• Taxpayers may elect (on Form 8863) a Lifetime Learning credit equal to
20% of up to $10,000 of qualified tuition and related expenses paid during the
tax year. The maximum credit is $2,000. IRC §§ 25A(a)(2), 25A(c)(1). There is
no limit on the number of years for which the credit can be claimed. The credit
is per taxpayer and does no vary based on the number of students in a family.
The credit is available for undergraduate, graduate and professional degree
students and for students acquiring or improving job skills. Unlike the
American opportunity tax credit (AOTC), which is available for the qualifying
expenses of each qualifying student, the Lifetime Learning credit is available
only per taxpayer. So, for example, a joint filing couple with two children
could claim no more than a $2,000 Lifetime Learning credit, even if each family
member is a qualifying student with qualifying expenses. For 2010, the credit
is phased out ratably for taxpayers with modified AGI (MAGI) from $50,000 to
$60,000 ($100,000 to $120,000 for marrieds filing jointly). For 2011, the
credit is phased out ratably for taxpayers with MAGI from $51,000 to $61,000
($102,000 to $122,000 for marrieds filing jointly).
American Opportunity Tax Credit (formerly Hope Credit)
• For tax years beginning in 2010, 2011 and 2012, individuals may elect (on Form 8863, attached to an original or amended return filed by the limitations period for filing a claim for credit or refund for the year the credit is claimed) a personal, partially refundable American opportunity tax credit (AOTC)—i.e., the Hope scholarship tax credit, as renamed and enhanced, available through 2012—equal to 100% of up to $2,000 of qualified higher-education tuition and related expenses plus 25% of the next $2,000 of expenses paid for education furnished to an eligible student in an academic period. Thus, the maximum American opportunity tax credit (AOTC) is $2,500 a year for each eligible student. The AOTC for first four years of post-secondary education (collegiate-level institutions) per student at an eligible institution. IRC §25A(i).
Lifetime learning credit
• The same treatment of expenses paid by dependent, adjustment for tax-free scholarships, etc., treatment of certain prepayments, denial of double benefit, denial of credit to marrieds not filing jointly, and nonresident alien bar that apply for AOTC purposes also apply to the Lifetime Learning credit. IRC §§25(d)(e)(f)(g)(h).
• Both the AOTC (formerly Hope) and lifetime learning credits cannot be claimed for the same student in a given year. Given a choice between the two credits, it will generally make sense to use the AOTC credit for the first four years of college, since it is currently larger and available for any number of students.
Coverdell Education Savings Accounts (CESAs)
• Taxpayers can contribute up to $2,000 per year to Coverdell Education Savings Accounts (CESAs, formerly called education IRAs) in 2010, 2011, and 2012, for beneficiaries under age 18 and special needs beneficiaries of any age. The account is exempt from income tax, and distributions of earnings from CESAs are tax-free if used for qualified education expenses.
• Nondeductible annual contributions of up to $2,000 can be made to an education IRA for any child under 18. Funds can accumulate and be paid out tax-free for college expenses, including books, room, and board.
• Funds in an education IRA must ether be paid out before the age 30 or rolled into an education account for another child, or the IRA will be subject to tax and penalties.
Here are some helpful suggestions:
• If your income is too high to let you establish education IRAs for your children, make a $2.000 gift to each child and have the child establish the IRA with himself/herself and the beneficiary.
• Because the annual contribution limit is so low, the longer an education IRA can grow, the more useful it will be as a source of funds for college. Start as early in your child's life as you can. You may also find it beneficial to roll an older child's IRA into the IRA of a younger child to get a longer compounding period.
• Shop around for an educational IRA with reasonable fees. If fees are too high, they may eat up the account's annual earnings.
• In your planning, remember that the education credits apply to expenses paid not only for your dependent child, but also to qualifying education expenses paid for you and your spouse.
Section 529 Plan - Saving for Higher Education:
Provide taxpayers with income tax benefits and estate planning benefits while allowing grantors (owner of the plan) more control in comparison to other higher education saving plans. Here is some facts about the 529 plan.
