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The American Recovery and Reinvestment Act was passed in early 2009 and created the American Opportunity Credit. This educational tax credit – which expanded the existing Hope credit – helps parents and students pay for college and college-related expenses.
Here are the top nine things the Internal Revenue Service wants you to know about this valuable credit and how you can benefit from it when you file your 2009 taxes.
- The credit can be claimed for tuition and certain fees paid for higher education in 2009 and 2010.
- The American Opportunity Credit can be claimed for expenses paid for any of the first four years of post-secondary education.
- The credit is worth up to $2,500 and is based on a percentage of the cost of qualified tuition and related expenses paid during the taxable year for each eligible student. This is a $700 increase from the Hope Credit.
- The term “qualified tuition and related expenses” has been expanded to include expenditures for required course materials. For this purpose, the term “course materials” means books, supplies and equipment required for a course of study.
- Taxpayers will receive a tax credit based on 100 percent of the first $2,000 of tuition, fees and course materials paid during the taxable year, plus 25 percent of the next $2,000 of tuition, fees and course materials paid during the taxable year.
- Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back.
- To be eligible for the full credit, your modified adjusted gross income must be $80,000 or less — $160,000 or less for joint filers.
- The credit begins to decrease for individuals with incomes above $80,000 or $160,000 for joint filers and is not available for individuals who make more than $90,000 or $180,000 for joint filers.
- The credit is claimed using Form 8863, Education Credits, (American Opportunity, Hope, and Lifetime Learning Credits), and is attached to Form 1040 or 1040A.
For more information about the American Opportunity Tax Credit visit the IRS Web site at IRS.gov/recovery.
An Interesting Rewrite for the Vanity Tax H.R. 3590 Looks As if Congress Found a Vanity Product with Enough Sin to Justify a Tax
By Stacie Clifford Kitts, CPA
It is all over the news; the Dems have enough votes to push the Patient Protection and Affordable Care Act on ward. But what has been eliminated from the latest version of the bill has me wondering – was it – our stimulating online debate that finally killed the dreaded 5% booby tax (i.e. the cosmetic surgery tax). Hmmmm …okay so it was most likely the influential lobbying by the American Health Association who strongly opposed the tax that murdered it.
But you know what; I’m all a-glow just the same. Congress – it appears – has responded to my points from a previous post where I chastise our lawmakers for attempting to tax the sinless personal choice of cosmetic enhancements.
I can’t say that I am totally opposed to taxing
behavior. That is, I agree with sin taxes. Taxes on cigarettes and alcohol for
instance do provide a certain amount of good since these products have been
shown to cause harm to the public welfare. Likewise, the cost of treating people
who have made themselves sick by indulging in unhealthy activities or behaviors
must be considered – I get that – and if a tax on so called unhealthy products
helps to relieve the public burden, then so be it.
But is cosmetic surgery really
sinful? Personally, I fail to see how it is. Maybe our lawmakers can explain to
me how slimmer hips, larger breasts, or plumper lips harms the public welfare or
places a financial burden on the government.But what is even more perplexing is
just how or why cosmetic surgery won the tax lottery. I fear that this type of
legislation opens the door for a whole litany of WTF taxes. I mean why not tack
on an additional tax for hair coloring, nail salons, or makeup. These are also
vanity products. Frankly where does it stop?I am all for affordable health care,
balancing the budget, and reducing debt. But come on lawmakers, I find it hard
to believe that you can’t do better.
In response to my argument, it would appear that our lawmakers did find a vanity procedure that fits the sin criteria. The new vanity target – tanning salons. Here is a portion of the amended law:
SEC. 10907. EXCISE TAX ON INDOOR TANNING SERVICES IN LIEU OF ELECTIVE COSMETIC MEDICAL PROCEDURES.
(a) IN GENERAL.—The provisions of, and amendments made by, section 9017 of this Act are hereby deemed null, void, and of no effect.
(b) EXCISE TAX ON INDOOR TANNING SERVICES.—
Subtitle D of the Internal Revenue Code of 1986, as amended by this Act, is amended by adding at the end the following new chapter:
CHAPTER 49—COSMETIC SERVICES
Sec. 5000B. Imposition of tax on indoor tanning services.
SEC. 5000B. IMPOSITION OF TAX ON INDOOR TANNING SERVICES.
(a) IN GENERAL.—There is hereby imposed on any indoor tanning service a tax equal to 10 percent of the amount paid for such service (determined without regard to this section), whether paid by insurance or otherwise.
