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More Stimulus Misconceptions
Find out about the new tax breaks for car purchases and college costs.
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
April 27, 2009
I still receive a ton of questions about the economic-stimulus package and how people can get their money. My 7 Misconceptions About the Stimulus column dealt with some of those issues, and Kevin McCormally's 5 Things to Know About the Making Work Pay Tax Credit answers a lot of questions about the mechanics of the stimulus payments. But we haven't written much about the tax breaks for car purchases and college costs yet. Here are some misconceptions about those programs -- and information about how they really work:
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7 Misconceptions About the Stimulus | ||
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5 Things to Know About the Making Work Pay Tax Credit | ||
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How the Stimulus Helps You | ||
Misconception #1: The stimulus package lets you write off sales taxes on all car purchases.
Many car purchases qualify, but there are some limits. If you buy a new car, light truck, motor home or motorcycle between February 17, 2009, and December 31, 2009, you can write off state and local sales taxes and excise taxes paid on up to $49,500 of the car's cost. The deduction doesn't apply to used-car purchases. And the deduction phases out for single taxpayers who have adjusted gross income between $125,000 and $135,000 and for married couples filing a joint return who have AGI between $250,000 and $260,000. If your AGI is halfway through the phaseout range, for example, your sales-tax deduction would be cut in half.
Misconception #2: You need to itemize to qualify for the car sales-tax deduction.
You can claim the deduction on your 2009 tax return regardless of whether you itemize your deductions or claim the standard deduction. However, if you itemize and deduct state sales taxes (because you live in a state that doesn't have an income tax, for example), you cannot claim this new tax break.
Misconception #3: The new American Opportunity credit merely increases the size of the Hope credit for paying college costs.
The new American Opportunity tax credit replaces the Hope credit for 2009 and 2010, and it increases the amount from $1,800 to $2,500. This new credit can be used in any year of college (not just the first two years, as was the case with the Hope credit). And the income limits to qualify have increased. Last year, you could qualify for the Hope credit only if your modified adjusted gross income was less than $58,000 if single, or $116,000 if married filing jointly. You can now receive the American Opportunity credit as long as you earn less than $90,000 if single or $180,000 if married filing jointly.
Misconception #4: You can qualify for the full American Opportunity credit no matter how you pay for college.
If you do qualify for the American Opportunity credit for college costs, then you need to be careful about how you pay those bills.
Because you can't double dip on tax benefits, money you use to pay for college from a 529 or Coverdell education savings account (which can already be used tax-free for college bills) doesn't count toward the American Opportunity credit.
This no-double-dipping rule was also the case for the Hope and Lifetime Learning credits. But people with higher incomes who never qualified for those older credits need to keep the calculation in mind when paying for college this year and next.
The new American Opportunity credit is based on 100% of eligible college costs up to $2,000, plus 25% of college costs above $2,000, which means that you'll need to pay at least $4,000 in college costs for the year from a source other than a 529 or Coverdell education savings account to qualify for the full credit.
For more information about all of the stimulus provisions, see How the Stimulus Helps You.
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Reader Comments (1)
Posted by: Rich Hershman at 04/27/2009 09:54:56 PM
Kim, another thing worth pointing out about the American Oppurtunity Tax Credit is that the new credit now includes course materials as an eligible expense, which generally is an out of pocket expense for most families. That means even students and families that get grant aid which covers most of tuition, can still apply the book cost to the tax credit and maximize the credit.