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Before taxpayers and/or their dependents enter the classroom, it would benefit them to educate themselves about the many tax provisions related to education that may save them tax dollars. This is especially true because postsecondary education and its costs have been on the rise. Undergraduate enrollment rose 25% between 1997 and 2007, while graduate enrollment rose 67% between 1985 and 2007. 1 If those enrollment numbers seem surprising, consider the cost of the education for those enrolled. While the average tuition, room, and board for students at the nation’s four-year public colleges and universities for the academic year 2007–2008 was $13,424, the cost for four-year private colleges and universities during that period was $30,393. 2
Given the size and frequency of these educational costs, taxpayers must take advantage of any opportunities to mitigate them, and practitioners need to be alert to the tax benefits that can best serve their clients. This is important not only for tax compliance reasons but also—and perhaps more beneficially—for financial planning reasons. In fact, these potentially significant tax-saving measures could affect not only the taxpayer but also multiple generations within the taxpayer’s family. This article provides an in-depth discussion of available educational benefits as well as recent federal legislation that increases those benefits.
Categories of Exclusions
Perhaps the most advantageous available tax benefits are six exclusions for educational benefits that would otherwise be taxable. The IRS has established a hierarchy within which these six exclusions function that allows taxpayers and their family members to take advantage of multiple exclusions for qualified tuition and related expenses.
Employer-Provided Educational Assistance
The employer-provided educational assistance exclusion is twofold: While taxpayers may avail themselves of an employer-provided plan by which to derive a tax-free benefit, the taxpayers’ employers can provide employees with a limited form of tax-free compensation without all the related payroll tax and benefit payments that would normally be attached (for example, FICA tax, workers’ compensation, and benefit plan contributions). Ultimately, this also improves the company long term by developing a more educated work force. What is needed to make it work?
An employee’s gross income does not include amounts paid or expenses incurred by the employer for educational assistance to the employee if the employer furnishes the assistance under a qualified program. 3 In order for employees to take advantage of this exclusion, the educational assistance program offered by the employer must consist of a separate written plan for the exclusive benefit of the employees to provide them with educational assistance. There are also other requirements, such as meeting eligibility standards and notifying employees of the existence of such a program. This exclusion is limited to the first $5,250 furnished to an individual during a calendar year. Since 2001 this exclusion has applied to both undergraduate and graduate educational expenses. 4
If an employer’s program qualifies, the educational assistance that is excludible by the employee consists of any payments by an employer for expenses incurred by or on behalf of an employee for the education of the employee. 5 Such payments include, but are not limited to, expenses for tuition, fees, books, supplies, and equipment, as well as any courses of instruction offered to the employee. However, employer-provided tools or supplies that the employee may retain after completing a course of instruction, along with the costs of meals, lodging, or transportation incurred during the education, are not excludible. 6
Qualified Scholarships and Tuition Reductions
Qualified scholarships: Another available exclusion is for qualified scholarships. Any amount received as a qualified scholarship by an individual taxpayer who is a candidate for a degree at a qualifying educational organization is excluded from income. 7 Under Treasury regulations, a qualifying educational organization includes primary, secondary, preparatory, and high schools in addition to colleges and universities. 8 This creates a very long window of time to use this exclusion if taxpayers or their dependents are fortunate enough to receive them. Qualified scholarships include any funds that the individual received as a scholarship or fellowship grant that were used for qualified tuition and related expenses. 9 However, taxpayers must be aware that they cannot exclude the component of scholarships designated for room, board, and travel expenses. 10 In addition, this exclusion does not apply to any portion of an amount received that represents payment for such services as teaching, research, or other services required as a condition for receiving the qualified scholarship. 11
Qualified tuition reductions: The sister exclusion to the qualified scholarship exclusion is the qualified tuition reduction exclusion. Under this, gross income does not include any tuition reduction provided to an employee—or a person treated as an employee—of an educational organization for education below the graduate level. 12 “A person treated as an employee” is defined by reference to Sec. 132(h). This includes the spouse and the dependent children of the employee. 13 A special rule applies to individuals who are graduate students at an educational organization and are engaged in teaching or research activities for that organization. These individuals may exclude a qualified tuition reduction from income regardless of the fact that the individual is being educated at the graduate level. 14