But what is even more telling is this tid bit found over at Kay Bell’s blog Don’t Mess with Taxes
“Congressional bean counters had estimated the Bo-Tax would bring in $5.8
billion over the next decade. The Tan Tax, which would go into effect next July,
is projected to produce $2.7 billion over 10 years.
But that loss of revenue is OK, because the new tax addresses health
Or as one anonymous aide put it, the tanning tax was added out of
“concern that use of these tanning beds creates a health problem with respect to cancer.”
Well, I guess I got what I wanted, a tax that benefits the public welfare and relieves the public burden by taxing those people who intentionally expose themselves to cancer causing tanning beds.
Geez, I sure do hope that smog doesn’t cause cancer otherwise our lawmakers might tack on an excise smog tax for my sinful choice to live in California and breathe in the foul air.
By Stacie Clifford Kitts, CPA
I just want to go briefly back to one point that was missed during my extensive commentary about the Vanity Tax.
You may have read a couple of posts I have written regarding my disapproval of this tax commonly known as the cosmetic surgery tax which is included in the Patient Protection and Affordable Care Act (HR 3590).
If you want to catch up, here are the links to the previous posts:
You might also recall that Mary O’Keeffe over at Bed buffaloes in your tax code wrote some good responses to my posts and even answered some of the questions posed in my ramblings.
The gist of my angst over this tax issue really arises from my query as to why it is that Cosmetic surgery won the tax lottery.
As I pointed out in previous posts:
The Patient Protection and Affordable Care Act has declared VANITY as the eighth
deadly sin punishable by the imposition of a 5%excise tax.
The bill, which apprises to seek affordable healthcare also imposes an additional tax on those people wishing to improve their appearance or self-esteem via cosmetic
So again, I ask, why did cosmetic surgery win the tax lottery, why not the treatment of acne? After all dermatologists went to medical school too, their education was also subsidized. The answer is clear, because taxing little pimple faced teenagers for their acne treatment would tick people off. It doesn’t matter that this procedure is also elective and even vanity driven. However, people who elect to have cosmetic surgery are perceived as vain, spoiled, overindulged, and sinful.
Mary also ponders on this question and in her post More on taxing cosmetic surgery, subsidies, and tax simplification She makes this observation.
Our existing tax code already makes a distinction between its treatment of
cosmetic surgery (which is not tax-deductible on Schedule A, nor is it eligible
for tax-excluded flexible spending account use) and treatment of acne (which is,
I believe, eligible for both tax breaks.) But you haven’t complained about that
distinction in existing tax law?
Well here is where I complain, thanks for the reminder:
Absent some brilliant legal argument regarding why acne treatments should or should not qualify for a tax deduction let me just put this out there where it belongs.
The distinction Mary mentions that includes acne treatments, as deductible vs. the non-deducibility of elective cosmetic procedures is in my opinion a clear example of the TAX THE OTHER GUY SYNDROME.
Consider this, the reshaping of one’s enormous nose may to have found its way to the tax-deductible pages of some legislation had that “problem” been a common issue for lawmakers. Had their children been unfortunate enough to be saddled with some enormous honker, then we might be talking about THE ENORMOUS NOSE REDUCTION ACT.
Why then can we deduct the cost of acne treatments?
The answer is as plain as the nose on my face, because our lawmakers and their children know the embarrassment and social stigma associated with acne. Acne is a universal and relatable vanity issue. Acne simply represents the “average guy.”
And what does the average guy do, he says, tax the other guy!
So then, what happens?
Well, we get the Patient Protection and Affordable Care Act which shoves its fist between the couch cushions of the OTHER GUY in search of loose change.
[Stacie says: I didn’t have time to write up the post I wanted for today. However, I did read this informative news release about modified mortgages. ]
WASHINGTON – The U.S. Department of the Treasury and Department of Housing and Urban Development (HUD) today kick off a nationwide campaign to help borrowers who are currently in the trial phase of their modified mortgages under the Obama Administration’s Home Affordable Modification Program (HAMP) convert to permanent modifications. The modification program, which has helped over 650,000 borrowers, is part of the Administration’s broader commitment to stabilize housing markets and to provide relief to struggling homeowners and is a primary focus of financial stability efforts moving forward. Roughly 375,000 of the borrowers who have begun trial modifications since the start of the program are scheduled to convert to permanent modifications by the end of the year. Through the efforts being announced today, Treasury and HUD will implement new outreach tools and borrower resources to help convert as many trial modifications as possible to permanent ones.
