Help! I Got an IRS Letter About My Education Tax Credit!

The Chalk Board

Photo by Jack Amick at

Did you receive a letter from the IRS denying your Education Tax Credit?  Before you give up on that important tax benefit, take a few minutes to see if perhaps you can reclaim it.


First—did you have your taxes done by H&R Block?  They had a little glitch in their tax program early in the tax season.  Although most of those tax returns have been fixed, if you had an H&R Block prepared return, make sure you call them and let them know about the problem.  They will take care of it.  If you cannot reach your local HR Block tax preparer, then call their national number at 1 (800) HRBLOCK.  Be patient with the automated answering service.  Eventually you will get through to a human being who can help you.


So you got a letter and you didn’t use H&R Block?  Well that’s not so surprising.  Although Block had all the publicity for their software having a glitch, it turns out they weren’t the only ones.  (They were just the biggest and got all the blame.)


Before you write the IRS a check (or accept a smaller refund), take a look at your Education Tax Credit Form (number 8863) and see if it was done correctly.  Here’s where I’m finding mistakes:


Question number 23:  Has the Hope Scholarship Credit or American opportunity credit been claimed for this student for any 4 prior tax years?


The question means:  Have you claimed a Hope or American Opportunity credit 4 times already for this particular student?  The way it reads, it seems like it’s asking if you’ve ever claimed it at all in the last 4 years.  You want to answer NO (unless of course you’ve already gotten the credit 4 times already.)


Many people have been answering YES.  If you say YES, you don’t qualify for the American Opportunity Credit; you only qualify for the Lifetime Learning Credit which is smaller.


What I’ve been seeing is that some programs have let the American Opportunity credit carry through on the 1040 even though the taxpayer said YES.   Usually, the software “idiot light” tells you about the error, but not all tax software did that.  And the question is so confusing that it’s an easy mistake to make.  Once the IRS reviews the returns, they’re catching the YES and sending out letters.


So, if this is your problem, you don’t need to amend your tax return.  Just call the IRS at 1 800 829-1040 and talk to someone there.  You will be able to fax a corrected form 8863 form to them and they’ll take care of it right away saving you a couple of weeks of waiting.


If you had a different IRS problem with the Education Tax Credit, please post about it.  Thanks.

Everything You Wanted to Know About FAFSA But Were Afraid to Ask

University of Oregon

Photo by Jeff Ozvold on

Whether you’re a parent or a student, if you’re going to college next year (parents-you’re staying home, it just feels like you’re going to college) you need to know about the FAFSA. FAFSA is the Free Application for Federal Student Aid. A very important word here is FREE. You see, there are a lot of websites that will say they’ll do the FAFSA for you, but you have to pay them. The real FAFSA application is free.

The first thing you want to do is make sure that you’re using the correct website. Here’s the address: Notice that it doesn’t have a .com or .org in the address. Make sure you go to the right place.

When you complete the FAFSA application, you’re going to want to have all of your information ready. It’s a pain in the behind to get started and then stop and start a million times. Do yourself a favor and print out a copy of the FAFSA application before you start. Here’s a link to that too:

Did you look at that application? That’s for last year. If you’re looking to do the FAFSA for starting school in September of 2012, you won’t be able to complete that form until after January 1. You’re going to need your tax information for 2011 also, so you should really do your tax returns before you file your FAFSA. You can submit them with estimates based upon last year, but you’re really much better off doing your taxes first if it’s at all possible.

Look at the state deadlines listed to the right of the application. Don’t ignore those. For example: I’m in Missouri, it says April 1 is the date by which the application should be received and has a little # meaning that priority is given to applications received by that date. But make sure you check the deadline for the school you’re applying to as well. Missouri as a state has a deadline of April 1, but if you’re applying to Washington University here in St. Louis, they’ve got a FAFSA deadline of January 30th. Make sure you know those deadlines.

