
Watkins Meegan, Bethesda, Md.

Previous questions:
Q. I had deferred compensation from my previous employer which was not paid upon my retirement in June 2009 due to bankruptcy. The court system has determined all people will get their deferred compensation less legal fees. My deferred comp was mapped to a mutual fund's performance to determine actual payout amount. Can I claim a loss for the difference between what was originally due to be paid upon retirement and the final distribution amount received almost four years later? Or, can I claim a loss for the value of the deferred comp based on the mutual fund's performance over the four years since retirement and the actual value received.

A. Unfortunately, you can't deduct income that you didn't receive and pay taxes on, which means that you are unable to claim a loss for the amount that you expected to receive but did not due to the bankruptcy. This is an example of the downside of deferred compensation, which is that when you made the election, you basically agreed to the risk of becoming an unsecured creditor of your employer.

A case could be made for taking a loss for the change in value of the mutual fund over four years based on the value you will receive, but that is a very specific case that would require the personal engagement of a CPA or tax attorney. May I also opine that considering the state of the stock market in 2009, there is a good chance that the mutual fund's value has only increased since then?

Kelley C. Long, CPA
Shepard Schwartz & Harris, Chicago

Q: I live in Washington state, where gay marriage is legal, we have no state income tax, and we are a community property state. My partner and I have been together for 12 years, but we have not yet converted our domestic partnership to marriage since it became legal in December. In previous years we have both filed our federal returns as single, but this year we bought a house together and we are wondering what the proper way would be for us to file our federal income tax.

A: Federal law does not treat same-sex or registered domestic partners (RDPs) who are married under state law as married. Thus, such couples may not file their federal income tax return as married filing jointly (MFJ) or as married filing separately (MFS). So, being married under state law will not change your filing status under federal law.

Because you live in Washington state though, being married or RDPs changes how much income you each report on your federal returns. The IRS will follow state community property laws and has provided guidance for RDPs and same-sex couples in three such states: California, Nevada and Washington.

Basically, spouses or RDPs in these states split their community property income, with each spouse or partner reporting half of it on their federal returns. The IRS has provided several FAQs, as well as Publication 555, and Form 8958, to help in determining how to report community property income (as well as deductions and credits) on each spouse's federal tax return.

You each still file a separate return (not a joint return). Note that there could be changes to the filing rules depending on the outcome of the U.S. Supreme Court's decision on the constitutionality of the Defense of Marriage Act (DOMA).

For the mortgage interest, if you are married or RDPs in Washington, you can show the split of the mortgage interest on Form 8598 (and report your share on your Schedule A, with a reference to "See Form 8958"). If you are not RDPs or a married couple in Washington, you each determine your share of the mortgage interest and you each deduct your share that you paid.

One of you likely received a Form 1098, Mortgage Interest Statement, with only one name and Social Security Number on it. The IRS suggests that the other payor attach a statement to their return explaining that they paid part of that Form 1098 amount and provide the name and address of the person who received the Form 1098, and how much of the mortgage interest each owner paid. On Schedule A, Line 11 for mortgage interest, add "See attached" so the IRS knows the statement explaining the interest amount is on the return (since the IRS does not have a Form 1098 for that owner). For details, see IRS Publication 936, page 9.

Annette Nellen, CPA
San Jose State University, San Jose, Calif.

Q: I filed 2 state tax returns for 2011, one for Massachusetts and one for Rhode Island. I received $400 from Rhode Island, but paid $200 for Mass. I itemized on my federal return. Do I have to claim the $400 refund as income, or can I reduce it by $200?

A: I will answer the question in two parts:

• The $200 paid to Massachusetts can be claimed as an itemized deduction on your 2012 tax return.

• The $400 refund from Rhode Island will need to be reported as income in 2012 if you paid taxes to Rhode Island in 2011 and claimed the taxes as an itemized deduction on your 2011 tax return. The entire amount of the refund would be reported as income if the entire amount of Rhode Island taxes were paid in the 2011 calendar year. This would include withholding amounts, quarterly estimates, extension payments and balance-due payments.

A portion of the refund may be taxable if the Rhode Island taxes credited on the 2011 tax return were paid over two years. In other words, you need to determine if payments were made in the 2012 calendar year but were credited in the 2011 tax-reporting year.

These type of payments would include a 2011 fourth-quarter estimate paid in January 2012 as estimates are due January 15th. Another type of payment is an extension payment that was paid in April of 2012 but was for the 2011 tax return year.

Therefore, if a state tax refund is the result of payments paid in two different years, you make an allocation to exclude the portion of the refund that was allocable to the 2012 calendar year payment. Please note that the portion that was excluded from income is also an offset to your 2012 state tax deduction.

Don Zidik, CPA
McGladrey LLP, Boston
Q: I am 73 and I cannot itemize my deductions (I will use the standard deduction of $7,400). My question: I heard there was a way to deduct my property tax ($4,600) while utilizing the standard deduction. Is this still allowed?

A: Unfortunately, this is not still allowed, and there is no way to deduct your property taxes on your federal income tax return without itemizing.

Five years ago, Congress passed a bill allowing a single person to deduct up to $500 of property taxes on a primary residence in addition to their standard deduction. The limit was $1,000 for a married couple filing jointly.

Unfortunately, this provision was only put in place for 2 years, so for the years 2008 and 2009, a person could deduct at least a portion of their property taxes, even if they were not itemizing.

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended some tax breaks, but this tax break was allowed to expire and has never been reinstated.;

The instructions to for the 2010 Form 1040 on the IRS website lists expired tax benefits on page 6. For more information on itemized and standard deductions:

Frequently asked questions for itemized and standard deductions

Mackey McNeill, CPA
Mackey Advisors, Bellevue, Ky.
Description: Is College Expenses Not Deductible ?
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