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Minimizing Tax Burden on The Segal AmeriCorps Education Award

August 22, 2012

This article originally appeared on our July Career Newsletter released on July 10, 2012. Please join AmeriCorps Alums today at noon ET for our August Professional Development Webinar: The Effective Segal Ed Award Webinar.

As many alumni have discovered, the Segal AmeriCorps Education Award can create an unexpected tax burden.  Each dollar of the Ed Award that you use counts as income in the eyes of the government, and is therefore taxed accordingly. Using the tax bracket chart as a guide, here are some potential scenarios and solutions that can help you minimize the tax burden created by the use of your Segal AmeriCorps Education Award.
 
FIGURE 1: Marginal U.S. Tax Rates^
Tax Bracket Married Filing Jointly Single
10% Bracket $0 – $17,400 $0 – $8,700
15% Bracket $17,400 – $70,700 $8,700 – $35,350
25% Bracket $70,700 – $142,700 $35,350 – $85,650
28% Bracket $142,700 – $217,450 $85,650 – $178,650
33% Bracket $217,450 – $388,350 $178,650 – $388,350
35% Bracket
Over $388,350
Over $388,350
^If a single person earns $40,000, taxes would be 10% of the amount from $0 to $8,700, 15% of the amount from $8,700 to $35,350, and 25% of the amount from $35,350 to $40,000. Not accounting for deductions, this person would owe $6,030 in federal income taxes.
Scenario 1*: Single alumnus who uses Ed Award to pay off student loans in 2012
Sue earns a salary of $32,500 year, and used her $5,550 Ed Award to pay off student loans.
Tax Burden Impact: Because Sue utilized all of her Ed Award in 2012, this has bumped her into the 25% tax bracket, which means she is deemed to have earned $38,050 in 2012.  In addition to increasing her federal tax obligation from $4,440.00 ($32,500) to $5,542.50 ($38,050), the manner in which she used Ed Award has bumped her from the 15% to the 25% tax bracket.  $2,700 of her $38,050 in income is now subject to a higher tax rate, and  the change in tax brackets has created an extra $270 in tax obligations.
Potential Solution: Sue could apply the use of her Ed Award over multiple years, which would allow her to remain in the 15% tax bracket, and eliminate the need to pay the additional $270 she would owe if she were in the 25% tax bracket.
Scenario 2*: Single alumnus who is in school, and uses Ed Award to pay off existing student loans
Tim earns a meager $3,500 a year, while also attending graduate school, and uses his Ed Awards from two AmeriCorps terms, or $11,100 to pay off existing student loans
Tax Burden Impact: Because Tim utilized both Ed Awards in 2012, he is deemed to have earned $14,600 in 2012. In addition to increasing his federal tax obligation from $350 ($3,500) to $1,755 ($14,600), the manner in which he used the Ed Awards has bumped him from the 10% to the 15% tax bracket.  Because $5,900 of his $14,600 in income is now subject to the higher tax rate, Tim owes an extra $295 of tax.
Potential Solution: Tim could apply the use of the Ed Award over mulitple years, which would help him remain in the 10% tax bracket, and he could save the extra $295 he would owe if he were in the 15% tax bracket.
*Scenarios don’t take into account tax deductions, which would lower your taxable income.  AmeriCorps Alums is not an expert in tax law, and we encourage you to do your own due diligence when considering the tax consequences of how you utilize your Education Award.
Please join AmeriCorps Alums today at noon ET for our August Professional Development Webinar: The Effective Segal Ed Award Webinar.

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