Education Savings Bond Program
A third form of income exclusion applies to U.S. Series EE Bonds, provided for under Sec. 135, which was enacted as part of the 1988 Technical and Miscellaneous Revenue Act. 15 This section excludes from the gross income of any individual who pays qualified higher education expenses during the year any income received from the redemption of any qualified U.S. savings bond, subject to certain limitations. 16
The exclusion applies to qualified higher education expenses such as tuition and fees, net of benefits such as amounts from a qualified tuition program (QTP), 17 employer-provided educational assistance, and scholarships. 18 It also includes any contributions to a QTP on behalf of a designated beneficiary and contributions to a Coverdell education savings account. 19 However, the interest exclusion applies only to bonds issued after December 31, 1989, to an individual who reached age 24 before the date of issuance. 20 The deduction is further limited based upon modified adjusted gross income (MAGI) and is currently adjusted to phase out between $70,100 and $85,100 in 2010 ($105,100 and $135,100 in the case of joint returns). 21
Coverdell Education Savings Account
The Coverdell education savings account (CESA), formerly known as the education IRA, 22 is found under Sec. 530. Distributions from a CESA are not taxable to the extent they do not exceed the qualified education expenses for the year. 23 The CESA is a trust created for a designated beneficiary exclusively to pay for his or her qualified education expenses until the beneficiary reaches age 30, unless the beneficiary has special needs. 24 Any remaining balance is included in the beneficiary’s income within 30 days of the date the beneficiary turns 30. Any individual may set up a CESA for a designated beneficiary. This may allow grandparents, aunt and uncles, or brothers and sisters who meet the income limitation to contribute.
The contributions to a CESA are nondeductible and are subject to income limitations, phasing out ratably for MAGI between $95,000 and $110,000 ($190,000 and $220,000 for joint returns). 25 The maximum annual nondeductible contribution per designated beneficiary to a CESA is $2,000. 26 While the contributions are nondeductible, the CESA allows earnings to grow effectively tax free, and they are excludible if used to pay qualified education expenses. Any distributions in excess of qualified expenses will be includible in income by determining the excludible portion of the distribution (essentially the aggregate amount of contributions compared with the total CESA balance at the time of distribution), with the balance being an inclusion. 27 Further, distributions from CESAs and QTPs can be used in the same year to the extent of qualified educational expenses.
Practitioners need to be cognizant of the use of these benefits throughout the taxpayer’s educational life because these tax-free distributions apply not only to postsecondary education but also to elementary and secondary education expenses. 28 This exclusion can also be used with either the Hope or lifetime learning credits (see the discussion on p. 469) within the same year as long as the same expenses are not used for both benefits. 29 With the advent and extension of the kiddie tax, the CESA is a great savings alternative that allows funds to grow on a tax-free basis for minors without creating current income that, depending on the age of the child, could end up being taxed at their parents’ highest tax rate. 30
Education Exception to Additional Tax on Early IRA Distributions
Actual distributions taken by taxpayers from their traditional (i.e., non-Roth) individual retirement accounts (IRAs) are taxable. 31 Such distributions taken prior to age 59½ are normally subject to the 10% penalty over and above the income tax. 32 However, if the distribution is used to pay for qualified higher education expenses for the taxpayer, the taxpayer’s spouse, or any child or grandchild of the taxpayer or taxpayer’s spouse at an eligible educational institution, they are not subject to the 10% penalty, as long as the distributions do not exceed the qualified higher education expenses of the taxpayer. 33
Recent case law has focused on early IRA distributions, with one holding alleviating the tax burden normally associated with early distributions. In Benz, the taxpayer took a premature IRA distribution to pay for higher education expenses. 34 These distributions were in addition to those the taxpayer received in a series of substantially equal periodic payments that were not subject to the 10% penalty. 35 The IRS ruled that as a result of this second pre-59½ distribution, all distributions were now subject to the 10% penalty. The tax court ruled in favor of the taxpayer and against the IRS, highlighting the fact that a taxpayer may qualify for more than one statutory exception to the additional 10% penalty.
With the economic climate affecting funds available for education, practitioners should advise their clients to use IRA distributions for education while avoiding the additional 10% penalty. Based on the recent Benz case, practitioners should also keep in mind that a taxpayer may be able to take advantage of multiple exceptions to this penalty. It is also worth noting that such distributions extend to grandchildren.
