Will the American Opportunity Tax Credit be Another Victim of the Fiscal Cliff?

As I was driving to work yesterday, I heard an interesting article on NPR’s Morning Edition (link provided below).  Now, I am aware that everyone is probably either very tired of hearing about the Fiscal Cliff or very stressed!  However, as a heads up, here is another potential victim of the Fiscal Cliff – the American Opportunity Tax Credit.  Although originally set to expire in December of 2010, the Tax Relief and Job Creation Act of 2010 extended the American Opportunity Tax Credit for an additional two years, through December 2012.  In retrospection, a very bad date for the expiration of the tax credit because this lumps the American Opportunity Tax Credit in with all of the other services that will be under scrutiny for adjustment or elimination as Congress wrestles with the adjustments necessary to begin cutting the nation’s deficit.

Popular Student Tax Credit Will Expire:

Under the American Recovery and Reinvestment Act (ARRA), more parents and students qualified for a tax credit, the American Opportunity Tax Credit, to pay for college expenses.  A modification of Hope Credit, the American Opportunity Tax Credit has been in effect for tax years 2009, 2010 and, under ARRA, 2011 and 2012.  The American Opportunity Tax Credit has been very popular because it was accessible to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible qualified for the maximum annual credit of $2,500 per student.  Created to help tax payers whose modified adjusted gross income were $80,000 or less, or $160,000 or less for married couples filing a joint return, the credit allowed tax payers to actually receive the credit, whether they owed taxes or not, a feature that proved a huge benefit to lower income families. The credit was phased out for taxpayers with incomes above these levels. The income limits for the American Opportunity Tax Credit were higher than under the existing Hope and Lifetime Learning Credits.

Since extending this tax cut is estimated to cost $10 billion, I personally do not think it will be extended again, but I am optimistic and live in hope…..  So, what will happen if this tax credit is not extended?  The Hope College Tax Credit will come back into effect. 

Hope Tax Credit

Although the Hope Tax Credit is better than nothing, it iss a less generous program than the American Opportunity Tax Credit.  Here is a brief summary of some differences:

·         It is not refundable; it can only reduce the amount of federal taxes you pay.

·         It is worth up to $1,800.

·         100% of the first $1,200 in qualified tuition and related expenses.

·         50% of the next $1,200 in qualified tuition and related expenses.

·         It can only be used for tuition and required enrollment fees- not required course materials.

·         It can only be used for the first two years of undergraduate study.

·         It can only be claimed for two tax years.

·        The credit can be only be claimed in full for single filers' income of $50,000; partial credit is allowed up to $60,000. For joint filers, the full credit can be claimed for incomes up to $100,000; partial credit is allowed up to $120,000.

·       You can claim the Hope educational credit even if the qualified expenses were paid by college loans for students.

·       You can also claim the credit if the student withdrew from school and these expenses were not refunded.

·       Students are eligible if

• they have been enrolled at least half-time in a degree, certificate or otherwise recognized credentialed program for a semester that started in the tax year
• not already taken this education tax credit for two years
• not completed their first two post-secondary years before the tax year
• been free of a drug conviction as of the end of the tax year

SOURCES for this article were National Public Radio’s Morning Edition and the IRS Publications website. 

Link to the NPR news Article from December 11, 2012: http://www.npr.org/2012/12/11/166938090/could-the-opportunity-credit-be-eliminated

Hopefully, after the first of the year, this IRS website  will provide information for the upcoming year. (questions and answers

Save the Earth, Save Your Wallet....

OK – so this article seems to be a little off from my usual topic, but bear with me and hear me out. On Sunday, April 22 we will once again celebrate Earth Day. This began way back when I was a junior in High School, but we are still here, still trying to save the planet and, in this case, save some money too. Guess how I am going to suggest you use this “found” money? By making additional payments on your student loans, of course! Yes, you can help the planet and yourself too! You may be surprised by the amount you can save by simply switching to CFL (Compact Florescent Lights) or LED.

When you visit the lighting department of your favorite store, if you are like me, the first thing you will notice will be the price difference. These bulbs are more expensive than the incandescent bulb. They can range in price from slightly more expensive to outrageously more pricey. The good news is that the average CFL will pay for itself in energy savings within 6 months of use. Over the lifetime of a CFL bulb, you can save about $40, even more if you use the bulb in your high usage light fixtures. To see exactly how much you can save visit:

http://www.energystar.gov/index.cfm?c=cfls.pr_cfls_savings, click on the “calculate your savings “ link.