“We are encouraged by the pace at which trial modifications are now being made to provide immediate savings to struggling homeowners,” said the new Chief of Treasury’s Homeownership Preservation Office (HPO), Phyllis Caldwell. “We now must refocus our efforts on the conversion phase to ensure that borrowers and servicers know what their responsibilities are in converting trial modifications to permanent ones.” In her new role, Caldwell will lead HPO’s conversion drive efforts.
“Encouraging borrowers to move through the process of converting trial modifications to permanent modifications remains a top priority for HUD,” said HUD Assistant Secretary for Housing and FHA Commissioner David Stevens. “As a part of our continuing efforts to improve the execution of the HAMP program, HUD is committed to working with servicers, borrowers, housing counselors and others dedicated to homeownership preservation to improve the transition of distressed homeowners into affordable and sustainable mortgages.”
With tens of thousands of trial modifications being made each week, the Administration is now working to ensure that eligible borrowers have the information and the assistance needed to move from the trial to the permanent modification phase. (All mortgage modifications begin with a trial phase to allow borrowers to submit the necessary documentation and determine whether the modified monthly payment is sustainable for them.) As the first round of modifications convert from the trial to permanent phase, the Administration has identified several strategies for addressing the challenges that borrowers confront in receiving permanent modifications.
In addition to the conversion drive that kicks off today, the Obama Administration has already taken several steps to make the transition from trial to permanent modification easier and more transparent by:
Extending the period for trial modifications started on or before September 1st to give homeowners more time to submit required information;
Streamlining the application process to minimize paperwork and simplify the submission process; meeting regularly with servicers to identify necessary improvement to borrower outreach and responsiveness;
Developing operational metrics to hold servicers accountable for their performance, which will soon be reported publicly;
Enhancing borrower resources on the MakingHomeAffordable.gov website and the Homeowner’s HOPETM Hotline (888-995-HOPE) to provide direct access to tools and housing counselors.
The Mortgage Modification Conversion Drive will include the following:
Servicer Accountability. As part of the Administration’s ongoing efforts to hold servicers accountable for their commitment to the program and responsibility to borrowers, the following measures will be added:
Top servicers will be required to submit a schedule demonstrating their plans to reach a decision on each loan for which they have documentation and to communicate either a modification agreement or denial letter to those borrowers. Treasury/Fannie Mae “account liaisons” are being assigned to these servicers and will follow up daily as necessary to monitor progress against the servicer’s plan. Daily progress will be aggregated by the end of each business day and reported to the Administration.
Servicers failing to meet performance obligations under the Servicer Participation Agreement will be subject to consequences which could include monetary penalties and sanctions.
The December MHA Servicer Performance Report will include the data on permanent modifications as well as the number of active trial period modifications that may convert by the end of the year if all borrower documents are successfully submitted, sorted by servicer and date.
Servicers will be required to report to the Administration the status of each modification to provide additional transparency about situations where borrowers face obstacles to moving to the permanent phase.
Web tools for borrowers. Because the document submission process can be a challenge for many borrowers, the Administration has created new resources on http://www.makinghomeaffordable.gov/ to simplify and streamline this step. New resources include:
Links to all of the required documents and an income verification checklist to help borrowers request a modification in four easy steps;
Comprehensive information about how the trial phase works, what borrower responsibilities are to convert to a permanent modification, and a new instructional video which provides step by step instruction for borrowers;
A toolkit for partner organizations to directly assist their constituents;
New web banners and tools for outreach partners to drive more borrowers to the site and Homeowner’s HOPETM Hotline (888-995-HOPE).
Engagement of state, local and community stakeholders. Through the conversion drive, the Administration is engaging all levels of government – state, local and county – to both increase awareness of the program and expand the resources available to borrowers as they navigate the modification process.
HUD will engage staff in its 81 field offices to distribute outreach tools. HUD will also encourage its 2700 HUD-Approved Counseling Organizations to distribute outreach information to participating borrowers.
By engaging the National Governors Association (NGA), National League of Cities (NLC) and National Association of Counties (NACo) the Administration is connecting with the thousands of state, local, and county offices on the frontlines in large and small communities across the country who are hardest hit by the foreclosure crisis. These offices will now have the tools to increase awareness of the program, connect with and educate borrowers and grassroots organizations on how to request a modification and take the additional steps to ensure they are converted to permanent status; and serve as an additional trusted resource for borrowers who are facing challenges with the program.
In partnering with the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators, state regulators will now have enhanced tools to assist borrowers who are facing challenges in converting to a permanent modification and to report to the Administration on the progress and challenges borrowers and servicers are facing on the ground. Regulators will also be empowered to work directly with escalation and compliance teams to ensure that HAMP guidelines are consistently applied.