Part of the application process that confuses people is the sections about the student and the parents. FAFSA asks questions with the assumption that the student is filling out the form. The whole first section is for the student. This really messes up parents who are completing the form because it asks questions like, Are you married? Do your children receive more than half of their support from you? As a mom myself, I’m answering, yes, I am married and of course I support my children. Oops! Those are all in the section for the student to fill out. My daughter is not married and she has no children to support—big difference. Don’t make my mistakes! Remember, not all people applying to college are kids in still high school.

Parents will get to answer questions starting on page 6. But it’s all asked like the student is filling out the form—what is your parent’s address? And things like that. Outside of the address part, your kids aren’t going to know most of those answers, especially the financial information. They’ll need your help with that.

One question that I have been asked a few too many times is, “Should I just lie about my income?” No, you shouldn’t. The colleges have a verification process for granting financial aid, in most cases you’ll be asked to provide an actual copy of your income tax return. By lying on the FAFSA, not only do you risk losing your potential financial aid—you could also risk losing admission to the school as well. It’s just not worth it.

When you’ve finished the FAFSA application and submitted it, you’ll get your SAR report which basically tells you how much they think you are able to pay towards your college tuition this year. Let me give you a fair warning: whatever you think you are able to pay for tuition, your SAR score will be about twice that amount. Be prepared for that shock, but don’t let it deter you from applying for college. Remember that even though the FAFSA report might say you can afford more than you think you can—the different schools have different programs so you have a good chance of finding a school that has a more generous financial aid program.

One final thing, you might think that your income is too high for you to receive financial aid and so you shouldn’t even apply. The year my son started college, we didn’t really qualify for financial aid, but had submitted the FAFSA application anyway. Later, my husband lost his job and we were afraid that we wouldn’t be able to pay the tuition. Because we had completed the FAFSA, our son’s school adjusted his scholarship based upon my husband’s new situation. They would not have done that if we didn’t have the FAFSA filed. Even if you think you don’t qualify, it could very well be worth your while to do the application.

Tax Tips for Families with High School Aged Children

Planning for collegeIf you’ve got kids in high school, you know how expensive it can be—food, clothes, car insurance…  And of course, there’s that big expense coming up; college.   A little strategic planning right now could help you with your college expenses in the future.  Let’s take a look.

Senior year:  If your child is already a senior, you’ll be completing the FAFSA application soon.  You financial picture for the college process is already done so there’s not much you can do now.  Even if you don’t think that you’ll qualify for financial aid, you should complete the FAFSA anyway.  Should your financial situation dramatically change, you may be able to renegotiate your aid with the school.  You won’t be able to without a completed FAFSA application on file. 

Junior year:  This is the most important year for you as far as tax strategy.  If your child is a high school junior right now, then your 2011 income tax return is what will be used to determine your future financial aid.  It’s really important to think through any actions that may affect your income.  For example cashing out an IRA or 401(k) right now would increase your taxable income, and because of that would reduce your potential financial aid.  Cashing out stock for a capital gain—same thing.  On the other hand, cashing out stock for a capital loss would reduce your income.   Be sure to take advantage of any programs that would reduce your taxable income such as flexible spending accounts and adding to your 401(k) if possible.

Sophomore year:  This is the year before you’re working on the FAFSA.  If you anticipate that you’ll need to sell stocks, cash out 401(k)s or anything else that would raise your income, this is the year to do it in. While the parent of a junior would want to defer income, if your child’s a sophomore you’d rather claim the income during this year.  This is a little counter-intuitive.  A tax person is always going to advise deferring income, but this is the one year where that’s not the case because you really want to keep that junior year income down.

Freshman year:  Welcome to high school.  It’s hard to think about college when you’re still trying to adjust to Friday night football games and the concept of your child riding in a car with other kids.  In a perfect world, you’ve been saving for college since pre-school and you’re all set.  Unfortunately, the world isn’t perfect and life gets in the way.  Now’s the time to really think about money.  How are you going to pay for your child’s education.  While your student might not have a clue yet about what school to attend, you need to start thinking about it.  How much can you really expect to contribute to tuition?  How are you going to make up the difference?  You don’t need to solve all these issues now, but you need to do some serious thinking now, before you get to graduation without a plan.