Newer and Better!  CFL bulbs have been improved over the past few years and are now available in dimmable versions, both for use with special “dimming” light fixtures, as well as bulbs that will “dim” in a standard light fixture (no expensive fixture replacements needed!).

Regardless of whether you switch to CFL or LED bulbs, our savings can really add up – up to $262 over 50,000 hour life span. (http://eartheasy.com/live_led_bulbs_comparison.html ).

Final thoughts: I am going to give you a break and I am not going to repeat how making additional payments to your student loan can help you save money and clear your debt faster (you can look at previous Blogs on this page). However, I would like to ask you to do one more thing.

Show Your Commitment: You can show your commitment to Earth Day and join a billion other people around the world. Click on the link below and select Change-Out My Light Bulbs.

http://act.earthday.org/ You may even find a few more Earth Saving ideas you’d like to join! 

TAX REFUND? Be Sure to "Pay Yourself" First!

By popular demand, we are repeating an article from March 2011.

So you received a tax refund check – Lucky You! Getting a lump sum of money is fun. Sometimes I think that dreaming of all the ways you could spend it are the biggest part of the fun – a well deserved vacation, a shopping spree, down payment toward a car……you can spend days dreaming and planning. However, before you make your final decision, think about “paying” yourself first! Seriously, would you like to would you like to make 47% on an investment? Sounds like a ponzi scheme or something but the savings are real and you can turn part of your tax refund into some serious money for yourself.

If you follow this Blog, then you know that I am a huge proponent of making small additional payments to “chip” away you student loan debt. However, paying larger sums toward your student loan will also help, significantly – even if it is only a one-time payment! Let’s look at two scenarios, to see how making a lump sum payment can benefit you. Each of these will be based on a $20, 000 loan debt, at 6.8% interest, with standard 10 year repayment plan.

Scenario 1: Payment of $1,000
No Extra Payments                                             With Extra Payments
Monthly Payment $230.16                                   Monthly Payment $1,230.16
10 years Pay-off time                                           7 years 8 months Pay-off time
$7,619.28 Interest Paid                                       $6,149.15 Interest Paid

Advantages of Additional Payments:
2 years 4 months Time Saved $1,470.13 Total Interest Savings

Balance Schedule for Scenario 1:
Year ---No Extra Pymt                        With Extra Pymt
2012 ---$18,553.54                             $18,553.54
2013 =-$17,005.60                              $17,005.60
2014 -=$15,349.06                              $15,349.06
2015 --.$13,576.29                              $12,524.12
2016 =-$11,679.15                              $  9,489.03
2017 =-$  9,648.90                              $  6,240.99
2018 =-$  7,476.21                              $  2,765.07
2019 =  $  5,151.09                             $         0.00
2020 = .$  2,662.83                             $         0.00
2021 =. $         0.00                             $        0.00

Scenario 2: Making $500 additional Payment
No Extra Payments                                                 With Extra Payments
$230.16 Monthly Payment                                       $730.16 Monthly Payment
Pay-off time 10 years                                               Pay-off time 8.75 years
$7,619.28 Interest Paid                                           $6,733.53 Interest Paid

Advantages of Additional Payments:
1 year 4 months Time Saved $885.75 Total Interest Savings

Balance Schedule for Scenario 2:
Year =-No Extra Pymnt                          With Extra Payments
2012 =-$18,553.54                                 $18,553.54
2013 =-$17,005.60                                 $17,005.60
2014 =-$15,349.06                                 $15,349.06
2015 =-$13,576.29                                 $13,050.21
2016 =-$11,679.15                                 $10,584.09
2017 =-$  9,648.90                                 $  7,944.95
2018 =-$  7,476.21                                 $  5,120.64
2019 =-$  5,151.09                                 $  2,098.19
2020 =-$  2,662.83                                 $         0.00
2021 =-$         0.00                                 $        0.00

If you would like to see how different amounts of “lump” sum payments can help you clear those loans faster, visit http://www.mortgagecalculatorsplus.com/calc-additionalpayment.php .

PAY YOURSELF FIRST – You Deserve It! It is tempting to splurge and spend your tax refund check on something fun or frivolous – I am not talking about using your whole refund to pay toward your student loans. I am a believer in having your cake and eating it too. However, if you will take just a small amount and pay toward your student loan debt, you can significantly shorten your repayment period. Think of all of the ways you could spend the money you currently have to pay on your student loan monthly payments once they are GONE! Now that’s something fun to dream about!

2012 Education Tax Credits and Deductions....

WHOPPEE – its tax time again! As you start to gather your 2011 tax documents, don’t forget to include your education costs or the interest paid on federal student loans. There are also two tax credits this year, so more opportunities for savings. Of course, you cannot “double dip”, claiming more than one credit or deduction for the same expense, so do your homework and make sure you take advantage of the most advantageous choice for you!

