Maximize Your 2013 Tax Refund with these Tax Deductions & Credits

Maximize Your 2013 Tax Refund with these Tax Deductions & Credits

Credits & deductions available on your 2013 federal returns due April 15, 2014 include:

• Child Tax Credit (CTC) (Form 8812 to Form 1040, line 51) - CTC has been made permanent at $1,000 per child under age 17 at the end of the year.  This credit may be claimed in addition to the Child & Dependent Care Credit.
• Child & Dependent Care Credit (Form 2441 to Form 1040, line 48) - Maximum amount of child and dependent care expenses eligible for the credit is now $3,000 if you have one child and $6,000 if you have two or more children.  These amounts are permanent.
• Tuition & Fees Deduction (Form 1098-T to Form 8917 to Form 1040, line 34) - If you, your spouse or dependent is enrolled in a post secondary institution (college), you may be able to deduct tuition (up to $4,000) expenses as an adjustment to income, even if you don't itemize deductions. You generally take this deduction if you don't qualify for an education credit. (No double benefit allowed).
• American Opportunity Tax Credit (Form 8863 to Form 1040, line 49) - Maximum credit for the first four years of post secondary education (college) costs in a degree or certificate program is $2,500 per student. Costs may include tuition, fees and course materials (books).  If you owe no tax, you may also be eligible to receive up to 40% of the credit ($1,000) as a refund.
• Lifetime Learning Credit (Form 8863 to Form 1040, line 49) - Tax credit for any person who takes college classes. It provides a tax credit of 20% of tuition expenses, with a maximum of $2,000 in tax credits on the first $10,000 of college tuition expenses. You can claim the Lifetime Learning Credit on your tax return if you, your spouse, or your dependents are enrolled at an eligible educational institution and you were responsible for paying college expenses. Unlike the American Opportunity credit, you need not be in the first four years of undergraduate classes. Even if you took only one class, you may take advantage of the Lifetime Learning Credit.
• Educator Expenses Elementary and secondary educators can deduct up to $250 in related job expenses as an adjustment to income, even if not itemizing.  Educator expenses are not reduced by 2% of AGI, contrasting to most other employee expenses.
• Deduction for mortgage insurance premiums (PMI) (Form 1040, Sch A) If you pay mortgage insurance premiums, aka (PMI), you may be able to deduct these premiums as mortgage interest.
• Alternative Minimum Tax (AMT) (Form 6251) AMT was enacted by Congress (TRA1969) imposing a nearly "flat rate" (26%/28%) on an adjusted amount of taxable income above a certain threshold (exemption) to ensure wealthy taxpayers receiving large tax benefits pay "some" tax. AMT will now be adjusted for inflation each year so fewer people are subject to the AMT. The exemption amount for 2013 is $51,900 single, $80,800 married and $40,400 married filing separate.
• Adoption credit (Form 8839) you may qualify for a credit up to $12,970 of your adoption expenses including fees, court costs, attorney fees, traveling expense and other expenses directly related to and for the principal purpose of the legal adoption of a child. If your employer provides adoption benefits, you may be able to exclude up to the same amount from your income. Both a credit and exclusion may be claimed for the same adoption (child) by not for the same expense (child).
• State & Local sales tax deduction (Form 1040, Sch A) For 2013, you may deduct state & local sales tax in lieu of state income tax. You can take a deduction for state & local sales tax, or a deduction for state income tax, but not both.
• Learn more about these deductions and credits at irs.gov and file your income taxes!

Education Tax Credits

EDUCATION TAX CREDITS

There are two tax credits for higher education.  For more information see IRS Publication 970.

1. The American Opportunity credit (modified HOPE) provides a refundable tax credit of up to $2,500 for the cost of undergraduate college tuition and other related expenses. You’ll need to spend at least $4,000 in a single year to get the full credit. The credit begins to phase out for individual taxpayers with adjusted gross incomes over $80,000 or $160,000 for married couples filing jointly. Forty percent of the credit is refundable, which benefits low-income students paying their way through school (who may owe no federal income taxes).
2. The Lifetime Learning Credit provides a tax credit of up to $2,000 for any level of college education (even graduate school), and doesn't require a minimum level of enrollment. However, the Lifetime Learning Credit has a narrower income range compared to the tuition deduction. For single filers in 2012, the credit begins to get reduced starting at a $52,000 income level, and disappears entirely at $62,000. For joint filers in 2012, these limitation numbers begin at $104,000 and end at $124,000.

