Overview of the American Opportunity Tax Credit

The American Opportunity Tax Credit is an educational tax credit that mostly benefits parents of students under the age of 24 and recipients of the Hope Scholarship Credit. This tax credit was instituted when Section 1004 of Division B, Title 1, sub-title A of the American Reinvestment and Recovery Act of 2009 became law in February of 2009.  The tax credit increases and expands the tax credit that can be claimed by students or parents of students by increasing Hope tax credit income caps, qualifying expenses, and

To qualify for, and claim the American Opportunity Tax Credit

Tax filers must 1) Complete an IRS Form 8863, 2) Not claim a tuition and fees deduction on line 34 of the IRS’ 2009 Form 1040, and 3) have proper documentation for the qualifying educational expenses. The amount of the credit can be no more than $2,500 for tax year 2009 and is recorded on page 2, line 49 of 2009’s form 1040; the first $2000 of applicable educational expenses is also eligible for complete credit according to the IRS. Unlike a deduction, a credit reduces the amount of tax due rather than the taxable income. This can create significant tax savings.

For tax filers with dependent children

The American Opportunity Tax Credit can be claimed for each child that attended a qualifying education institution for the 2009 tax year, and up to $4000 can be claimed for each student according to IRS Form 8863.  However, since the first $2000 is fully credited, only 1 child with a full $4000 of expenses would be needed to reach the maximum credit i.e. the credit itself amounts to 25% of the claimed expenses after a $2000 reduction. For example, if a parent of a student with a single filing status claims the full $4000 for the tax year, the full credit can be granted because $2000 x .25= $500 + $2000 x 1=$2500.00.

Students who were in school at or above half-time enrollment can claim the American Opportunity Tax Credit on their own tax filing if they are over 24 years and meet specific qualifying criteria implemented by the U.S. Internal Revenue Service (IRS). These criteria are illustrated in Part IV of the IRS 2009 Form 8863 instructions. They include age, income, parental and tax filing status requirements. 

American opportunity tax credit tips to consider

The American Opportunity Tax Credit may not be the best choice for everyone, nor may every student or parents of students qualify for the credit. This is because of the existence of other tax reducers, and limitations on the use of the tax credit. These limitations are described in the IRS Form 8863 Instructions, and include income, age, amount, type of expenses, financial assistance and educational enrollment status.

• If the tuition and fees deduction on line 34 of the IRS 2009 Form 1040 leads to greater tax savings than the American Opportunity Tax Credit, the deduction may be a better choice. This deduction is calculated on IRS Form 8917 .

• Qualifying expenses for some students may be eligible for a higher maximum credit than the American Opportunity Tax Credit. For example, the maximum credit for the Hope credit is $4000.00 in 2009.

• Since the American Opportunity Tax Credit can only be claimed for the first 2-4 years of post-secondary education, it may be advantageous to claim this credit  and save additional credits for later educational expenses if a realistic chance of these expenses in the future exist.

• The American Opportunity Tax Credit can only be claimed in full if the claimants taxable income is below $80,000 for single filers and $160,000 for married filers filing jointly.

• Tax credit cannot be claimed for income earners above $90,000 and $180,000 respectively.

• Claimants of the 2009 Hope tax credit or the 2009 Lifetime Learning Credit cannot simultaneously utilize the American Opportunity Tax Credit.

• Recipients of Federal grant money or scholarships must deduct the amount of any non-taxable funding from eligible expenses as per the Form 8863 instructions.

Sources:
1. http://www.irs.gov (U.S. Internal Revenue Service)
2. http://www.gpo.gov (U.S. Government Printing Office)

How To Sell An Annuity

Annuities are financial instruments that pay income to an "annuitant" i.e. recipient who funds the annuity in earlier years. Annuities come in three types, fixed, variable and income and can be sold in two types of ways 1) pre-owned sale and 2) new annuities to clients. 

Annuity features may vary based on the insurance company managing the annuity and this can affect payment structure, fees, surcharges, terms of agreement etc. For this reason understanding the benefits and costs of selling an annuity is important to the successful sale of one. Before selling an annuity it may be beneficial to understand the reasons for the sale as well as the dynamics involved. This article will discuss the types of selling applicable to annuities.

Two kinds of annuity sales

1. Client to buyer sales

In a client to buyer sale an annuity holder or annuitant essentially decides to sell an existing annuity income stream or cash out the value of annuities income stream. The annuity may not be salable if it is held within a retirement plan such as an IRA or Employer managed retirement account. A whole annuity does not have to be sold as partial sales are also possible. Annuities can be sold back either to Insurance companies or on secondary markets. The former is the faster approach but may incur significant surrender charges and less potential for profit.

To sell an annuity to a buyer other than the insurance company, one may wish to research companies known to purchase annuities second hand. The reasons some companies do this is because they can make a profit on the annuities present value before the future value to the client becomes payable. In other words, it is kind of like buying money at a discount for reinvestment and/or resale at a profit. A few of the companies that deal with this type of selling can be found in the sources listed in this article, specifically the article published by bankrate.com and setcap.com.

