The cost of high education keeps rising. If you, or a dependent, are in college make sure you take advantage of the tax breaks you might be eligible for. The neat thing here is that you are allowed to take the credit or deduction with the best tax benefit for you. So hand your CPA that 1098-T tuition statement and make sure he or she chooses the right one for your situation!
American Opportunities Credit (AOTC)
The AOTC (formerly the Hope Credit) is available for the first four years of college when a student is pursing a degree. Eligible students can get up to $2,500 annually. To be eligible the student must be enrolled at least half time, have not claimed the AOTC or the Hope Credit for more than four years, and not have a felony drug conviction.
The bad news- the AOTC might be limited depending on your income. If your income is over $90,000 for single or $180,000 for married filing jointly you cannot claim the credit.
Lifetime Learning Credit (LLC)
The LLC is available for an unlimited number of years for undergraduate, graduate and professional degree courses. The credit is worth up to $2,000 per tax return. Claim the LLC if the student is still in school after the AOTC has run out.
The bad news- the LLC might be limited depending on your income. If your income is over $62,000 for single or $124,000 for married filing jointly you cannot claim the credit.
Tuition and Fees Deduction
The tuition and fees deduction works a little differently than the AOTC and LLC. The deduction reduces your income by up to $4,000 without requiring you to itemize your deductions. This can be helpful if you are not eligible for the tax credits above.
The bad news- the deduction might be limited depending on your income. If your income is over $80,000 for single or $160,000 for married filing jointly you cannot claim the credit. Married filing separately filers cannot claim the deduction.
It is time to make your second estimated tax payment of 2013. The deadline for making this payment is June 15. For individuals you can get more information and vouchers here (the vouchers are at the end).
Corporations also need to file quarterly estimated payments. Their payment dates depend on the month that their fiscal year ends, but payments are due on the 15th day of the 4th, 6th, 9th, and 12th month of their tax year- if you have a December year end that means June 15 is your next payment date. To find out more information check out the instructions here. Unfortunately corporations can’t send in paper checks- only electronic payments through EFTPS.
Any of this seem confusing? Contact me for clarity!
Code Section 469 defines passive activities as “any activity which involves the conduct of any trade or business, and in which the taxpayer does not materially participate.” This section was enacted in 1986 in an effort to reduce the prevalence of tax shelters.
You hear a lot of talk about tax shelters, especially during election season. Back when Sec. 469 was enacted, tax shelters commonly involved real estate, where businesses owned property and generated losses for the investors. The investors were able to offset- or shelter- their other income with these losses. For example, if someone had $100,000 in wages and $20,000 in real estate tax shelter losses, they would only be taxed on $80,000. Real estate activities were specifically identified by Sec. 469 as passive (unless the taxpayer qualifies as a real estate professional-to be discussed in a different post).
How Passive Activity Income Works
Classifications and Buckets
Income can be classified as passive or non passive (there are other classifications as well, but we will ignore those for this discussion). Losses of a particular type can only offset income of the same type. You can think of different types as being in different buckets, not able to mix with each other. So the losses for passive activities can only offset the income for passive activities. The exception to this grouping is when a passive activity is disposed, then it becomes non passive- meaning that when you sell a passive activity any losses generated can be used to offset other income.
Passive Activity Income Examples
The most basic example is a passive loss from a rental property. Any losses generated CANNOT offset non passive income. It is the opposite of the tax shelter example above.
Say you have two rental properties, one generates a loss and the other generates income. The income and loss from two properties will net against each other. BUT if there is a net loss, that CANNOT be used to offset other non passive income.
Now say you sell the rental property that has been generating losses. In the year of the sale, those losses are “freed up” and can be used to offset other non passive income.
Summary and Conclusion
The basic thing to remember is that passive and non passive income don’t mix. Same nets against same in their buckets, except in the year of a sale of a passive activity. This was a simplified explanation of passive activity rules and an extremely simplified explanation of rental properties. Please if you own real estate speak with a tax expert- every individual situation is different!
IRS Circular 230 Disclosure: Please be advised that the tax advice contained herein is not intended or written by the practitioner to be used and cannot be used by
the taxpayer for the purpose of avoiding any U.S. tax-related penalties that may be imposed on the taxpayer.