The Bottom Line

More beer money for college

Welcome to the last installment of “How the IRS indirectly pays for a Penn education!” The two tax credits for higher education available for 2008’s return are the Hope and Lifetime Learning Credits. Keep in mind that any student can only claim one of these three credits and deductions: Hope, Lifetime Learning, or the tuition and fees deduction.

There is an income restriction on who can claim either of these credits on their tax return: the tax credit decreases when your adjusted gross income reaches $48,000, and you become ineligible at $58,000.

Only tuition and mandatory fees can be claimed for these credits. Like the tuition and fees deduction, you cannot include amounts spent on room and board, insurance, transportation and other non-tuition expenses. In other words, Friday night BYOs with your friends are not considered a “qualified expense” by the IRS, although many of us might beg to differ. Read more…

Uncategorized ask the taxpert, higher education, tax credits, Taxes

Indicator of a recovering economy?

My friend emailed me this article a while back. So Elizabeth Strott (author of aforementioned article) tells us about five signs we should look for to tell us if the recession is over, some of which are expected, others unusual.

Of course, she mentions indexes: rising indexes of either prices or quantities reflect a growing economy. No surprise at Strott’s choice here.

Strott then tells us to look at cardboard boxes. How can cardboard boxes tell us anything about the economy? As the economy grows, the cost of shipping becomes more expensive, which means the price of cardboard boxes increases. Read more…

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“Any number Wal-Mart gives is tantamount to an economic indicator.”

Jack Ablin, executive vice president and chief investment officer of Harris Private Bank

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Like I mentioned last week, one of the key parts of the new stimulus is changes to personal taxes. For your edification:

Individual Tax Return

The stimulus generally won’t affect your 2008 returns due in April. The provisions may affect your 2009 returns due April 2010.

“Making Work Pay” Tax Provision

Remember what I said about federal withholding on your paychecks? As part of the stimulus, the government will withhold less tax every week/biweek/month. So you’ll get to keep more of your paycheck during the year, amounting to $400 for singles, instead of the one-time $300 or $600 stimulus check from 2008.

Read more…

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Teaser for the weekend’s post:

A tax loophole is “something that benefits the other guy. If it benefits you, it is tax reform.”

— Russell B. Long, U.S. Senator

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Scientific Debate

The world seems to be ambivalent about the new plans proposed by government to tackle current challenges. Yet the evidence that these plans may not work is glaring at us bold in the face. The Dow Jones Industrial Average soared 500 points and the S&P 500 rallied another 50 points since the weekend. That’s a 19% and 21.5% two week gain respectively: the fastest such gain since 1938.

It seems apt that “The areas that fall the fastest are going to recover,” Guy Cecala, publisher of Inside Mortgage Finance, said. “There’s going to be a floor established. Seven-hundred-thousand-dollar houses are $250,000 — that’s what’s bringing people back into the markets.”

This rise has come in light of recent government acts. In particular, Geithner’s plan to buy up huge amounts of toxic assets seems to be giving the economy the kick start it needs. As always, the radical move taken has generated much criticism. Check out this commentary by some of the greatest minds out there.

Side Note: Paul Krugman, Simon Johnson, Brad DeLong and Mark Thoma are all economists. Just saying.

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“If all economists were laid end to end, they would not reach a conclusion.”

George Bernard Shaw, playwright

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Form 8917

Last week, I blogged about how the IRS encourages Americans to go to college by offering a deduction against your total annual income in the amount of student loan interest paid. In addition to this lovely deduction, the IRS also offers the tuition and fees deduction if you don’t use student loans (and also if you do use them) to pay for a Penn education.

In practice, in order to claim this deduction, you will need to file another worksheet along with the 1040A or EZ. This is Form 8917, pictured to the right.

Tuition and Fees Deduction

This deduction works pretty much like it sounds: if you or your parents paid tuition and fees, which we all do in order to be able to take classes for grades, you generally can deduct up to $4,000 in income on your tax return. Either you or your parents can take this deduction, depending on whether or not your parents claim you as a dependent and receive the tax benefits of doing so. If your parents do this, then this deduction will be part of the family’s tax return, not your individual return. If you file independently, you can claim expenses for yourself if you paid them. In other words, no one student’s expenses can be claimed on two parties’ tax returns in the same year.

The amount of the expenses can be figured out from “Tuition and Mandatory Fees” found on Form 1098-T that SFS sends you. This form conveniently aggregates the qualified higher education expenses you paid over 2008, which is essentially everything except room and board.

Not everything needs to be paid out of pocket: you can deduct expenses that you paid for via student loans. Getting a tax deduction on technically someone else’s money? Check. But scholarships and grants can’t be used as part of the deduction, so subtract those tax-free amounts listed on the 1098-T from the tuition and mandatory fees amount.

Got a question? Email bizexpert[at]dailypennsylvanian[dot]com.

Taxes ask the taxpert, deductions, higher education, Taxes

Federal Reserve Vs. Economy

The Federal Reserve has started to make its moves. In numerous announcements earlier this week, Federal Reserve Chairman Ben Bernanke has laid out his plan. It seems that the Federal Reserve will buy up to $750 billion in mortgage-related liabilities. Furthermore, it will buy as much as $300 billion in long-term government bonds.

By doing this, Bernanke aims to free up the credit market and get it flowing again. The interesting aspect about this approach is that interest rates do not change (staying low at 0% to 0.25%). It must also be mentioned that because of his actions, the value of the U.S. dollar has sharply decreased (which helps to act against the deflationary trap we are facing). The U.S. dollar index (a measure of the value of the U.S. dollar against a basket of other major currencies) has finally begun to come down after climbing steadily for most of the year.

As always, this provides us with a new set of challenges. As the U.S. dollar devalues steadily, assets such as those on Wall Street become less attractive to both international and domestic investors, as evidenced by figures in from Friday: The Dow Jones Industrial Average fell 126.01 points to 7,274.79, the S&P 500 declined 16.96 points to 767.08 and the Nasdaq Composite dropped 32.92 points to 1,450.56. Even commodity prices have started to rise with oil breaking the $50 mark, indicating the economy is moving back towards an inflationary nature.

While it is true that there remains much to be done, and the economy will continue to worsen before it gets better, is the light finally showing?

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“The basic prescription for preventing deflation is straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation. In other words, the best way to get out of trouble is not to get into it in the first place.”

Ben Bernanke

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