NC help - Education expenses

[FEDUKE404]

I stumbled onto this jewel recently. See if you agree and/or you were aware of this issue.

For tax year 2009, client filed MFJ and claimed $3500 of allowable qualified education expenses using Form 8863 (American Opportunity Credit). The expenses resulted in both refundable and non-refundable credits. AGI is in the range of $140k.

Since NC does not allow education credits, the allowed amount can only be taken as a "deduction from income" on line 52 of Form D-400. Per NCDOR instructions: "may claim a deduction up to $4,000 for the Code Section 222 qualifying expenses."

My software kept giving me only $2,000 and not the expected $3,500 deduction for NC.

After a bit of due diligence, I looked up this information re IRS Code Sect 222:

(B) After 2003

In the case of any taxable year beginning after 2003, the applicable dollar amount shall be equal to -
(i) in the case of a taxpayer whose adjusted gross income for the taxable year does not exceed $65,000 ($130,000 in the case of a joint return), $4,000,
(ii) in the case of a taxpayer not described in clause (i) whose adjusted gross income for the taxable year does not exceed $80,000 ($160,000 in the case of a joint return), $2,000, and
(iii) in the case of any other taxpayer, zero.

I assume this verifies why the $2,000 amount was used. Is this news to you, have I been living in a dense fog, or what?? Maybe I've just been lucky on the few other recent education tax credit returns (most of my folks were "too rich" until the rules changed in 2009).

One would think the NCDOR instructions might be a bit clearer - how many "normal" people have any idea what the printed NCDOR instructions ("up to $4,000") mean?

Thanks for any input....or sympathy.....or even needed lecturing.

FE

[JohnH]

I tested it on my software (ATX) and it worked exactly as you described. Increasing AGI above $130K caused the adjustment on NC to drop from $4K to $2K, and one dollar over $160K zeroed it out completely.

If a taxpayer with Education Expense happened to be right on the border line (within $2K-$4K of $130K or $160K), might be an excellent time to put some money into an IRA. Too late now for 2009 filers, even on extension. But if they have a Schedule C and are on extension they might be able to utilize a SEP to achieve the same result.

I wasn't aware of this either - something else to keep an eye on when next year rolls around, unless they change it.