American Opportunity (modified HOPE) Credit & Lifetime Learning Credits

A new provision in the tax laws took hold in 1998, to help foster higher education.  This part of the Taxpayer Relief Act of 1997 involves two related tax credits: The HOPE scholarship credit, and the Lifetime Learning credit.  These credits are one part of the new "Education Trilogy" package that was recently enacted.  The other two parts are the Education IRA and the Student loan interest deductibility.

All three of these enactments are designed primarily to help low and middle income families deal with the costs of higher education.  In regard to the HOPE and Lifetime Learning credits, taxpayers will be eligible for a direct credit against their federal income taxes per year for higher educational expenses paid on behalf of a qualifying student.  A brief rundown of these two credits follows.

HOPE Scholarship Credit (old law) 
Beginning with expenses paid after December 31, 1997, this is a credit for the first two years of a higher educational program.  The expenses must be for tuition and related fees for the taxpayer, taxpayer's spouse, or taxpayer's qualified dependent.

The credit can be up to $1,500 per year for the first two years, based on a percentage formula equal to the sum of 100% of the first $1,000 of tuition plus 50% of the next $1,000 in tuition.  So, to get the full $1,500 credit, you would have to pay at least $2,000 in qualified tuition expenses.

President Obama signed in law on the American Recovery and Reinvestment Act (HR 1), which passed Congress on Friday, February 13th, 2009.

American Opportunity (modified HOPE) Tax Credit 
The HOPE education credit was renamed the American Opportunity Tax Credit in 2009. The credit is worth up to $2,500 on the first $4,000 of qualifying educational expenses, which will include course materials as well as tuition. The credit now applies to all four years of undergraduate college education, not just the first two years of college as under the previous HOPE credit. The credit is also available to more taxpayers than the previous HOPE credit, with a new phase-out range of $80,000 to $90,000 (or $160,000 to $180,00 for joint filers). Up to 40% of the credit is refundable.

What is the American Opportunity Tax Credit? ($2,500 max credit per year per student)
The American Opportunity Tax Credit is a federal tax credit for college tuition, fees, books, and supplies paid during the tax year for yourself, your spouse, or a dependent. The credit applies to the first four years of post-secondary education.

The credit equals 100% of the first $2000, and 25% of the next $2000 that you paid, up to a maximum of $2500 per year per student. Forty percent of the credit is refundable, allowing families with little or no tax liability to get a refund payment of up to $1000 per student.

The American Opportunity Tax Credit is part of the American Recovery and Reinvestment Act of 2009 (Economic Stimulus Plan). It replaces the Hope Credit for tax years 2009 through 2012.

Is the American Opportunity Tax Credit the same as the Hope Credit?
The American Opportunity Tax Credit, part of the 2009 Economic Stimulus Plan, expanded, increased, and replaced the Hope Credit for tax years 2009 and 2010, and has been extended for tax years 2011 and 2012. Some people refer to the American Opportunity Credit as the Hope Credit.

Compared to the Hope Credit, the American Opportunity Credit:

• has higher income limits
• increases the tax credit to a maximum of $2500 (vs $1800 for the Hope Credit)
• can be used for the first four years of college instead of only the first two years
• allows credit for required books and supplies in addition to tuition and fees
• is 40% refundable

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended the American Opportunity Tax Credit for tax years 2011 and 2012.

Lifetime Learning Credit ($2,000 max credit per year per family)

Congress pegged this supplemental credit to go into effect as of July 1, 1998.  Originally, this was a 20% credit on a maximum of $5,000 of annual educational expenses for post-secondary schooling to improve or achieve job-related skills.  This maximum educational expense amount became $10,000 by the year 2003.  This translates into a $2,000 maximum credit against one's income taxes.  It is for an unlimited number of years, so it can be used for graduate school programs as well.  

What is the Lifetime Learning Credit?

The Lifetime Learning Credit is a federal tax credit for qualified education expenses paid during the tax year for yourself, your spouse, or a dependent. The credit applies to full-time or part-time post-secondary education, including undergraduate, graduate, and professional study.

The credit equals 20% of the first $10,000 that you paid for all family members, up to a maximum of $2000 per year per family. The credit is not refundable, meaning that you will not get a refund payment if your credit is more than what you owe in taxes.

The Lifetime Learning Credit is one of two federal tax credits that help families offset the costs of post-secondary education.  You cannot claim both 
credits for the same student in the same year.

How The Two Credits Interract

Basically, the law says you cannot claim BOTH a HOPE and a Lifetime Learning credit for the same student during the same year.  You must choose one or the other.   

Some Limitations And Caveats

There are four major ways in which these credits may be reduced or totally eliminated for a taxpayer.