2. Insurance company to client

Another way to sell an annuity is to clients. Typically, insurance companies are experienced in this area and train their underwriters on both annuity plans and selling techniques. In recent years a controversy has arisen over the sale of annuities due to high commissions and aggressive selling techniques that have caused some companies to be sued. When being sold an annuity, it is advisable to understand all the fees, surcharges, maintenance costs, insurability, guarantee and details of the annuity. If the annuity provides a reasonable rate of return after the service costs are deducted, then it may be an advantageous tax deferred use of money that may also offer garnishment protection, guaranteed future payments and varying rates of returns.

Tips to consider when selling an annuity

Before selling an annuity, it can be a good idea to think about all the factors, costs, implications and reasons behind the sale in addition to investigating different potential buyers of the annuity. Having a good understanding of the dynamics behind an annuity sale can help make the decision to retain or sell an annuity more sound. Below are a few tips that one may ponder before selling an annuity.

• Contact the Annuity Manager: The Insurance company may want to talk around selling, but they should have all the details available
• Contact a Settlement Company or Lawyer: If the insurance company refuses to sell the annuity, contact a third party such as Settlement Capital Corporation for additional assistance.
• Calculate the advantages of cashing out an annuity income stream
• Weigh The tax implications of the income from sale against potential return on income
• Contemplate purposes of selling an annuity to justify the rationality
• If reinvestment of the sale amount of the annuities present value yields a greater return than the future value of the annuity after fees and costs, selling may be a good idea.

The selling of annuities by annuity holders is a relatively new phenomenon and is a result of an evolving securities market in which cash and financial derivatives improve operational ability of financial institutions, cash flow and liquidity within financial markets. Annuity sales provide both individuals and financial institutions more financial options to improve financial management, efficiency of operations. The annuity sale process may not always be worthwhile therefore it is important to consider all the selling options and charges involved in the sale.

Sources:

1. http://www.investorwords.com/225/annuity.html
2. http://www.investorwords.com/223/annuitant.html
3. http://www.bankrate.com/brm/news/insurance/20070507_annuity_secondary_market_a1.asp
4. http://www.setcap.com/settlementcapital/aboutus.aspx?pt=aboutus
5. http://www.fool.com/personal-finance/retirement/2005/08/04/the-quotcriminalsquot-who-sell-annuities.aspx

Best Tax Free Investment Options

Reducing taxes through 'tax free investments' may be a good idea when one wants to increase financial leverage of one's income and/or lower taxable income for a given year via a lower tax bracket ex 15% instead of 25%. Moreover, the income that would have been taxed that is invested, can also increase either free of tax or tax deferred through the tax free investments. A few of the investments commonly used as a hedge against taxes are described below.

• Tax Free Mutual Funds

Money invested in tax free mutual funds is not taxed because the mutual funds themselves invest in tax free investment vehicles. Depending on which type of investments the mutual funds the income earned in this type of investment instrument is not taxable as the federal level and sometimes the state and local levels.

• Individual Retirement Accounts (IRA's)

There are several types of IRA's including spousal, individual, and the Roth IRA. Some of these are tax deductible while others are tax free investments. Either way, investment in retirement accounts is a way to avoid taxes either in the present or future.

• Municipal Bonds

Municipal bonds are bonds issues by States and local governments. Income earned from these investments is often free of Federal tax but they may also have a lower interest yield than other forms of investment.

• Treasury Bonds

The Federal government also issues bonds, at least two of which can earn tax deferred income. The series I and E/EE bonds are not taxed until redemption making them a possible investment option for those seeking to lower short term taxable income on investments.

• Life Insurance Policies

Money invested in life insurance policies accumulates and increases in value without tax. Examples of such policies include universal and whole life policies through which an account value is added to over and above the monthly premiums paid on the policy. In certain instances the distribution of life insurance after the policy holder's death may be tax free and should the holder survive the maturity of the policy, the proceeds are then subject to tax i.e. tax deferred.

• Real estate

While personal residences are subject to property tax regulations, capital gains on the sale of homes after 2 years of residence are tax free up to a certain dollar amount. If the home value is above 250K, capital gains on it are taxable if there is only one owner. This tax cap amount doubles for homes with more than one owner/resident.

• Education

While education is not an investment that pays solid returns, the investment made into and education is tax deductible on the Internal Revenue Service form 1040 as of the date of this article. The tax deduction may be enough to lower one's taxable income into a lower tax bracket.

There are many ways to invest and avoid paying taxes on those investments. In many of the cases the tax benefit is tied to a provision the money will not be used for an extended period of time or it is only taxed upon withdrawal. Whatever the investment one makes, the benefits can add up either as tax deferred income growth and/or increased financial leverage via a higher tax return or money saved through a lower taxable income.