Tax Laws Offer Extra Credit for Teachers

There was a little extra credit for teachers in the economic stimulus bill that President Bush signed a week ago.

The new law, which primarily affects businesses and unemployment benefits, allows teachers who buy books and supplies for their classrooms to deduct as much as $250 a year for these expenses, even if they don’t usually itemize deductions.

The modest break advances a growing trend of providing tax relief for the nation’s teachers--often as a way to lure people into the field.

Several states--most notably California--also have special tax rules for teachers, some of which can save a bundle for those who teach in grammar and secondary schools.

“In a perfect world, we would be paying our teachers a fair wage so we wouldn’t have to monkey with the tax system to give them this little bite,” said Jim Southward, an enrolled agent in San Carlos, Calif.

In the real world, teachers need to know about taxes.

Here’s the rundown:

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Federal Deduction

Under the economic stimulus act, qualified educators can deduct as much as $250 a year in expenses for books, supplies, computer equipment, services and supplementary materials used in the classroom, beginning with the 2002 tax year.

Qualified educators are defined as anyone working 900 or more hours a year as a kindergarten through 12th-grade teacher, instructor, counselor or principal in a public, private or parochial school providing elementary or secondary education as determined by state law.

This federal deduction will be a “before-the-line” item, which means that even teachers who do not itemize deductions will be able to claim it, said Mark Luscombe, principal tax analyst with CCH Inc., a Riverwoods, Ill.-based publisher of tax information.

The bad news is that this deduction lasts just two years. It won’t cover expenses incurred after Dec. 31, 2003, and it doesn’t come close to what teachers actually spend on school supplies, educators contend.

“There have been some studies that have shown that the average elementary school teacher spends $2,000 a year on supplies for their classrooms,” said Wayne Johnson, president of the California Teachers Assn. in Burlingame, Calif.

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California Tax Credit

The teacher retention credit, which can shave as much as $1,500 off a California state tax bill, went into effect in 2000, but only about 214,000 of the state’s 300,000 teachers claimed it last year, the Franchise Tax Board reports. The board expects more teachers to claim the credit on their returns this year.

Unlike the straightforward federal tax break, the California teacher retention credit is complex. To qualify, a teacher must be credentialed and have taught at least four years in an elementary, secondary or vocational trade school serving grades kindergarten through 12. Those working with emergency or internship credentials do not qualify.

The amount of the credit will vary based on the teacher’s years of service and what percentage of the family’s income comes from teaching.

Teachers with four to six years of service can claim as much as $250. The maximum credit rises to $500 after six years of service, to $1,000 after 11 years and to $1,500 after 20 years. However, the credit cannot exceed 50% of the state tax owed on teaching-related wages.

Teachers whose spouse is not a qualified educator must figure out which portion of their joint tax liability is attributable to teaching, potentially limiting the credit they can claim. (This limitation is calculated on form 3505, which must be filed with any return claiming the credit.)

Moreover, if teachers derive some of their income from nonacademic work--for instance, for coaching the volleyball team--that amount must be deducted from the calculation.

“I’m telling you, it’s brutal,” said Alfonso U. Bundoc Jr., enrolled agent with Premier Tax Service in Los Angeles.

“If you are the principal of the school and you also teach, you are supposed to look at your contract to see how much of your salary is allocated to teaching and how much to administration,” he said. “If I make [$50,000] and my contract calls for 50% teaching and 50% administrative, I can only count [$25,000] toward the teacher retention credit.”

But for those who qualify, the credit is generous enough to make the extra tax calculations worthwhile.

Unlike deductions, which reduce taxable income--thus saving a person in the 30% tax bracket roughly 30 cents on the dollar--tax credits reduce the tax paid on a dollar-for-dollar basis.

Those who qualifed for the teacher credits but failed to take them in 2000 should amend their returns by filing a form 540X, Bundoc said.

“It sounds better politically than it works out in real life, but it still helps our teachers,” Southward said.

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Other States’ Breaks

Several other states also have tax breaks for teachers, though none as generous as California’s, said Daniel Schibley, an expert in state taxation with CCH.

For instance, Virginia teachers can take a deduction for as much as 20% of the cost of tuition for taking continuing teacher education courses required by the state.

In Maryland, a teacher can get a credit of up to $1,500 for tuition for graduate-level courses they are required to take to maintain certification.

A few states also allow teachers to exempt all or part of their teacher retirement payments from state tax, Schibley said.

However, the rules for these exemptions often are complicated and include caveats and phase-outs. If you’re not sure about which credits or deductions you can claim, seek professional tax advice.

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Times staff writer Kathy M. Kristof, author of “Investing 101” (Bloomberg Press, 2000), welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail [email protected]. For past Personal Finance columns visit The Times’ Web site at www.latimes.com/perfin.

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A Little Relief

In addition to a new tax break for teachers, there are a few other consumer-oriented tax breaks in the economic stimulus bill.

* AMT relief: Personal tax credits for adoption, disability, children and education will continue to be exempt from the alternative minimum tax through 2003. These exemptions would have expired this year.

* Archer medical savings accounts: These accounts, which allow the self-employed and small-business owners to save for some medical costs on a tax-free basis, were extended through 2003.

Foster care: A provision in the law expands the definition of those considered a foster-care child and who may receive tax-exempt payments for their care.

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Source: CCH Inc.