Back to School Time

Whho’s Back to School Time


In my neighborhood it’s back to school week!  Here’s some tax tips related to sending the kids back to school.


It seems like if they start school on Monday, then the gift wrap/candy sale starts on Tuesday.  If you have a choice, you’re better off writing a check directly to the PTO for whatever donation you’d like to make to the school rather than buying whatever the kids are selling.  For one thing, the school will get all of your donation instead of the money going to some fundraiser sales company.  For another, your check to the PTO will be 100% tax deductible.  (I would argue that 50% of whatever you pay for the gift wrap should be counted as tax deductible as well, but the fund raising companies will argue that their gift wrap really is worth $7 per roll so it’s an iffy deduction.)


If you’re a school volunteer, the money you spend for the classroom counts as a charitable contribution.  For example, let’s say you’re the “Halloween Party Mom.”  You spend $30 on candy, $20 on art supplies, and $15 on face paint.  Save those receipts because that’s a $65 contribution to the school.  The same goes for scouts and church groups.  Hold on to those receipts for  those projects as well.


Now if the kids pay an activity fee and you’re using the kids’ activity money to buy supplies, then you can’t deduct those receipts.  But if you’re spending your own money on projects, then you definitely can use that as a deduction.   Scout leaders–your uniform is deductible, your kids uniform isn’t.


Remember that the mileage you put on your car for volunteering is also deductible with your contributions.  Charity miles are counted as 14 cents per mile.  It doesn’t seem like much, but for some people it really adds up.


Welcome back and have a great year!


Saving for College

Saving For College

New parents always want to start saving for their child’s college education. People often ask me what’s the best way to do that?   To be honest, for different circumstances I give different answers, but these are some of my standard recommendations.

First, before you put any money into a college savings plan, make sure that you have enough money in your emergency savings fund. You should have enough money in savings to cover at least three months worth of expenses (I prefer to see six.)  If you lose your job or have some other financial emergency, putting food on the table and a roof over your child’s head ranks over having money for college. People fight with me over that, they say, “No, I want to have money I won’t spend.” Bingo, that’s why it’s called savings. Think of your savings account as your college fund, it’s just step one.

Once you’ve got that established, I like to see money in a Roth IRA. Once again, this isn’t a college fund, but it makes sense financially. First, a Roth IRA can be used to pay for college expenses penalty free.   Also, because you get no tax break for contributing to a Roth, you pay no income tax on the money when taking it out.   And it grows tax free, so a Roth is a good vehicle for college savings.  Secondly, suppose your child decides not to attend college or manages to get a free ride at a University? Well, then you’ve just got more retirement money sitting around for you. (Sweet.) Third, let’s say you’re not financially able to pay for all of Junior’s tuition and you need to apply for financial aid. Money in a child’s 529 plan is considered to be fully available to pay for college. Money in an IRA is not. Your financial aid package will be better if your funds are in a Roth.

One more point in favor of paying towards retirement before paying for college. When push comes to shove, if there is no money for college, a motivated kid can get a loan for school. But if you’re 70 years old and your only income is your Social Security check, do you honestly think a bank will give you $100,000 to help you with your retirement expenses? It’s not going to happen.  It’s kind of like the airplance emergency demonstration, you need to put on your own oxygen mask first,  before you help someone else.

So let’s say you have all your bases covered, you’ve got savings and you’ve got retirement money, then what? Now we can start with the 529 plans. Although there are no federal tax benefits for 529 plan contributions, they do grow tax free. Also, many states exempt a portion of your income from tax when you contribute to their state plan. For example, in Missouri, you can contribute $8,000 a year tax free to a 529 plan. If you’re married, both spouses can contribute– giving you a $16,000 tax deduction. Here’s a link to their website:

The most important thing about saving for college is to start.  You won’t believe how fast your kids grow up until they’re already grown.  By then it’s too late.  Good luck.