529 Plans
The final and probably most significant tax and financial planning category of the six exclusions analyzed here is QTPs, more commonly known as 529 plans. 36 Distributions from 529 plans are exempt from tax if they are used to pay a beneficiary’s qualified higher education expenses. 37 In 2001, Congress made substantive changes to 529 plans that were initially intended to sunset after 2010. 38 But after an extended period of much controversy and uncertainty, Congress made the 2001 changes permanent in 2006. 39
Special rules apply to 529 plans in 2009 and 2010. For those years, the American Recovery and Reinvestment Act of 2009 (ARRA) expands the definition of qualified educational expenses to include the purchase of computer technology and equipment, as well as internet access and related services, if they are to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is enrolled at an eligible educational institution. 40
Further, the IRS announced that for 2009 only, a participant in a QTP can change the investment strategy selected for the account twice—instead of once—without violating Sec. 529(b)(4), which provides a once-a-year rule for changing investment options. 41
Recent stock market conditions have created losses for taxpayers not only in taxable accounts but also in CESAs and 529 plans. The amount of the loss, deductible as a miscellaneous itemized deduction, is determined when all amounts have been distributed from the respective CESA or 529 plan, and the amounts distributed are less than the unrecovered basis (essentially the contributions put into the account). 42
529 plans are very flexible and allow anyone to contribute. However, since all plans must be established and maintained by a state, 43 each state will mandate maximum and minimum contributions to the plans. For most states, the maximum contribution is based upon a dollar limit on the total balance in the 529 plan. Accordingly, these plans provide a way to transfer assets to multiple family members and multiple generations. Practitioners should advise their clients about the annual gift tax exclusion for those looking to make large contributions to 529 plans. An election is available 44 for taxpayers who intend to contribute in excess of the annual exclusion amount for any given year whereby the donor may take into account the aggregate ratably for a five-year period, beginning with the calendar year in which the contribution was made. 45 In addition, unlike a number of other benefits under the Code, there is no income limitation that would restrict or deny contributions from higher-income individuals.
The Hierarchy of the Benefits
When considering applying the aforementioned education-related exclusions, the taxpayer must consider the following hierarchy for them, as set out in the Code:
- Qualified expenses will first be reduced by qualified scholarships, employer-provided educational assistance, and any other educational assistance that is excludible from income other than gifts, bequests, devises, or inheritances; 46
- Any remaining qualified expenses are then permitted to be used for either the Hope credit (referred to as the American opportunity tax credit in 2009 and 2010) or the lifetime learning credit; 47
- Any remaining qualified expenses may then be allocated and claimed against distributions from Coverdell education savings accounts and qualified tuition plans; 48
- Any remaining qualified expenses may be used to exclude the interest from a qualified U.S. savings bond; 49 and
- Qualified expenses cannot be taken as a deduction if such expenses were taken as an exclusion or tax credit as enumerated above. 50
Above-the-Line Deductions
The Code provides two deductions for adjusted gross income (AGI), allowing nonitemizers, particularly students and recent graduates, to benefit through lower taxes. However, the amount is capped and limited based on MAGI. Taxpayers should evaluate taking the tuition deduction relative to using the tax credits to determine which alternative minimizes their tax liability.
Student Loan Interest
The first deduction for AGI involves interest on education loans. Specifically, an individual who has a legal obligation to make interest payments on a qualified education loan may take as a deduction for the tax year an amount equal to the interest he or she paid during the tax year on any qualified education loan. 51 From 2001 onward, the maximum deduction is $2,500. 52 However, there is a further limitation on this maximum allowable amount based on MAGI. 53 For 2010, the phaseout of the $2,500 maximum deduction begins for individuals with MAGI of $60,000, and the deduction is completely phased out for individuals with MAGI of $75,000 ($120,000–$150,000 for joint returns). 54
Qualified Tuition and Related Expenses
The second AGI deduction concerns deductions for qualified expenses, which were available for tax years before 2010. 55 Here, an individual may take a deduction in an amount equal to the qualified tuition and related expenses that he or she paid during the tax year. 56 Deductions under this section do not require any relationship to a taxpayer’s trade or business, as would be the case under the Sec. 162 work-related education deduction (see the discussion below). Rather, this deduction applies to the tuition and fees expended on the enrollment or attendance at an eligible educational institution for the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer for whom a deduction under Sec. 151 applies. 57 However, this deduction was subject to a dollar limitation after 2003, based upon the type of return and the taxpayer’s level of AGI (see the exhibit). 58
Tuition deductions under Sec. 222 should always be reviewed relative to the tax credit provisions (as described on p. 469) to determine the maximum tax savings to be derived based upon deductibility. Further, if taxpayers cannot deduct tuition expenses under Sec. 222 due to the income limitations and cannot take tax credits under Sec. 25A, they should evaluate whether the tuition and related expenses qualify as deductible under Sec. 162.