First, there is a phase out limitation based on your modified adjusted gross income (AGI).  Lifetime Learning Credit for single filers in 2012, begins to get reduced starting at a $52,000 income level, and disappears entirely at $62,000.  For joint filers in 2012, these limitation numbers begin at $104,000 and end at $124,000.  American Opportunity credit begins to phase out for individual taxpayers with adjusted gross incomes over $80,000 or $160,000 for married couples filing jointly. Forty percent of the credit is refundable.

Second, these credits are reduced by scholarships, grants, and other tax free educational assistance programs the student receives.

Third, you can't take either of the credits in any year that you withdraw money from the new Education IRA plan to pay for the same educational expenses.

Fourth, if you cash in certain Series EE Bonds to pay for the educational expenses, and you take the credits, the interest from these bonds may not be exempt from tax.  So you may have to choose between taking the credits or exempting the bond interest.

These credits are definitely a strong statement from the Federal Government to support higher learning.  For low to middle income taxpayers, they can make a positive difference in the "bottom line" when it comes to educational expenses.

Deducting interest on student loans. Students often take out loans to pay for college expenses. Interest on student loans may be deductible up to $2,500 per year. Be aware that this deduction is gradually phased out as your income raises. This deduction may change after 2012 to provide that interest is deductible only for the first 60 months of repayment. Like the tuition deduction, the student loan interest deduction is taken directly on your tax return and doesn't need to be itemized.

Reference: Practice Enhancers, Able & Co., Education Credits – Federal Tax Guide • 1040.com – File Your ...

Education Tax Breaks & Section 529 Plan

Education Tax Breaks & Section 529 Plan 

• Taxpayers may elect (on Form 8863) a Lifetime Learning credit equal to 20% of up to $10,000 of qualified tuition and related expenses paid during the tax year. The maximum credit is $2,000. IRC §§ 25A(a)(2), 25A(c)(1). There is no limit on the number of years for which the credit can be claimed. The credit is per taxpayer and does no vary based on the number of students in a family. The credit is available for undergraduate, graduate and professional degree students and for students acquiring or improving job skills. Unlike the American opportunity tax credit (AOTC), which is available for the qualifying expenses of each qualifying student, the Lifetime Learning credit is available only per taxpayer. So, for example, a joint filing couple with two children could claim no more than a $2,000 Lifetime Learning credit, even if each family member is a qualifying student with qualifying expenses. For 2010, the credit is phased out ratably for taxpayers with modified AGI (MAGI) from $50,000 to $60,000 ($100,000 to $120,000 for marrieds filing jointly). For 2011, the credit is phased out ratably for taxpayers with MAGI from $51,000 to $61,000 ($102,000 to $122,000 for marrieds filing jointly).

American Opportunity Tax Credit (formerly Hope Credit)
• For tax years beginning in 2010, 2011 and 2012, individuals may elect (on Form 8863, attached to an original or amended return filed by the limitations period for filing a claim for credit or refund for the year the credit is claimed) a personal, partially refundable American opportunity tax credit (AOTC)—i.e., the Hope scholarship tax credit, as renamed and enhanced, available through 2012—equal to 100% of up to $2,000 of qualified higher-education tuition and related expenses plus 25% of the next $2,000 of expenses paid for education furnished to an eligible student in an academic period. Thus, the maximum American opportunity tax credit (AOTC) is $2,500 a year for each eligible student. The AOTC for first four years of post-secondary education (collegiate-level institutions) per student at an eligible institution. IRC §25A(i).

Lifetime learning credit

• The same treatment of expenses paid by dependent, adjustment for tax-free scholarships, etc., treatment of certain prepayments, denial of double benefit, denial of credit to marrieds not filing jointly, and nonresident alien bar that apply for AOTC purposes also apply to the Lifetime Learning credit. IRC §§25(d)(e)(f)(g)(h).
• Both the AOTC (formerly Hope) and lifetime learning credits cannot be claimed for the same student in a given year. Given a choice between the two credits, it will generally make sense to use the AOTC credit for the first four years of college, since it is currently larger and available for any number of students.

Coverdell Education Savings Accounts (CESAs)
• Taxpayers can contribute up to $2,000 per year to Coverdell Education Savings Accounts (CESAs, formerly called education IRAs) in 2010, 2011, and 2012, for beneficiaries under age 18 and special needs beneficiaries of any age. The account is exempt from income tax, and distributions of earnings from CESAs are tax-free if used for qualified education expenses.
• Nondeductible annual contributions of up to $2,000 can be made to an education IRA for any child under 18. Funds can accumulate and be paid out tax-free for college expenses, including books, room, and board.
• Funds in an education IRA must ether be paid out before the age 30 or rolled into an education account for another child, or the IRA will be subject to tax and penalties.

