$Question of the Day$

How does ye olde federal government go about deciding on income limits for the claiming of tax credits?  And is not a single formula for the whole nation inherently unfair to urbanites?

Case in point: The Lifetime Learning Credit. 

A taxpayer may claim a tax credit for 20% of up to $10,000 in combined tuition and mandatory fees for himself, his spouse, and his dependent children. This equates to a $2,000 tax credit. There is no requirement that the student be studying towards a degree or be enrolled at least half-time, and there is no limit on the number of years the credit may be taken.

Sounds great, right?  So an individual can, say, go back to school in middle age to buff up her resume and claim a tax credit for 20% of the tuition.  Encouraging continuing education is surely in Uncle Sam’s best interests, as better educated citizens pay more taxes in the long run. 


In 2009, the credit is phased out for incomes between $50,000 and $60,000 (between $100,000 and $120,000 for married taxpayers filing jointly). 

Where did those numbers come from?  Those salaries might be sky-high in Upper Podunk, but in major metropolitan (read that: high cost-of-living) areas they are barely middle class. 

On a related note, I’m working on an article about saving for college, which is admittedly the only reason I know about the Lifetime Learning Credit.  If y’all wouldn’t mind sharing, please tell me if and how you are saving for your kids’ college educations.  Thanks.


22 thoughts on “$Question of the Day$

  1. Wow, not much for a family of four in any metropolitan setting to be sure.  I never took this credit when I was going to school, but maybe it’s time I thought about it.  I’ll buy a new book bag and continue to think.  I am really dopey when it comes to taxes and stuff like this so I don’t have any really relevant input.  Thanks for the info though…

  2. Agree that it doesn’t make much sense and appears to discriminate against high earning areas.  .  I have sent your question to a friend of mine who is a retired IRS agent.  I’ll let you know if anything comes back on this. 

  3. We have some 529 plans for our kids — one for each of them, opened at birth, and we contribute every month.  Unfortunately, the economy hasn’t helped much lately – but we keep plugging away.  We have made a decision to save enough to pay for our children to get an education at a state university.  If they decide to go to a private (higher cost) institution, they will need to contribute in the form of financial aid and/or scholarships based on merit or need.  We are fortunate to live in Virginia, where state schools are plentiful and have fantastic reputations.

  4. I think the social theory behind this tax credit is to help poor and unemployed people retrain so they can get gainful employment instead of crappy part-time jobs, not so that your next-door neighbor can take Thursday afternoons off from his consulting agency and learn Chinese to pad his resume.  University education should be free through the bachelor’s level, though.  It’s just as much a necessity as grade school and sewers.

  5. We contribute monthly to 529 plans for both of our boys, and have, more or less, since birth.  Since my husband works in NY (we live in NJ), we are able to deduct part of our contribution from our NY state taxes.  We also take any birthday/holiday/whatever money gifted to our kids, give them a small portion of it to spend as they wish, and add the rest of it to their 529s.  Our hope is that as our income grows, we will be able to afford larger monthly contributions for each kid.  So far, hasn’t happened yet.  Dh’s raises seem to roughly comport with something less than the increase to our cost of living (and let me tell you, we don’t live that glamourously).Since the fed gov’t adjusts pay for its employees based on location, I don’t know why they can’t come up with a formula to do that with taxes/tax credits (I mean, wouldn’t it basically be the same formula anyway?).  It would at least presume a more equitable pay system.  I know the salary I made in Buffalo went a lot farther while I was living there than a 30% higher salary did when we moved back to the metro NYC area.

  6. @ABlogWalksIntoABar – I agree.  However, there are a lot of other tax credits that phase out that don’t make a lot of sense geographically.  For example, the mortgage interest and student loan interest tax credits phase out at roughly an urban middle class income level.  That income level for the mortgage interest tax credit is huge if you are living in a low cost of living area, but if you live in a major metro area, it is really what you need to afford a basic house.  I have been to the suburbs of places like Lexington, KY and have seen brand new “McMansions” that are the same or better than the ones being built in my NJ suburb of NYC and they cost 20%-30% of what the same house costs here. 

  7. I did not save for college.  For two of my kids I was a professor and used tuition exchange.  For the last child we were lucky and happy to have him get really good financial aid.   I believe that the tax credit is phased out for those incomes you mentioned because the good colleges are reaching out to people in middle income brackets.  Some like Harvard say that you can go free if your parents make less than $60,000.  Being middle class is now considered diversity at some of those schools.  

