Education Expenses

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Dear friends,

I just got a MFJ client that has $205,000 AGI.
The wife was an international student who goes to graduate school (graduated this year) and worked for a company while a student, then accepted a position in the company and continued receiving wages. Since the student WAS an international student and was exempt from social security and medicare taxes, the school did not withold anything except for federal WH.

I think the school is wrong, and should have taxed the client when her "exempt" status ended which is when she graduated, and accepted the position. The w2 only show amounts in box 1 and 2. All the proper state and local taxes were paid.
What would be the best way to pursue this issue?

She also paid around $10K for graduate school (portion out of her pocket after scholarship paid for the rest), and 200 something for student loan interest.

As far as I know HOPE and Lifetime phases out @ $114K and the student loan interest phases out @ $140K. Someone made a presentation @ the school telling the students that "Now that the GRADUATE SCHOOL is qualified, they would be able to deduct their expenses, and it would not be subject to phase out"

My questions are:
1- What to do about the Social security and Medicare taxes that remain unpaid
2- Is there something I am missing regarding a "NEW LAW" about the Graduate students and phase out? I tried to do some research but came out blank.

I know this is a very busy season for all of us, but any help is greatly appreciated.

Best regards,

Oz

[Koss]

Higher Education

Hope, Lifetime, and the Tuition and Fees Deduction all phase out completely at higher income levels. So the school was simply providing incomplete information.

With that being said...

Is it possible that some of the her educational expenses could be deducted as work-related education on Schedule A?

As for the social security and medicare tax--

My primary concern would be whether she is still working for the same employer, and if so, whether they have finally begun to withhold SS and medicare.

I'm not sure I would proactively question whether withholding should have begun at a certain point during the year. The IRS is unlikely to question or challenge the school's determination that she was exempt.

There may be another reason that she remained exempt even after she was no longer a student.

Was she a nonresident alien?

You need to be very careful here. It's a pretty good bet that even after she graduated and ceased to be a student, she nevertheless had a valid visa and work permit. And based on your original post, it sounds like she is married to an American citizen.

If she is married to a US citizen, she can probably choose to be treated as a resident alien for tax purposes, and this allows the couple to file a joint return and use a regular Form 1040.

But her status as a nonresident alien may still make her exempt from SS and medicare--especially if she holds a visa that is formally defined as a visa for "teachers and researchers."

As the spouse of a US citizen, she may be eligible to apply for permanent residency. And since she has a visa that allows her to work in the US, she already has a social security number. But don't let any of that fool you into thinking that she's a permanent resident. Unless she already has permanent resident status, she's still a nonresident alien.

I'll betcha her visa type didn't change when she graduated and took the job. If she was on a "researcher" visa, they probably gave her a position that allowed her to keep working with the same visa. And that's probably why they have taken the position that she's still exempt.

Burton

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Hope, Lifetime, and the Tuition and Fees Deduction all phase out completely at higher income levels. So the school was simply providing incomplete information.

With that being said...

Is it possible that some of the her educational expenses could be deducted as work-related education on Schedule A?

As for the social security and medicare tax--

My primary concern would be whether she is still working for the same employer, and if so, whether they have finally begun to withhold SS and medicare.

I'm not sure I would proactively question whether withholding should have begun at a certain point during the year. The IRS is unlikely to question or challenge the school's determination that she was exempt.

There may be another reason that she remained exempt even after she was no longer a student.

Was she a nonresident alien?

You need to be very careful here. It's a pretty good bet that even after she graduated and ceased to be a student, she nevertheless had a valid visa and work permit. And based on your original post, it sounds like she is married to an American citizen.

If she is married to a US citizen, she can probably choose to be treated as a resident alien for tax purposes, and this allows the couple to file a joint return and use a regular Form 1040.

But her status as a nonresident alien may still make her exempt from SS and medicare--especially if she holds a visa that is formally defined as a visa for "teachers and researchers."

As the spouse of a US citizen, she may be eligible to apply for permanent residency. And since she has a visa that allows her to work in the US, she already has a social security number. But don't let any of that fool you into thinking that she's a permanent resident. Unless she already has permanent resident status, she's still a nonresident alien.

I'll betcha her visa type didn't change when she graduated and took the job. If she was on a "researcher" visa, they probably gave her a position that allowed her to keep working with the same visa. And that's probably why they have taken the position that she's still exempt.

Burton

First of all thank you for your prompt and detailed response. Much appreciated.
So the education credits are as I thought. I doubt any of the education expenses could be deducted as "job related" I'll have to dig deeper into that.

As for being a nonresident alien, I think their status is "resident" I will double check.

Thank you again for the response.