Here are some helpful suggestions:
• If your income is too high to let you establish education IRAs for your children, make a $2.000 gift to each child and have the child establish the IRA with himself/herself and the beneficiary.
• Because the annual contribution limit is so low, the longer an education IRA can grow, the more useful it will be as a source of funds for college. Start as early in your child's life as you can. You may also find it beneficial to roll an older child's IRA into the IRA of a younger child to get a longer compounding period.
• Shop around for an educational IRA with reasonable fees. If fees are too high, they may eat up the account's annual earnings.
• In your planning, remember that the education credits apply to expenses paid not only for your dependent child, but also to qualifying education expenses paid for you and your spouse.

Section 529 Plan - Saving for Higher Education:
Provide taxpayers with income tax benefits and estate planning benefits while allowing grantors (owner of the plan) more control in comparison to other higher education saving plans. Here is some facts about the 529 plan.

§529 Plan in a nutshell:
• The plan is subject to "Sunset" provision, and must be re-enacted before 2011 for qualified withdrawals to remain tax-free
• The plan is to be established by individual states
• The plan must identify a beneficiary
• Can be moved from one beneficiary to another (must be related to the original beneficiary)
• The state selects a plan manager to invest assets (in mutual fund)
• Each state sets its own maximum amount of contribution (plan limit)
• The limits are based on tuition of an eligible institute (within or outside the state)
• The limits are adjusted according to the expected increase in tuition
• Taxpayers can participate in ANY state plan, or in a multiple plans up to the maximum limits of any one plan (no residency restriction)
• The amount of contribution is limited by the plan's limits
• Anyone can establish a plan for anybody (child, grandchild, neighbor, etc.) including self.
• Owner or anyone-else can contribute the entire amount in one single year
• Single taxpayer may ADVANCE GIFT for five-years by depositing $65,000 in one year as a gift in advance for 5-years at the current rate of $13,000 per year (Annual gift tax exclusion of $13,000 excluded from tax). (Husband and wife can contribute up to $130,000)
• Gift will require filing a Gift Tax Return - Form 709

§529 Withdrawals for post-secondary education are tax free and can be made for:
• Tuition, books, fees, and required supplies and equipment in eligible institutions
• Room and board (if student is enrolled at-least part time)
• Withdrawals must be made by the owner of the plan (the contributor)
• Beneficiary cannot withdraw from plan regardless of age
• Owners must keep records of tuition paid to support withdrawals which are reported to the IRS on Form 1099-Q
• Non-qualified withdrawals are taxed at taxpayer rate
• Non-qualified withdrawals will incurs 10% penalty, except for:
   ○ Death, 
   ○ Disability, or 
   ○ Scholarship (up to the scholarship amount)
• Rollover to another 529 plan within 60-days
• The plan is a valuable estate planning tool, and allow owner more control over beneficiary, as it
• Allows owner to control the assets; while excluding the plan's asset from being included in the estate
• Owners controls withdrawals, and select a successor to control withdrawals upon his/her death
• Owner can have multiple plans
• Owner can change investment selection
• Owner can change beneficiary
• Owner is NOT obligated to pay beneficiary

Gift Tax Implications
• Gift to family members same or higher generation incurs no gift tax
• Gift to family member of lower generation is subject to "Gift Tax Exclusion"
• Excess contribution reduce the amount of lifetime gift tax credit

Example: Grandmother contributes $100,000 to "Little Johnny" 529 plan in one year. The first $65,000 is an accelerated annual gift tax for 5-years ($13,000 x 5 years), the remainder $35,000 will reduce the Grandma's lifetime credit from $5 million to $4,965,000 ($5,000,000 - $35,000).

The unified credit enables you to give away $5 million during your lifetime without having to pay gift tax on estate tax returns after January 01, 2011. According to a new law enacted in December 2010, estates valued at $5 million or less are exempt from the tax. Estates worth more than $5 million are taxed at a 35 percent rate.

In addition to the annual exclusion amounts, you also can give the following without triggering the gift tax:
• Charitable gifts.
• Gifts to a spouse.
• Gifts to a political organization for its use.
• Gifts of educational expenses. These are unlimited as long as you make a direct payment to the educational institution for tuition only. Books, supplies and living expenses do not qualify.
• Gifts of medical expenses. These, too are unlimited as long as they are paid directly to the medical facility.