  8. I don’t see that as unfair.  It would be unfair to give extra advantages to Americans who choose to live in more expensive areas; that is a lifestyle choice.  State and local governments have the opportunity to offer the same incentives if their citizens demand them.  By your standards of fairness, people who live in states with no income tax and lower costs of living should pay a greater percentage of federal income taxes than those who live in places where money doesn’t go as far.  

  9. I don’t want to debate any more in your comment box after this, but yes, it’s a choice to live where there are more jobs, and to have a shorter commute — if you want your money to go farther, move farther.  Other people live in a rural area or a part of the country where the economy is not as diverse, and that is precisely why they’re most in need of this tax credit, so they can get a better job and move to a more expensive place and be as miserable as the rest of us.

  10. Just had a child graduate from college and we were never able to save for it.  Although I once calculated that the costs of all the music and dance lessons and camps and extra activities over the years would have contributed a pretty penny for college, she was able to get some decent scholarships, for probably about the same as we spent on those activities, and as a result of the skills she gained.  The cost of college in our state seems to be higher than in many others, but of course to go to another state you are hit with exorbitant out-of-state tuition rates.  Even with all the scholarships, the “assistance” the colleges offered us were mostly in the form of loans.  I found the same results for graduate schools, with even less “free money” in the form of scholarship aid, and higher reliances on loans.  And I have to say that the FAFSA we filled out was a little misleading.  The amount we were “responsible” for bore no relation to the amount we actually paid.  We could have afforded that, but no!

  11. It’s futile to expect logic from our ridiculous tax system.  Chances are, Congressperson A proposed the tax break without the income limit, Congressperson B said that would cost the treasury too much money, so a compromise income limit was reached in return for votes on completely unrelated matters.  To fix the problem you cite, some kind of incredibly complicated sliding scale would be needed based on geographic location.  It would have to be updated every time the economic situation changes in any given region of the country, and every update would have to be debated and voted on in congress.Or we could just scrap the income tax and go with a national sales tax.

  12. I am middle-class, have a higher degree myself, and expect my kids to go to college… but I don’t save for my kids’ college education.  Unfortunately, my OWN college education is not yet paid for!!  And while I would hate to see my own kids take on the level of student loan debt that I have…  my priorities are saving for my own retirement and looking out for their education right now, as young children (i.e. one child in private school, working less so I can be with them more, enrichment activities, etc.).   I think the hype and fear about the future cost of college and saving for college education is a lot of unnecessary pressure put on working-class and middle-class parents – saving is never a bad thing, but not at the expense of your own retirement saving (unlike the college years, you may not be able to work or get loans or scholarships to fund your retirement!).  There are many variables in paying for college when the time comes – grants, loans, WORK (I had to work all through college – my parents couldn’t pay for anything), choosing a less expensive school, living at home, community college, etc. etc.   And of course we will help them out if we have any assets (i.e. home equity) left by then!  That’s my .02  πŸ™‚ 

  13. We are doing 529 plans for the kids (although keeping it in a savings account would have been better these last few years).  We plan on having a max amount we will pay for college and they can make the choice to go to 4 year school, technical school or use the money as seed money to start a small business. I will probably encourage my kids to go to the local community college (that current lets local hs students attend for free if they have high enough grades -bonus!) and then transfer jr yr to a 4 year university when they know more what degree they want to get. If our kids want to go to Harvard or something like that, that’s fine, but they will have debt clearly explained to them (as we will only pay out X amount no matter where they want to go).

  14. @miss_order – I think that’s a good plan – saying, we will pay X amount per year (or total) towards your college education/living expenses, no matter where you go.   I guess it’s because I didn’t get my own B.A. until I was 27 and married… but I strongly feel that they will be adults and need to take some adult responsibility for their educational and career paths.  When did college become an extended adolescence, anyway, and when did it become SOLELY the responsibility – DUTY, even – of parents to pay for it??   That is my question, TR, so perhaps you can address that in a future article?  haha.  

  15. @DrTiff – Yeah, we kind of think of helping to pay for college as our children’s inheritance, which is what an inheritance used to be – not a big lump sum to blow, but something to get you started in life.  And in our society, college does play a significant role in getting started in life. Okay, back to packing.

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