Fidelity Select Fundranker

Fundranker Blog—February 2009 Archive

Education Expenses

Education expenses can be reported in four different places on your tax return, which naturally creates some confusion on which place benefits you the most. You can take a Hope credit, a Lifetime Learning credit, or a Tuition and Fees deduction for you, your spouse, and your dependents, and you can take a student loan interest deduction, as well. See IRS Publication 970 for more details. First, let’s review how the credits and deductions work:

For 2008, the Hope credit is limited to $2,400 of qualified expenses ($4,800 if the student attended school in a Midwestern disaster area). The Hope credit equals 100% of the first $1,200 ($2,400) and 50% of the second $1,200 ($2,400), for a maximum of $1,800 ($3,600). For 2008, the Hope credit can be claimed for a student who had not completed the first two years of post-secondary education at the beginning of 2008, who was working toward a degree or certificate, who took at least one-half of a normal full-time workload for at least one academic period in 2008, who has never been convicted of a felony for a controlled substance, and for whom a Hope credit was not claimed in more than one prior tax year.

For 2008, the Lifetime Learning credit is limited to $10,000 of qualified expenses for all students together. The Lifetime Learning credit equals 20% (40% if the student attended school in a Midwestern disaster area) of qualified expenses, for a maximum of $2,000 ($4,000). The Lifetime Learning credit can be claimed for an unlimited number of years, and the student does not need to be pursuing a degree or certificate, can take one or more courses, and can have a felony drug conviction.

For 2008, the Tuition and Fees deduction is limited to $2,000 or $4,000 of qualified expenses for you, your spouse, and your dependents together, depending on your income level.

For 2008, the Student Loan Interest deduction is limited to $2,500 of student loan interest expense for you, your spouse, and your dependents together. Each student must have been enrolled at least half-time in a degree program. Student loan interest can be deducted until the loan is payed off. This deduction can be taken in addition to whichever of the Hope credit, the Lifetime Learning credit, or the Tuition and Fees deduction you take for a particular student, so you should always take this deduction.

Now, let’s consider which credit or deduction you should take. You only get to take one of the Hope or the Lifetime Learning credits for a particular student, so if a student meets the qualifications for both, which should you take for that student? If you have two or more students who qualify for the Hope credit, taking the Hope credit for those students maximizes your education credit. If only one student qualifies for the Hope credit, and that student has qualified expenses less than $9,000, take the Hope credit for that student; for qualified expenses of $9,000 to $10,000, take the Lifetime Learning Credit for that student. Of course, if a student does not qualify for the Hope credit, you should take the Lifetime Learning Credit for that student.

As for the Tuition and Fees deduction, it potentially can reduce your tax by a maximum of $1,000 for all students together, and if you take the deduction for a particular student, you can’t take either the Hope or the Lifetime Learning credits for that student. The only reason you should consider the Tuition and Fees deduction in lieu of either of the two credits is that it reduces your AGI, which in turn can affect your itemized deductions and a number of other tax credits for which you may qualify.

Posted 2/26/09 12:49pm ET in Tax Tips | Permalink | Comments (0)

Twelve-Year Lows

With the market close on February 23, the Dow Jones Industrial Average and the S&P 500 hit lows they haven’t seen since early 1997. Both indexes are about 50% lower than their October, 2007, highs. Fundranker bucked the trend when this bear market first started in November, 2007, and made new highs in May and June, 2008. It has fallen dramatically over the last eight months, but it has not been set back nearly as far as the DJIA and S&P 500. With the February 23 close, Fundranker hit lows it last saw in late 2004.

The markets are weighing in extremely negatively on the latest developments for fixing our financial system and stimulating our economy. Business, investor, and consumer confidence continue to fall to new lows. The picture couldn’t look much bleaker, and consensus on this by all the players couldn’t be much stronger. Contrarians believe that when everyone thinks alike, everyone is likely to be wrong. Let’s hope the contrarians are right. Also, remember that the stock market is an advance indicator for shifts in the economy. Perhaps this new low will be the turning point for the next bull market to begin.

Posted 2/24/09 11:21am ET in Economy, Fundranker, Market | Permalink | Comments (0)

First-Time Homebuyer Tax Credit

The Housing and Economic Recovery Act of 2008 and the American Recovery and Reinvestment Act of 2009 both have provisions for a first-time homebuyer tax credit. For both of these tax credits, a first-time homebuyer is defined as a person who did not own any other main home during the three-year period ending on the date of purchase. So even if you have owned a home in the past, but not in the last three years, pay attention to these first-time homebuyer tax credits—they can be worth thousands of dollars to you.

The Housing and Economic Recovery Act of 2008 enacted a first-time homebuyer tax credit for homes purchased after April 8 in 2008, which essentially is an interest-free loan. It is a refundable tax credit (you get a tax refund for any amount of the credit that exceeds your tax liability) of 10% of the purchase price of the home up to $7,500, but it has to be repaid over a 15-year period starting in 2010. If you bought a home after April 8 in 2008, make sure you look at Form 5405 to see if you can claim this tax credit.

The American Recovery and Reinvestment Act of 2009, just signed into law by President Obama this month, goes a step farther. If you purchase a home in 2009 before December 1, you maybe able to claim 10% of its purchase price up to $8,000 as a refundable tax credit which does not have to be repaid at all as long as the home remains your main home for three years. If you are thinking of buying a home in 2009, this new tax credit is an excellent reason to get it done before December 1. You even can claim this new, refundable tax credit on your 2008 Form 5405, even though your new home was purchased in 2009. If you buy your home in 2009 after you have filed your 2008 income tax return, you can file an amended 2008 tax return to claim the credit or wait and claim it on your 2009 income tax return.

Posted 2/22/09 7:43pm ET in Tax Tips | Permalink | Comments (0)

Details Lacking

Treasury Secretary Tim Geithner’s new plan to rescue our ailing financial system, announced February 10, had some good points and some bad points. On the good side, it seems that the Obama administration and the Treasury Department really get the magnitude of the problem and are willing to put a ton of money to work solving it. He outlined a plan to inject as much as $2.5 trillion into our financial system. Part of that amount, $350 billion, comes from the remaining half of the Troubled Asset Relief Program, enacted by Congress and signed into law last year by President Bush. Geithner's plan stretches that money with funds from the Federal Reserve, using its ability to print money, but it also relies heavily on enticing private investors to step in with their money.

On the bad side, the Dow Jones Industrial Average fell nearly 400 points on February 10, making it clear that Wall Street received Geithner’s plan poorly, to say the least. Although Geithner strongly criticized the Bush administration for not acting boldly and quickly enough, he did not specify the details of his plan that would differentiate it from the plan implemented by President Bush and Treasury Secretary Henry Paulson last year. Leaving those details for another day negated Geithner's emphasis on bold and quick action, and the markets suffered dramatically. We can only hope that those details will come forth soon and that the program will be successful.

Posted 2/11/09 9:40am ET in Economy | Permalink | Comments (0)