Education Expenses Deducted from AGI
Employees who find themselves paying for education expenses related to their employment that are not reimbursed by their employer may be able to deduct these expenditures under Sec. 162. This deduction differs from the above-the-line deduction for tuition and fees because the expenses must be related to the taxpayer’s trade or business. Under Sec. 162, employees may take a deduction for all the “ordinary and necessary expenses paid during the tax year in carrying on a trade or business.” 59 As further interpreted by the regulations, this deduction is available if the education maintains or improves the skills required by the employee in his or her employment or other trade or business, or meets the express requirements of the employer (or those of the applicable law or regulations) that are required as a condition to the retention of the employee’s established employment relationship, employment status, or rate of compensation. 60
However, these deductions are not without limitations. Expenditures used to meet the minimum educational requirements of an employer or used to qualify the taxpayer for a new trade or business are treated as “personal expenditures” under the Code and are thus nondeductible. 61 However, if no limitation is applicable, such ordinary and necessary expenditures are deductible as miscellaneous itemized deductions from AGI (in the aggregate those deductions must exceed 2% of AGI). There is no limit on the amount of the deduction or the year of payment, and the expenses are not limited to tuition and enrollment fees (as they are under Sec. 222). Further, these expenses may include reasonable allowances for transportation and qualified travel, compensation for services rendered, and rental payments for property for purposes of employment. 62
Tax Credits
In addition to deductions, the Code contains tax credits that taxpayers can use to receive credit for educational costs. Specifically, the Hope scholarship credit and the lifetime learning credit are accessible through Sec. 25A. 63 Those two credits are distinct, noninteracting credits, even though both are under the same section of the Code. 64 ARRA expanded (and renamed) the Hope credit for 2009 and 2010. 65
Hope Scholarship Credit
Among the eligibility requirements for the Hope credit is that the student must be taking at least half the normal course load for the area of study he or she is pursuing. 66 For eligible students, the Hope credit may be applied to the qualified tuition and related expenses at an eligible educational institution of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer for whom a deduction under Sec. 151 would apply. 67
In 2009, a taxpayer could use the Hope credit in an amount equal to 100% of the qualified tuition and related expenses paid by the taxpayer during the tax year up to $1,200, plus 50% of the amount in excess of $1,200 but not in excess of $2,400. 68 Therefore, the total maximum allowable amount in 2009 is $1,800. However, the Hope credit is subject to an income limitation, which for 2009 is MAGI in excess of $50,000 ($100,000 for joint returns). 69
However, as a result of ARRA, there is an enhanced Hope credit, termed the American opportunity tax credit, that applies to qualified tuition and related expenses paid in 2009 or 2010. 70 The American opportunity tax credit covers 100% of the qualified tuition and related expenses paid in either tax year up to $2,000, plus 25% of the amount over that figure up to $4,000. Therefore, for tax years 2009 and 2010, taxpayers can take a total credit of $2,500. Further, the American opportunity tax credit is available to taxpayers who may not have been able to claim it for prior tax years because of the limitation on AGI. Specifically, the credit encompasses an increased range in MAGI from $80,000 to $100,000 ($160,000 to $180,000 for a joint return). 71
There are usually limitations on the Hope credit, such as the inability to use the credit for more than two tax years. 72 Further, if the student has completed two years of postsecondary education, he or she may not use the Hope credit at all. However, the enhanced American opportunity tax credit is available for not just two tax years but four, and the taxpayer may apply it to the first four years of postsecondary education. 73 Moreover, in addition to covering tuition and fees, the enhanced credit also applies to related expenses for course materials. 74
Through 2009, the Hope and lifetime learning credits are nonrefundable and are subject to both the taxpayer’s regular tax liability and the alternative minimum tax (AMT) liability for the tax year, limiting the amount otherwise allowable. 75 However, for 2009 and 2010 up to 40% of the American opportunity tax credit is refundable unless the qualifying student is a child whose income is subject to the kiddie tax. 76
After 2009, the Hope and lifetime learning credits are subject only to the taxpayer’s regular tax liability reduced by the tentative minimum tax for the tax year. 77 If the taxpayer is subject to the AMT after 2009, he or she cannot use the credits to offset the tax but can use the American opportunity tax credit for this purpose. 78
Lifetime Learning Credit
The lifetime learning credit applies to qualified tuition and related expenses associated with educational courses taken to acquire or improve job skills. 79 Taxpayers can take a credit for these expenses in an amount equal to 20% of the qualified tuition and related expenses that the taxpayer paid during the tax year, up to $10,000. 80 Like its counterpart the Hope credit, the lifetime learning credit is phased out ratably. 81
Taxpayers need to evaluate the maximum benefit under either of the educational tax credits or the tuition deduction. They can maximize their opportunity by using both tax credits, as they are mutually exclusive. Keep in mind that the tuition amounts claimed for a tuition deduction cannot be claimed for tax credits, and vice versa. 82 Therefore, taxpayers should calculate how to best use the tuition paid given the eligibility for the credits, income limitations, and tax rates.
