Here's a look at the laws that could wage a multipronged attack on your wallet and what you can do to prepare.
Summer is officially over, further signifying that it's that time of year again; back to school time! Many members of the Armed Forces have already started to crack the books in pursuit of advanced education or a specific degree. Although going back to school can be a pricey venture, military servicemen and women should keep in mind that their military status makes them eligible for certain education benefits. There are also several deductions and credits that can help offset the cost of ongoing education.
The Montgomery GI Bill (MGIB), offered by the Department of Veteran's Affairs (VA), provides education benefits for college, business, technical, correspondence or vocational courses. Additionally, this apprenticeship provides job training, flight school, high-tech training, licensing and certification tests, entrepreneurship training, and certain entrance examinations.
For retired active-duty military personnel, benefits may be received for up to 36 months, and participants have up to 10 years to use the benefits. The monthly benefit is based on the type of training, length of service, and other factors. The Department of Defense (DOD) may add a supplemental bonus known as a "kicker" as incentive for special military duty, which is based on various factors at the time of enlisting.
The plan for reservists is similar. To be eligible for the Montgomery GI Bill - Selected Reserve (MGIB - SR), the reservist must sign up for six years of duty in the Army, Navy, Air Force, Marine Corps, or Coast Guard Reserve, or the Army or Air National Guard. After six months, the participant can be paid while attending college, business, technical, or vocational school, or taking cooperative courses. Benefits may be received for up to 36 months, and the participant has up to 14 years from the date of eligibility to use the benefits or until their leave the Reserve, whichever comes first.
It is important to remember that payments received for education, training, or subsistence under any law administered by the Department of Veteran's Affairs are tax free and are not included as income on a tax return. If you qualify for one or more education benefits, you may have to reduce the amount of education expenses qualifying for a specific benefit by part or all of your VA payments. Consulting a professional tax preparer can help explain all of the options associated with VA payments.
You may find that you qualify for the Student Loan Interest Deduction. This deduction is for interest paid on student loans used for qualified education expenses and is subtracted directly from the income reported on your tax return. The maximum deduction for 2006 is $2,500.
You may also be able to deduct your education expenses as an employee business expense if you itemize deductions on Schedule A. To be deductible, the education must either be required by your employer or the law in order for you to keep your present salary, status, or job, or it must be needed to maintain or improve skills needed in your present work. Even if it meets either of these conditions, education will not be qualified work-related education if it is needed to meet the minimum education requirements of your present trade or business. It also is not deductible if it is part of a program of study that will qualify you for a new trade or business.
Like civilians, military men and women may be able to claim two significant education credits: the Hope Credit and the Lifetime Learning Credit. The requirements for these credits and the deduction can be found in IRS Publication 970, Tax Benefits for Education.
The Hope Credit covers up to $1,650 in calendar year 2006 (up from $1,500 in 2005) per eligible student. This credit can be claimed for only the first two years of postsecondary education and applies to study of part-time and higher in a qualified program. The Hope Credit allows you to claim 100% of the first $1,000 plus 50% of the next $1,000 you pay for qualified tuition and related expenses.
The Lifetime Learning Credit offers up to $2,000 each year for the total qualified tuition and related expenses paid during the tax year in eligible educational institutions. Unlike the Hope Credit, the Lifetime Learning Credit is not based on workload and is not limited to the first two years of postsecondary education. Expenses for graduate-level degree work are eligible.
There are a range of pro-taxpayer benefits relating to education that members of the Armed Forces can incorporate into their financial planning. A Jackson Hewitt professional tax preparer can assist those interested in exploring the tax significance of the various military educational bills, credit and deductions available. For more assistance, visit www.jacksonhewitt.com.