How the stimulus affects students: Taxes
Angela Hu
Like I mentioned last week, one of the key parts of the new stimulus is changes to personal taxes. For your edification:
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.
“American Opportunity” Education Tax Credit [PDF]
This provision makes me wish I’m not a graduating senior, just so I can get $1,000 back from the IRS for paying for college! For only 2009 and 2010, to help those working towards a college degree, you get to claim $2,000 of tuition and related expenses (books, etc.) as a credit. On the second $2,000 of expenses paid, you only get to claim a credit of 25% of that second $2,000 or a maximum of $500.
A credit is better than a deduction because deductions reduce income, which is what you multiply by 35% to get to the tax owed to the IRS, whereas the credit is applied against the very bottom number in your calculation or tax due. In other words, $1 of tax credit is equivalent to $2.85 of income saved.
The other great thing about tax credits is that they are sometimes directly refundable into cash as part of the refund check the IRS cuts you. Under this provision, the most that you can be refunded, which is different from applied against your tax due on the return, is $1,000.
Good stuff, huh? With incentives like these, “yes, we can”…pay less taxes.
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