§529 Plan in a nutshell:
• The plan is subject to "Sunset" provision, and must be re-enacted before 2011 for qualified withdrawals to remain tax-free
• The plan is to be established by individual states
• The plan must identify a beneficiary
• Can be moved from one beneficiary to another (must be related to the original beneficiary)
• The state selects a plan manager to invest assets (in mutual fund)
• Each state sets its own maximum amount of contribution (plan limit)
• The limits are based on tuition of an eligible institute (within or outside the state)
• The limits are adjusted according to the expected increase in tuition
• Taxpayers can participate in ANY state plan, or in a multiple plans up to the maximum limits of any one plan (no residency restriction)
• The amount of contribution is limited by the plan's limits
• Anyone can establish a plan for anybody (child, grandchild, neighbor, etc.) including self.
• Owner or anyone-else can contribute the entire amount in one single year
• Single taxpayer may ADVANCE GIFT for five-years by depositing $65,000 in one year as a gift in advance for 5-years at the current rate of $13,000 per year (Annual gift tax exclusion of $13,000 excluded from tax). (Husband and wife can contribute up to $130,000)
• Gift will require filing a Gift Tax Return - Form 709
§529 Withdrawals for post-secondary education are tax free and can be made for:
• Tuition, books, fees, and required supplies and equipment in eligible institutions
• Room and board (if student is enrolled at-least part time)
• Withdrawals must be made by the owner of the plan (the contributor)
• Beneficiary cannot withdraw from plan regardless of age
• Owners must keep records of tuition paid to support withdrawals which are reported to the IRS on Form 1099-Q
• Non-qualified withdrawals are taxed at taxpayer rate
• Non-qualified withdrawals will incurs 10% penalty, except for:
○ Death,
○ Disability, or
○ Scholarship (up to the scholarship amount)
• Rollover to another 529 plan within 60-days
• The plan is a valuable estate planning tool, and allow owner more control over beneficiary, as it
• Allows owner to control the assets; while excluding the plan's asset from being included in the estate
• Owners controls withdrawals, and select a successor to control withdrawals upon his/her death
• Owner can have multiple plans
• Owner can change investment selection
• Owner can change beneficiary
• Owner is NOT obligated to pay beneficiary
Gift Tax Implications
• Gift to family members same or higher generation incurs no gift tax
• Gift to family member of lower generation is subject to "Gift Tax Exclusion"
• Excess contribution reduce the amount of lifetime gift tax credit
Example: Grandmother contributes $100,000 to "Little Johnny" 529 plan in one year. The first $65,000 is an accelerated annual gift tax for 5-years ($13,000 x 5 years), the remainder $35,000 will reduce the Grandma's lifetime credit from $5 million to $4,965,000 ($5,000,000 - $35,000).
The unified credit enables you to give away $5 million during your lifetime without having to pay gift tax on estate tax returns after January 01, 2011. According to a new law enacted in December 2010, estates valued at $5 million or less are exempt from the tax. Estates worth more than $5 million are taxed at a 35 percent rate.
In addition to the annual exclusion amounts, you also can give the following without triggering the gift tax:
• Charitable gifts.
• Gifts to a spouse.
• Gifts to a political organization for its use.
• Gifts of educational expenses. These are unlimited as long as you make a direct payment to the educational institution for tuition only. Books, supplies and living expenses do not qualify.
• Gifts of medical expenses. These, too are unlimited as long as they are paid directly to the medical facility.
• Both the AOTC (formerly Hope) and lifetime learning credits cannot be claimed for the same student in a given year. Given a choice between the two credits, it will generally make sense to use the AOTC credit for the first four years of college, since it is currently larger and available for any number of students.
Coverdell Education Savings Accounts (CESAs)
• Taxpayers can contribute up to $2,000 per year to Coverdell Education Savings Accounts (CESAs, formerly called education IRAs) in 2010, 2011, and 2012, for beneficiaries under age 18 and special needs beneficiaries of any age. The account is exempt from income tax, and distributions of earnings from CESAs are tax-free if used for qualified education expenses.
• Nondeductible annual contributions of up to $2,000 can be made to an education IRA for any child under 18. Funds can accumulate and be paid out tax-free for college expenses, including books, room, and board.
• Funds in an education IRA must ether be paid out before the age 30 or rolled into an education account for another child, or the IRA will be subject to tax and penalties.