In cases where taxpayers cannot claim the education credits because of the AGI phaseouts, the family may benefit by having the parents waive the dependency exemption and allowing the child to take the credits.
Conclusion
The time to take advantage of tax-saving measures in connection with the costs of postsecondary education is now. As detailed above, due to recent legislation, case law, and IRS pronouncements, the Code contains provisions that may mitigate the ever-rising costs of enrollment in postsecondary educational institutions. However, as part of the planning process, taxpayers must be aware of the limitations and requirements embedded within the Code sections or they may fail to recognize the opportunity to take advantage of these benefits.
In addition to the exclusions and credits itemized above, current economic conditions have resulted in an increasing default rate on student loans. Normally, forgiveness of such debt is taxable. 83 However, a number of options are now available to qualifying students that would provide an exemption from income for that debt forgiveness. For an in-depth discussion of this recent change, see Schneider, “Student Loan Forgiveness and Repayment Programs,” 40 The Tax Adviser 390 (June 2009).
In the end, taxpayers and practitioners must evaluate available alternatives in order to maximize tax benefits and minimize tax liability. Given the multitude of tax benefits and their detailed requirements, an education should start well before the first day of school in order to make use of tax-saving (and ultimately cost-saving) measures.
Footnotes
1 National Center for Education Statistics, “Fast Facts” (citing U.S. Department of Education, National Center for Education Statistics, Digest of Education Statistics, 2008 (NCES 2009-020), chapter 3).
2 National Center for Education Statistics, Digest of Education Statistics, 2008 (NCES 2009-020), Table 331.
3 Sec. 127.
4 Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), P.L. 107-16, §411.
5 Sec. 127(c)(1).
6 Sec. 127(c)(1) (flush language) (noting that the term “educational assistance” also does not include any payment for any course or education involving sports, games, or hobbies).
7 Sec. 117(a) (noting that the educational organization must be described in Sec. 170(b)(1)(A)(ii) to qualify).
8 Regs. Sec. 1.170A-9(c)(1).
9 Sec. 117(b) (defining qualified tuition and related expenses as the tuition and fees required to attend an educational organization defined in Sec. 170(b)(1)(A)(ii) and the fees, books, supplies, and equipment required for the education at such institutions).
10 Prop. Regs. Sec. 1.117-6(c)(2).
11 Sec. 117(c)(1).
12 Sec. 117(d)(2).
13 Sec. 132(h)(2). A dependent child is a child of the employee (as defined in Sec. 152(f)) who is a dependent of the employee or both of whose parents are deceased and who has not attained age 25.
14 Sec. 117(d)(5)[4].
15 Technical and Miscellaneous Revenue Act of 1988, P.L. 100-647, §6009.
16 Secs. 135(a)–(b) and (d).
17 Exclusions as they relate to QTPs must fall within the meaning of Sec. 529(b).
18 Secs. 135(c)(2)(A) and 135(d).
19 Sec. 135(c)(2)(C).
20 Secs. 135(c)(1)(A) and (B).
21 Rev. Proc. 2009-50, 2009-45 I.R.B. 617, §3.13.
22 An Act to Amend the Internal Revenue Code of 1986 to Rename the Education Individual Retirement Accounts as Coverdell Education Savings Accounts, P.L. 107-22, §1.
23 Sec. 530(a); Sec. 530(b)(2) (defining qualified education expenses as qualified higher education expenses and qualified elementary and secondary education expenses, as further defined in Secs. 529(e)(3) and 530(b)(3)).
24 Sec. 530(b)(1).
25 Sec. 530(c)(1).
26 Sec. 530(b)(1)(A)(iii) (as amended by P.L. 107-16, §401).
27 Sec. 530(d)(2).
28 Sec. 530(b)(2)(A).
29 Sec. 530(d)(2)(C)(i).
30 Sec. 1(g).
31 Sec. 408(d)(1).
32 Secs. 72(t)(1) and (2)(A)(i).
33 Secs. 72(t)(2)(E) and (7)(A) (stating that for purposes of Sec. 72(t)(2)(E), the term “qualified higher education expenses” means qualified higher education expenses defined in Sec. 529(e)(3)).
