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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4024
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Customer Question

Hey guys, I wanted to get some input as to some tax planning moves I should make before the end of the year. Here is my tax situation:

tax filing status = single
Age by end of year =33
total income for the year = $44000
401(k) contributions = $3500
HSA contributions = $1200
Tuition paid for masters program for year = $13000
No home, no dependents, not planning on making a ira contribution.

I have a loan of about $7000 from my 401 (k) and want to know if I should call my 401(k) and ask them to convert a portion of the $7000 for example $3000 (the amount greater than $10000 paid in tuition) as a withdrawal as I can offset the 10% early withdrawal penalty against the $3000 i wont be using for tuition tax benefits as i believe the max tuition consideration is $10000 per year . I have taken 10 credits in the spring and winter semesters and should be considered a full time student. Not sure if I can also deduct cost for rent etc being a student.

I am not certain if my 401(K) plan will let me convert the loan to a withdrawal as I probably do not meet the requirement for hardship etc. I have $2500 in a traditional IRA that I can withdraw and use to pay down the existing 401(k)loan. I plan on leaving my employer next year and dont want to be taxed for the full $7000 loan on my taxes next year. I am also not certain if I qualify for the Life Learning Credit.

I am a stock broker and i am doing a master in finance program. I also receive $10000 in tuition reimbursement from my employer in addition to my salary but it is coded as non taxable according to the employer (education does not qualify for a different position)


thanks in advance

Kim
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi Kim,

Here's a broad brush estimate of where you are given the data you've provided.

Gross income $44,000
Qualified plan contributions - $4,700
Adjusted gross income = $39,300
Standrd/Itemized deductions - $5,950
Personal exemptions - $3,800
Taxable income = $29,550
Tax liability before credits $3,998
Child tax credits - $0
Estimated tax liability = $3,998

Of course, your withholding or estimated payments would offset the tax

The waiver of the 10% penalty for higher education WOULD apply, but it would be atypical for a qualified plan administrator to CONVERT part of a loan to a withdrawal.

You may want to consider pulling the money from the IRA and have the custodian code the distribution as for higher education (this will waive the 10% penalty there) and then use that to pay down the loan.... because if you leave your employer the loan will most certainly be coded as a distribution.

Now, on the IRA distribution, review the 1099 your IRA custodian sends you. You should receive this in late January or early February from your IRA custodian. IRS Form 1099-R details all IRA distributions you took during the tax year. Check to see that your custodian properly reported your distributions to the IRS. For example, Box 7 should include the number "2," which, as of November 2010, indicates an early IRA withdrawal that is exempt from the 10-percent tax penalty.

In terms of the education credit, yes you should qualify for the lifetime learning credit:

See this:

The Lifetime Learning Credit is a tax credit for any person who takes college classes. It provides a tax credit of 20% of tuition expenses, with a maximum of $2,000 in tax credits on the first $10,000 of college tuition expenses.

You can claim the Lifetime Learning Credit on your tax return if you, your spouse, or your dependents are enrolled at an eligible educational institution and you were responsible for paying college expenses.

Unlike the American Opportunity credit, you need not be in the first four years of undergraduate classes. Even if you took only one class, you may take advantage of the Lifetime Learning Credit.

From: http://taxes.about.com/od/Tax-Credits/qt/Lifetime-Learning-Tax-Credit.htm


And here's the IRS guidance:
http://www.irs.gov/publications/p970/ch03.html





Hope this helps.

Lane

Customer: replied 1 year ago.

Hi lane, this doesnt quite answer my question. So you have put Estimated tax liability = $3,998 i am guessing this is before the $2,000 in tax credits? so with the $2000 credit, final taxes owed should be $1998?


 


My main question is if I can deduct the $13000 I paid in tuition for the year under Tuition and Fees Deduction (Form 8917) or as a Professional Education Expense along with the lifetime credit and if so how does that impact my overall tax liability? Also how does the $10000 i received from my employer affect this?


 


thanks


 

Expert:  Lane replied 1 year ago.

That's right, as you can see there is no tax credit in the projection, and again, the projection assumes no withholding or estimated taxes either.

... I just wanted to provide a starting place.

And no you cannot take both a tuition credit AND and education deduction for the same tax year.

Your income puts in the 25% bracket, so the tax benefit for 13,000 in fees is 13000 X .25 is 3250, so this is worth more to you that the 2000 credit.

The law changed in 2002 to allow up to $5,250 in graduate school related expenses paid by educational assistance program to be excluded from gross income. If your employer has included amounts paid for graduate school related expenses amounting to $5,250 or less with your wages, tips, and other compensation shown in box 1 of your W-2, ask your employer for a corrected W-2. If you have received amounts for graduate school related expenses that are includable in gross income, you may deduct expenses attributable to those amounts on Form 1040, Schedule A, Itemized Deductions.










Customer: replied 1 year ago.

This answer is again incomplete. With the $10000 in reimbursement from my employer, will I qualify for 13000 X .25 = $3250 or $3000 ($13000 -$10000 reimbursement) x .25 =$750? How does the reimbursement affect the amount of the education credit?


 


Also if as per my employers tuition reimbursement form:


 


Tax Treatment of the Reimbursement:



A. Course is not part of a degree program and it enhances or improves skills required of you in your present position, [ii] does not qualify you to perform a substantially different position, and [iii] is not a minimum requirement to obtain (not retain) your present position. This reimbursement is not taxable.


 


B. Course is part of a graduate degree program in which you are enrolled and it enhances of improves skills required of you in your present position, [ii] does not qualify you to perform a substantially different position, and [iii] is not a minimum requirement to obtain (not retain) your present position. This reimbursement is not taxable.


 


C.Course is part of a graduate degree program in which you are enrolled that enhances or improves skills required of you in your present position, and either [ii] qualifies you to perform a substantially different position or [iii] is a minimum requirement to obtain (not retain) your present position. The reimbursement up to $5,250 per year is not
taxable and the portion of the reimbursement in excess of $5,250 is taxable.


 


D.Course is part of a bachelor degree program in which you are enrolled. The portion of the reimbursement in excess of $5,250 per year is taxable.


 


They have been coding the info as the "B" option so obviously the information about "The law changed in 2002 to allow up to $5,250 in graduate school related expenses paid by educational assistance program to be excluded from gross income" is not correct for my situation.


 


final try


 


Thanks

Expert:  Lane replied 1 year ago.

Please specify your question.

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