Tax Advantages for College Cash – Series 2 of 2

The American Opportunity Credit replaces the Hope credit.  It is for full-time students and is figured per student.  Your expenses incurred during the first four years of post-secondary education are used to determine the credit with a maximum credit is $ 2,500.  Up to 40% of this credit is Refundable, meaning you could receive a $ 1,000 refund even if you owe no tax!

The Lifetime Learning Credit can be used by any student from undergraduate to graduate or even course work to improve job skills.  Plus, the student doesn't have to be enrolled full time.  However, it is by taxpayer household, not per student.  Maximum credit is $ 2,000. 

Tuition and Fees Deduction is an adjustment.  Meaning it can reduce taxable income by as much as $ 4,000.  This can be used along with Coverdell ESAs and 529 Plans, as long as you paid for different educational expenses with various funds.  There are adjusted gross income limitations.

Student Loan Interest Deduction is another adjustment, allowing a reduction of taxable income by up to $ 2,500.  It has filing status and adjusted gross income limitations.

If you cashed in Savings Bonds to pay for education expenses, the interest could be tax-free.

Extensions

The April 15 tax-filing deadline is fast approaching. Some taxpayers may find that they need more time to file their tax returns. If you need extra time, you can get an automatic six-month extension from the IRS.

Extension:  

• You can file an extension for your personal income taxes resulting in an additional six (6) months to complete your return.  
• The new due date would be Oct 15th.
• The extension is for FILING only.
• There is no extension for any balance due.  
• Balance Due Payment is still required by April 15th.

Failure to File:  

• IRS will assess a Failure to File penalty.  
• Therefore, even if you owe you can avoid this penalty by filing.

Failure to Pay.  

• IRS will assess a Failure to Pay penalty.  
• A payment plan request with your return normally eliminates this penalty.

Tax Advantages for College Cash – Series 1 of 2

Educational 529 Plan contributions are not deductible on your federal return, but the money invested in the plan accumulates tax-free.  When you withdraw account funds to pay for qualified education costs, those distributions are not taxed.  There is a named beneficiary, so anyone can contribute to the plan. The plan can be rollover to another immediate family member for unused funds. 

All 529 Plans are administered by states, and every state now has at least one. You don't, however, have to limit yourself to your state's options. There may be an additional tax advantages for establishing a plan in your home state.

Coverdell Education Savings Accounts, or ESAs, were once known as education IRAs because the accounts operate much the same way.  Contributions are not tax deductible, but they and subsequent earnings can be withdrawn tax-free as long as they are used to pay eligible schooling costs.  They operate similar to the Educational 529 Plans, but there are contribution restrictions.  However, their distribution rules are flexible and can cover kindergarten to college.

Understanding your Tax Return – Series 2 of 2

Taxable Income is your overall, or gross, income reduced by all allowable adjustments, deductions and exemptions.  As the US Tax system uses progressive taxation with tax brackets starting at 10 percent and raising to 39.6 percent for the wealthiest taxpayers, the lower your taxable income the better.

Tax Liability is how much you owe in taxes.

Tax Credits are used to reduce Tax Liability.  Tax credits are more valuable than tax deductions because they directly cut the amount of tax you owe, rather than reducing the amount of taxed income.  However, once your tax liability is $0, they cannot be used.

Refundable Credits are the same as tax credits, except they are still eligible for refund when your tax liability is $0.  Meaning you will still get a refund, even if you owe no tax.

Withholding is the amount withheld for each time you are paid, paid in from previous year, or paid in as an estimate for current year.  It is the most common of all Refundable Credits.

-         If you are NOT required to file, but had Federal and/or State withholding, the only way to get a refund is to file a return.