34 Benz, 132 T.C. No. 15 (2009).
35 Id. See also Sec. 72(t)(2)(A)(iv).
36 Sec. 529.
37 Secs. 529(a) and (e)(3)(A).
38 EGTRRA, §§401 and 901.
39 Pension Protection Act of 2006, P.L. 109-280, §1304.
40 Sec. 529(e)(3), as amended by ARRA, P.L. No. 111-5, §1005. See also Sec. 529(e)(3)(A)(iii) (noting that the clause relating to computer technology and equipment does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature).
41 Notice 2009-1, 2009-2 I.R.B. 250; see also Sec. 529(b)(4).
42 IRS Publication 970, Tax Benefits for Education (2009) at 69.
43 Sec. 529(b).
44 Election is made on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
45 Sec. 529(c)(2)(B). Proposed regulations were issued on January 18, 2008, wherein the IRS and Treasury stated that they will issue rules to clarify the process of this election. See REG-127127-05, 73 Fed. Reg. 3441 (January 18, 2008).
46 Sec. 25A(g)(2).
47 Id.
48 Secs. 530(d)(2) and 529(c)(3)(B).
49 Sec. 135(d)(2).
50 Sec. 222(c)(2).
51 Sec. 221.
52 Sec. 221(b)(1).
53 Secs. 221(b)(2)(A)–(B).
54 Rev. Proc. 2009-50, §3.23. The phaseout limits begin at $50,000 and are adjusted annually for inflation. See Secs. 221(b)(2) and (f).
55 Sec. 222(e) (stating that this section is inapplicable to tax years beginning after December 31, 2009). As of this writing, four bills were pending before Congress that would extend Sec. 222 for 2010 or make it permanent.
56 Secs. 222(a) and (d)(1) (defining qualified tuition and related expenses as having the meaning given in Sec. 25A(f), which does not include any course involving sports, games, or hobbies (unless part of a degree program) or certain nonacademic fees).
57 Sec. 222(d)(1), referring to Sec. 25A(f)(1).
58 Sec. 222(b)(2)(B).
59 Sec. 162(a).
60 Regs. Secs. 1.162-5(a)(1) and (2).
61 Regs. Secs. 1.162-5(b)(2) and (3).
62 Sec. 162(a).
63 Sec. 25A(a).
64 Sec. 25A(c)(2)(A).
65 ARRA, §1004.
66 Sec. 25A(b)(3).
67 Sec. 25A(f)(1)(A) (defining qualified tuition and related expenses for purposes of this section).
68 Rev. Proc. 2008-66, 2008-45 I.R.B. 1107 at §3.05(1). The Code section relating to the Hope credit states that the allowable amount is 100% of the qualified tuition and related expenses paid by the taxpayer during the tax year, up to $1,000 plus 50% of the amount in excess of $1,000 but not in excess of the applicable limit, which is adjusted periodically for inflation (Secs. 25A(b) and (h)).
69 Rev. Proc. 2008-66, §3.05(2). The phaseout limits begin at $40,000 ($80,000 for joint returns) and are adjusted annually for inflation. See Sec. 25A(d)(h)(2).
70 Sec. 25A(i), added by ARRA, §1004.
71 Sec. 25A(i)(4).
72 Sec. 25A(b)(2).
73 Sec. 25A(i)(2).
74 Sec. 25A(i)(3).
75 Sec. 26(a)(2), as amended by ARRA, §1011(a).
76 Sec. 25A(i)(6).
77 Sec. 26(a)(1).
78 Sec. 25A(i)(1), as amended by ARRA, §1004(a).
79 Sec. 25A(c)(2)(B); see also Sec. 25A(f)(1) (defining qualified tuition and related expenses for purposes of the lifetime learning credit).
80 Sec. 25A(c)(1) (for tax years beginning before January 1, 2003, the maximum credit was $5,000).
81 Rev. Proc. 2009-50, §3.05(2).
82 Sec. 25A(g)(5); see also Regs. Sec. 1.25A-5(d).
83 Sec. 61(a)(12).
EditorNotes
Jack Zook is managing director of Zook Dinon PA in Moorestown, NJ, and a tenured faculty member at LaSalle University in Philadelphia, PA. Kristin Zook is an associate at Costello, Cooney & Fearon, PLLC, in Syracuse, NY. For more information about this article, contact Mr. Zook at jzook@zdcpas.com.