More information about the Obama Administration’s mortgage modification program can be found at http://www.makinghomeaffordable.gov/.
More on This Topic From the IRS – Yet Again -10 Important Facts about the Extended First-Time Homebuyer Credit
[Stacie says: Boy the IRS is really bombarding us with the rules on the extended homebuyers credit. Do you think they are worried that taxpayers are going to get it wrong – again?]
If you are in the market for a new home, you may still be able to claim the First-Time Homebuyer Credit. Congress recently passed The Worker, Homeownership and Business Assistance Act Of 2009, extending the First-Time Homebuyer Credit and expanding who qualifies.
Here are the top 10 things the IRS wants you to know about the expanded credit and the qualifications you must meet in order to qualify for it.
You must buy – or enter into a binding contract to buy a principal residence – on or before April 30, 2010.
If you enter into a binding contract by April 30, 2010 you must close on the home on or before June 30, 2010.
For qualifying purchases in 2010, you will have the option of claiming the credit on either your 2009 or 2010 return.
A long-time resident of the same home can now qualify for a reduced credit. You can qualify for the credit if you’ve lived in the same principal residence for any five-consecutive year period during the eight-year period that ended on the date the new home is purchased and the settlement date is after November 6, 2009.
The maximum credit for long-time residents is $6,500. However, married individuals filing separately are limited to $3,250.
People with higher incomes can now qualify for the credit. The new law raises the income limits for homes purchased after November 6, 2009. The full credit is available to taxpayers with modified adjusted gross incomes up to $125,000, or $225,000 for joint filers.
The IRS will issue a December 2009 revision of Form 5405 to claim this credit. The December 2009 form must be used for homes purchased after November 6, 2009 – whether the credit is claimed for 2008 or for 2009 – and for all home purchases that are claimed on 2009 returns.
No credit is available if the purchase price of the home exceeds $800,000.
The purchaser must be at least 18 years old on the date of purchase. For a married couple, only one spouse must meet this age requirement.
A dependent is not eligible to claim the credit.
For more information about the expanded First-Time Home Buyer Credit, visit IRS.gov/recovery.
Homeowners Now Also Qualify
By Stacie Clifford Kitts, CPA
Mary O-Keeffe strikes back with another good argument in response to my post Still Talking About Fuller Lips, Larger Breasts, Slimmer Thighs, And H.R. 3590. In her post More on taxing cosmetic surgery, subsidies, and tax simplification Mary is certainly on target when she says:
“If we as taxpayers don’t want more taxes, then we as taxpayers also have
to send a clear signal to our politicians as to what we don’t want the
government to be spending our money on.”
Well Mary, I agree so here goes:
I would greatly appreciate your not spending $100 million to buy a vote.
If Louisiana needs the money, base it on that need, not on your need to win.
Also,are you really spending $1.15 million to put a guardrail around a dry lake
in Oklahoma? Because if you are, I would rather that my portion of the tax
coffer not be spent on that – please.
And what’s the deal with giving the SETI Institute $13.8 million in
2008? Did you know they spent $456,312 to search for “signs of intelligent
extraterrestrial life”? (Although that does sound kinda cool, I am
wondering, why can’t we wait until they find us? I mean, let them spend the
And If even half of the rest of what Senator Coburn said about your
spending habits is right, would you please knock off all of the other
shenanigans, too – The public can’t afford it AND their cosmetic surgery too!
I eagerly await your response.
Very truly yours,
Stacie Clifford Kitts, CPA
As Mary pointed out, the cost of “unnecessary” cosmetic surgery is not deductible for tax purposes and cannot be paid with pre-tax or what I’d call “tax efficient” dollars. And the proposed tax does not apply to otherwise deductible cosmetic surgery. So, yep, they do dictate behavior and have done so for quite awhile.
But that’s not the point.
The point is where does it stop? Yes, as Mary pointed out, they already started down this slippery slope, particularly with the [ab?]use of their taxing powers. Yes, the tax code is replete with behavior modifying incentives and disincentives. While this tax may be new, the concept on which it rests certainly is not. This “vanity” tax is merely an example of how far down the slope they’ve slipped.
So what’s next? Maybe congress will decide that having two bathrooms is unnecessary? So levy a tax or limit a deduction on anyone owning, renting, or squatting in a house with more than one?
How many cars per family are acceptable? Isn’t one enough? Why not charge an excise tax on each car purchased after the first?
Ok – so that’s a little dramatic. None of that is likely to happen – at least not before the next election.
