January 8, 2007

Late Tax Changes Create Opportunity, Confusion

Posted in Student Loan News at 8:54 AM by Joe From Boston

The Los Angeles Times is reporting that the tax break for tuition that was reinstated at the last minute in December 2006 is causing problems with tax returns.

“An expired deduction for those paying college tuition was reinstated in late December. But, like many of today’s tax breaks, this one is ‘means tested’ — if you make too much money, you may not qualify.

The tuition break allows singles earning less than $65,000 and couples earning less than $135,000 to write off as much as $4,000 in college bills.

A reduced deduction of $2,000 is allowed for singles earning more than $65,000 but less than $80,000, and for married couples earning more than $130,000 but less than $160,000.

Importantly, because this deduction is taken before the taxpayer’s “adjusted gross income” is computed, it can help individuals get a bigger bang out of other means-tested deductions and credits, such as the child tax credit.

Because this break was reinstated so late in the year, it doesn’t show up on the 1040 form. The Internal Revenue Service suggests that taxpayers write it in on line 35 of the return, the space for ‘domestic production activities deduction,’ which is a rarely used deduction for certain businesses and partnerships that make products in the United States.

One other suggestion: If you want this deduction, don’t file your return until mid-February. The IRS has to recode its computers to accept it and anticipates that tuition deduction claims will be rejected until that’s done.”


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