The American Opportunity Tax Credit (AOTC) replaced the HOPE tax credit and provides additional benefits, extending coverage from the first two years to college to four years, covering text books and AOTC is partially refundable (40% or $1,000 maximum). This means that, even if you do not have a federal tax liability, you might still qualify for a refund. To claim your credit, you must use form 8863 and attaché to your 1040 or 1040A. At this time, this credit will expire at the end of 2012.

The Lifetime Learning Credit remains in place for 2011 and can create a tax credit of up to $2,000 for any level of college education (even graduate school). One unique feature of this credit is that it doesn't require a minimum level of enrollment. However, the Lifetime Learning Credit has a narrower income range compared to the tuition deduction, so you need to look at all options before deciding which tax credits or deductions to submit.

Here are some key facts the IRS wants you to know about these valuable education credits:

1. The American Opportunity Credit
• The credit can be up to $2,500 per eligible student.
• It is available for the first four years of post-secondary education.
• Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
• The student must be pursuing an undergraduate degree or other recognized educational credential.
• The student must be enrolled at least half time for at least one academic period.
• Qualified expenses include tuition and fees, coursed related books supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return.

2. Lifetime Learning Credit
• The credit can be up to $2,000 per eligible student.
• It is available for all years of postsecondary education and for courses to acquire or improve job skills.
• The maximum credited is limited to the amount of tax you must pay on your return.
• The student does not need to be pursuing a degree or other recognized education credential.
• Qualified expenses include tuition and fees, course related books, supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return.

A Few Final Reminders: You cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.

For more information, visit: http://www.irs.gov/newsroom/article/0,,id=218389,00.html or
http://www.savingtoinvest.com/2011/02/american-opportunity-tax-credit-extension-for-2011-and-2012-eligiblity-income-and-phase-out-limits.html

Finally, watch for the 2011 edition of the IRS Publications, referencing Education Tax Credits. As of January 9, 2011, the link still gave 2010 information. (http://www.irs.gov/pub/irs-pdf/p970.pdf )

Don’t Let the Season Carry You Away!

TrueCredit.com Survey Reveals U.S. Consumers are Trimming Holiday Spending Credit Experts Share Shoppers’ Insights and Offer Easy Tips to Avoid Overspending: “While clipping coupons and bargain hunting are effective ways to pinch pennies, now more than ever, consumers need to plan for long-term savings,” said Lucy Duni, vice president of consumer education at TrueCredit.com by TransUnion. “During the holidays, it’s important for consumers to take a holistic approach to their spending, to ensure they don’t rack up debt that will impact their credit long after the holidays are over.”

The experts at TrueCredit.com compiled a list of helpful tips and insights to help consumers navigate the holiday shopping landscape:

Wallet Makeover: Surprisingly, the survey found 55 percent of people say they do *not* feel they’re more at risk of ID theft during the holiday shopping season. As more shoppers hit the stores, so do identity thieves, so it’s important for consumers to protect themselves. To reduce your risk, do not carry extra credit cards, your Social Security card, birth certificate or passport with you unless needed.

Check it Twice: Before you shop this holiday season, check your credit report to get an up-to-date view on your balances and to ensure everything is accurate. After the holidays, check your report again to make sure there isn’t any fraudulent activity on your report.
Trim the Tree: Talk to your friends and family about scaling back on extravagant gifts to ensure the holiday season is more economical for everyone. Try making a list of people you plan to buy gifts for and set a spending limit for each one.

Buyer Beware: According to the survey, more than half of Americans have between one-to-five retail credit cards, and 2 percent say they have seven or more! Avoid the temptation to sign up for every credit card you are offered while shopping. While the promotion may be enticing, it can also make it easier for you to rack up more debt.

Go Green: Go to the ATM and take out the amount of cash you plan to use for the day. Put it in your wallet. When your wallet is empty, stop shopping.

Eyes on the Prize: Maintain good spending habits and a healthy credit report during the holidays and throughout the year. Budgeting ahead for holiday and other spending extravaganzas can help limit financial stress while also keeping your debt accumulation to a minimum.

Final Tip: If you are lucky enough to get that lovely green stuff for a gift (otherwise known as cash), consider giving yourself a real gift and make an additional payment to your student loan principal. Remember, since interest is "fee simple" the faster you pay your principal down, the less your loan will cost!

To see the full results of TrueCredit.com’s survey and learn more about credit management, log onto www.gotruecredit.com and visit the learning center.