H1B & student + Wife F1 visa tax query

[sunnyum]

Hello Experts -

I am looking for some advice on taxes because I am not able to figure it out. Here's the situation -

- I have been in the country for more than 7 years and last year filed as joint married.
- I am on an H1B visa and also studying part time MBA for which I am hoping to claim education credit
- My wife is on an F1 visa and earned about $20k in her assistantship and internship during the year. She paid a federal tax of 1250$.

Here is the strange part. When I calculate my tax (using 2007 number for now to get an estimate) I end up owing IRS only few hundred dollars. However, when I add the $20k earned by the wife the tax I owe jumps up to $4500. I am not sure what is the best way to file the taxes in 2009. Also, we have collectively paid more than $40k in education in 2008.

Please help.
Thanks
Sunny

[Atlanta Tax Guru]

Sunny:

The reason the tax jumps up when you add your wife's income is that your wife's income is being taxed at YOUR marginal tax rate (the rate you paid on taxes on the LAST dollar you made in 2008).

It is possible that filing separately may result in a lower overall tax rate, but the only way to be sure is to prepare the returns BOTH separately and jointly and compare the results.

You WILL be able to claim the education credit, plus be able to deduct your education costs as an itemized deduction as well.

We at Visataxes.com prepare the returns both ways as a matter of routine to ensure you legally pay the least amount in taxes.

[sunnyum]

I see that you have also replied on one other forum. I am posting a follow up here as well. Please feel free to reply at any place.

Thanks for your reply ATE. I will compare the two.

Is it safe to say that I cannot claim education credit when filing separately?

Thanks
Sunny

[sunnyum]

Also, it seems like the lifetime education credit is decreasing as I am approaching the max MAGI allowed to claim for joint return.

Any thoughts?

I am also curious about education costs as itemized deduction.

Thanks
Sunny

[Atlanta Tax Guru]

As noted, the education deductions/credits DO decrease and eventually go away as your Modified Adjusted Gross Income increases.

Your education costs for your MBA probably qualify as deductions under employee business expenses, because an MBA generally enhances your current job skills, yet is NOT a requirement for employment at your current job.

It is an itemized deduction, but MBA tuition costs are normally large enough to justify itemizing.