Posts Tagged ‘Education Expenses’

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Important Information for All Parents

Tuesday, January 24th, 2012

The exclusive purpose for the information which is provided from this website is to disseminate  information, and not to provide tax advice.

IRS Reminds Parents of Ten Tax Benefits 

Your kids can be helpful at tax time. That doesn’t mean they’ll sort your tax receipts or refill your coffee, but those charming children may help you qualify for some valuable tax benefits. Here are 10 things the IRS wants parents to consider when filing their taxes this year.

1. Dependents In most cases, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

2. Child Tax Credit You may be able to take this credit for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. For more information see IRS Publication 972, Child Tax Credit.

3. Child and Dependent Care Credit You may be able to claim this credit if you pay someone to care for your child or children under age 13 so that you can work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.

4. Earned Income Tax Credit The EITC is a tax benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund. IRS Publication 596, Earned Income Credit, has more details.

5. Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. If you claim the adoption credit, you must file a paper tax return with required adoption-related documents.  For details, see the instructions for IRS Form 8839, Qualified Adoption Expenses.

6. Children with earned income If your child has income earned from working, they may be required to file a tax return. For more information, see IRS Publication 501.

7. Children with investment income Under certain circumstances a child’s investment income may be taxed at their parent’s tax rate. For more information, see IRS Publication 929, Tax Rules for Children and Dependents.

8. Higher education credits Education tax credits can help offset the costs of higher education. The American Opportunity and the Lifetime Learning Credits are education credits that can reduce your federal income tax dollar-for-dollar. See IRS Publication 970, Tax Benefits for Education, for details.

9. Student loan interest You may be able to deduct interest paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970.

10. Self-employed health insurance deduction If you were self-employed and paid for health insurance, you may be able to deduct any premiums you paid for coverage for any child of yours who was under age 27 at the end of the year, even if the child was not your dependent. For more information, see the IRS website.

Forms and publications on these topics are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

 

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Tax Credits for Higher Education

Tuesday, January 18th, 2011

There are two important “tax credits” that may be available to you, if you meet all of the prerequisites.  They are the “American Opportunity Credit” and the “Lifetime Learning Credit.”  “Credits” are important tax considerations as they reduce your tax liability dollar-for-dollar, i.e. a “tax credit” of $1,000.00 will reduce your income taxes by exactly the same amount.  In contrast, a deduction that is an addition to your “itemized deductions” will increase your itemized deductions, but it will not reduce your total taxes by the same exact amount.  From page 2 of your tax return,  Total Adjusted Gross Income” less “Deductions” (Itemized or the Standard) less “Exemptions” equals “Taxable Income.”  “Taxable Income” x your marginal tax bracket rate (i.e. 10%, 15%, 25%, 28%, 33%  or 35%) will equal your “Tax.”  For example, if I am in the 25% tax bracket with the same $1,000.00 in education expenses my taxes are now only reduced by $250.00 ($1,000 x 25%). 

Finally, with the exception of part of the “American Opportunity Credit”, higher education tax credits are usually “non-refundable tax credits.”  Taxpayers with no tax liability (before the tax credit) and a $1,000.00 higher education tax credit will receive no tax refund since this is a “non refundable tax credit.”  If the same $1,000.00 tax credit was  “refundable” (which is the case for the Earned Income Tax Credit, the Child and Dependent Care Credit, the Child Tax Credit, the Retirement Savings Contributions Credit, and the Health Coverage Tax Credit) the taxpayers would receive a $1,000.00 income tax refund.

Important facts to note:

1.  Unless it is extended by Congress, 2010 is the last year to use the “American Opportunity Credit”;

2.  The credit may be claimed by either the parents or the student, but not both;

3.  Only one of the two credits may be claimed in a tax return year;

4.  The maximum American Opportunity Credit is limited to $2,500.00/year while the maximum Lifetime Learning Credit is $2,000.00/year;

5.  40% of the American Opportunity Credit is “refundable” .

Addiitonal information from the IRS for these two education expense credits follows: (more…)

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