Here are some helpful suggestions:
• If your income is too high to let you establish education IRAs for your children, make a $2.000 gift to each child and have the child establish the IRA with himself/herself and the beneficiary.
• Because the annual contribution limit is so low, the longer an education IRA can grow, the more useful it will be as a source of funds for college. Start as early in your child's life as you can. You may also find it beneficial to roll an older child's IRA into the IRA of a younger child to get a longer compounding period.
• Shop around for an educational IRA with reasonable fees. If fees are too high, they may eat up the account's annual earnings.
• In your planning, remember that the education credits apply to expenses paid not only for your dependent child, but also to qualifying education expenses paid for you and your spouse.
Section 529 Plan - Saving for Higher Education:
Provide taxpayers with income tax benefits and estate planning benefits while allowing grantors (owner of the plan) more control in comparison to other higher education saving plans. Here is some facts about the 529 plan.
§529 Plan in a nutshell:
• The plan is subject to "Sunset" provision, and must be re-enacted before 2011 for qualified withdrawals to remain tax-free
• The plan is to be established by individual states
• The plan must identify a beneficiary
• Can be moved from one beneficiary to another (must be related to the original beneficiary)
• The state selects a plan manager to invest assets (in mutual fund)
• Each state sets its own maximum amount of contribution (plan limit)
• The limits are based on tuition of an eligible institute (within or outside the state)
• The limits are adjusted according to the expected increase in tuition
• Taxpayers can participate in ANY state plan, or in a multiple plans up to the maximum limits of any one plan (no residency restriction)
• The amount of contribution is limited by the plan's limits
• Anyone can establish a plan for anybody (child, grandchild, neighbor, etc.) including self.
• Owner or anyone-else can contribute the entire amount in one single year
• Single taxpayer may ADVANCE GIFT for five-years by depositing $65,000 in one year as a gift in advance for 5-years at the current rate of $13,000 per year (Annual gift tax exclusion of $13,000 excluded from tax). (Husband and wife can contribute up to $130,000)
• Gift will require filing a Gift Tax Return - Form 709
§529 Withdrawals for post-secondary education are tax free and can be made for:
• Tuition, books, fees, and required supplies and equipment in eligible institutions
• Room and board (if student is enrolled at-least part time)
• Withdrawals must be made by the owner of the plan (the contributor)
• Beneficiary cannot withdraw from plan regardless of age
• Owners must keep records of tuition paid to support withdrawals which are reported to the IRS on Form 1099-Q
• Non-qualified withdrawals are taxed at taxpayer rate
• Non-qualified withdrawals will incurs 10% penalty, except for:
○ Death,
○ Disability, or
○ Scholarship (up to the scholarship amount)
• Rollover to another 529 plan within 60-days
• The plan is a valuable estate planning tool, and allow owner more control over beneficiary, as it
• Allows owner to control the assets; while excluding the plan's asset from being included in the estate
• Owners controls withdrawals, and select a successor to control withdrawals upon his/her death
• Owner can have multiple plans
• Owner can change investment selection
• Owner can change beneficiary
• Owner is NOT obligated to pay beneficiary
Gift Tax Implications
• Gift to family members same or higher generation incurs no gift tax
• Gift to family member of lower generation is subject to "Gift Tax Exclusion"
• Excess contribution reduce the amount of lifetime gift tax credit
Example: Grandmother contributes $100,000 to "Little Johnny" 529 plan in one year. The first $65,000 is an accelerated annual gift tax for 5-years ($13,000 x 5 years), the remainder $35,000 will reduce the Grandma's lifetime credit from $5 million to $4,965,000 ($5,000,000 - $35,000).
The unified credit enables you to give away $5 million during your lifetime without having to pay gift tax on estate tax returns after January 01, 2011. According to a new law enacted in December 2010, estates valued at $5 million or less are exempt from the tax. Estates worth more than $5 million are taxed at a 35 percent rate.
In addition to the annual exclusion amounts, you also can give the following without triggering the gift tax:
• Charitable gifts.
• Gifts to a spouse.
• Gifts to a political organization for its use.
• Gifts of educational expenses. These are unlimited as long as you make a direct payment to the educational institution for tuition only. Books, supplies and living expenses do not qualify.
• Gifts of medical expenses. These, too are unlimited as long as they are paid directly to the medical facility.
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