So again I ask, why just cosmetic surgery?
Is it, as Mary argues, because it is unfair to subsidize “elective” surgery? Admittedly, I am not well read on medical education subsidies and the resulting economics. And if she is willing, she may help educate us all on the topic.
Remember, I’m pleading ignorance and despite that – or because of it – I’m not yet buying her argument.
First, I don’t understand how the doctor’s get a discount and second I don’t see the logic that explains how that discount gets to the public. From what I can find, most of the subsidies go to the teaching hospitals or schools. Doctors don’t directly benefit.
Oh, there is the “collateral benefit.”
Let’s consider – without the subsidies one of three things can happen: 1) the schools and hospitals can reduce training and research thereby eliminating the costs currently subsidized 2) the schools can raise tuition to compensate for the lost revenue or 3) they can collude with a combination of the two.
Well – less training and less research means lower quality. Lower quality generally means lower demand, which means poorer health. Poorer health raises the cost of taking care of sick people who shouldn’t be sick – and said cost are then being paid for by the public. This of course does not subsidize medical care. So why go there?
Ok, so subsidies result in lower medical school tuition (thus lowering the barrier to entry) which increases the supply of doctors. Supply pressure then pushes the price of the doc’s services down.
Okay, am I getting this yet?
Or, maybe subsidies result in lower tuition which means lower costs (and lower opportunity cost – threw that in for you economists) which means they can charge a lower fee and still make the same profit margin. This, in theory, means they charge less.
Is this what Mary means?
I suppose this is why I’m an accountant and not an economist ‘cause I know what really happens. Doc hires an accountant who says: “Raise your price as high as possible to accomplish one of two goals.
- 1) If you raise the price just right, you will maximize your profit margins without losing patients. So you will pocket more money even after my fees.
2) Or, you might lose a few patients (due to your price increase), while maintaining the same level of profit leaving more time to play golf or whatever docs do when they aren’t available.
So what does the doc do? She decides to maximize revenues because no matter the outcome she wins.
In reality – There is no subsidized discounts to the patient, just higher income or more time off for the doc.
Now let’s consider this -why not tax where the money really goes? That is levy the tax on the docs!
Look, assuming the doc has risen rates to accomplish the goals recommended by the accountant – which duh she has, the tax increases the cost to the patient means too much price pressure means lower demand means lower revenues means lower profits means doctor pockets less means accountant pockets less which really sucks!
Speaking of sucks – so does the “vanity tax” and all it represents.
By Stacie Clifford Kitts, CPA
Mary O-Keeffe over at Bed buffaloes in your tax code has responded to my post:
Her answer to my question is thoughtful and while I do agree with Mary’s point that there is some government subsidizing in the medical profession, I think her argument provides fodder for the slippery slope that this type of public policy inspires.
In my previous post, I say:
- “But what is even more perplexing is just how or why cosmetic surgery won the tax lottery. I fear that this type of legislation opens the door for a whole litany of WTF taxes. I mean why not tack on an additional tax for hair coloring, nail salons, or makeup. These are also vanity products. Frankly where does it stop?”
Mary’s answer is this:
- “The government provides large subsidies for the education of physicians. Yes,they do pay tuition, often taking out large loans to do so, but their tuition does not cover all the costs of their training. Government subsidies for medical education make up the difference. At the moment, people who purchase cosmetic surgery services are getting it at a discount thanks to the general public’s subsidies of their physicians’ training.”
Given the current economic state, and the need for our government to find revenue sources, I worry what source will be next.
Are we now to accept that any government subsidized product or profession is subject to this excise tax? If this is your position, then be wary, there are hundreds of thousands of government subsidies in all types and forms.
Tell me – are we now to explore the background of every product that we buy and determine if the government ever subsidized research or provided tax breaks? How soon do you think it will be before it becomes “public policy” to tax all of our choices, in products, or services, or lifestyle? Moreover, who gets to decide which items are wicked enough to be taxed first.
So again, I ask, why did cosmetic surgery win the tax lottery, why not the treatment of acne? After all dermatologists went to medical school too, their education was also subsidized. The answer is clear, because taxing little pimple faced teenagers for their acne treatment would tick people off. It doesn’t matter that this procedure is also elective and even vanity driven.
However, people who elect to have cosmetic surgery are perceived as vain, spoiled, overindulged, and sinful.
Do you see how letting our government tax our life choices even when those choices are not harmful to the public welfare creates a morality clause in our tax system by giving lawmakers the power to tax those items or services that they believe are wrong?