Top 10 Facts About Deducting Your College Student's Tuition

From the desk of the IRS:

The Tuition and Fees deduction of up to $4,000 is available to help parents and students pay for post-secondary education. Below are ten important facts about this deduction every student and parent should know.

1. You do not have to itemize to take the Tuition and Fees deduction. You claim a tuition and fees deduction by completing Form 8917 and submitting it with your Form 1040 or Form 1040A.
2. You may be able to claim qualified tuition and fees expenses as either an adjustment to income, a Hope or Lifetime Learning credit, or – if applicable – as a business expense.
3. You cannot take the tuition and fees deduction on your income tax return if your filing status is married filing separately.
4. You cannot take the deduction if you are claimed, or can be claimed, as a dependent on someone else's return.
5. The deduction is reduced or eliminated if your modified adjusted gross income exceeds certain limits, based on your filing status.
6. You cannot claim the tuition and fees deduction if you or anyone else claims the Hope or Lifetime Learning credit for the same student in the same year.
7. If the educational expenses are also allowable as a business expense, the tuition and fees deduction may be claimed in conjunction with a business expense deduction, but the same expenses cannot be deducted twice.
8. You cannot claim a deduction or credit based on expenses paid with tax-free scholarship, fellowship, grant, or education savings account funds such as a Coverdell education savings account, tax-free savings bond interest or employer-provided education assistance.
9. The same rule applies to expenses you pay with a tax-exempt distribution from a qualified tuition plan, except that you can deduct qualified expenses you pay only with that part of the distribution that is a return of your contribution to the plan.
10. IRS Publication 970, Tax Benefits for Education, can help eligible parents and students understand the special rules that apply and decide which tax break to claim. The publication is available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

• Form 8863, Education Credits (PDF 82K)
• Publication 970, Tax Benefits for Education (PDF 368K)
• Tax Topic 605

What Qualifies as a Home Office Deduction?

From the desk if the IRS:

Claiming a Deduction for Your Home Office

Taxpayers who use a portion of their home for business purposes may be able to take a home office deduction if they meet certain requirements.

In order to claim a business deduction, you must use part of your home for one of the following two reasons:

1. Exclusively and regularly as either: your principal place of business, or as a place to meet or deal with patients, clients or customers in the normal course of your business. Where there is a separate structure not attached to your home, the regular and exclusive use does not need to be your principal place of business as long as the use is in connection with your trade or business.


2. On a regular basis for certain storage use -- such as storing inventory or product samples -- as rental property, or as a home daycare facility.

Generally, the amount you can deduct depends on the percentage of your home that you used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

If you use a separate structure not attached to your home for an exclusive and regular part of your business, you can deduct expenses related to it.

There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

If you are self-employed, use Form 8829 to figure your home office deduction and report those deductions on line 30 of Schedule C, Form 1040.

Different rules apply to claiming the home office deduction if you are an employee. For example, the regular and exclusive business use must be for the convenience of your employer.

For more information see IRS Publication 587, Business Use of Your Home, available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Six Tax Breaks for Companies That Go Green

(Borrowed from the newsletter Bottom Line Secretes...)

Carolyn R. Turnbull, CPA, MST

Grant Thornton LLP

ompanies gain multiple benefits for being green. In addition to helping the environment, they save money on fuel and energy consumption... gain a marketing edge by promoting their environmentally responsible behavior... and become eligible for tax breaks at the federal and/or state levels. Here are six ways companies can go green and gain tax breaks...

1. Allow staff to telecommute. Recent survey: Just one day of telecommuting by one employee saves, on average, an amount of energy equivalent to 12 hours of electricity (measured as equal to 12 hours of an average household’s electricity use). Note: The amount of electricity used was based on energy used for transportation (aside from gasoline) and energy associated with use of commercial office space.

Tax savings: A company does not currently receive a federal tax break for allowing employees to telecommute, but Georgia recently implemented a tax credit for companies whose employees agree to telecommute and other states may follow suit.

Allowing workers to telecommute can also help them qualify for the home-office income tax deduction on their personal returns -- which may help with the business’s labor costs and employee retention.

Helpful support for the employee deduction: A formal written agreement between the company and the employees at the time the telecommuting arrangement goes into effect stating that the arrangement is for the convenience of the company. Note: Be aware that if any of your employees telecommute from a state other than the state where your company is physically located, you need to check what taxes you might owe the other state.

2. Encourage the use of mass transit. Workers can help the environment by using public transportation rather than driving to work. Companies can encourage this practice by offering monthly transit passes as an employee benefit. Payment for the passes can be set up so that employees either pay for them on a pretax basis using an arrangement similar to making pretax contributions to a 401(k) plan, or the company pays for them as a tax-free fringe benefit.

Tax break: The following income tax savings are available to either employees or the company, depending on who pays for monthly transit passes...

If an employee pays for his/her transit passes on a pretax basis, the portion of wages used to pay for the passes is not subject to income tax.

If a company pays for the passes, the company can deduct the cost of the passes. Furthermore, a company can save on employment taxes because employment taxes are not imposed on tax-free transit passes (up to $115 monthly in 2008).

Alternative break: Commuting in a company-provided “commuter highway vehicle” (a vehicle that seats at least six adults, not including the driver) is also tax free up to $115 per employee per month in 2008. At least 80% of the vehicle’s mileage must be used for transporting employees between home and work, and on those trips, at least half of the adult seating capacity of the vehicle (excluding the driver) must be occupied by employees.

3. Use hybrids. A company can purchase a vehicle that runs on alternative fuel, such as the 2008 Honda Civic GX, which operates on compressed natural gas, or a hybrid vehicle (a vehicle that combines gasoline and electric power).

Tax break: The federal government offers a tax credit for purchasing a hybrid vehicle. The amount of the credit is determined by the IRS.

Example: The 2008 Ford Escape two-wheel-drive hybrid is eligible for a $3,000 credit.

For a complete list of available credits, go to the IRS newsroom page at www.irs.gov. State tax breaks (exemption from sales tax on qualified purchases, for example) may also be available.

Caution: Because of their popularity, Toyota hybrid vehicles are no longer eligible for credits, and the credits for Honda hybrids have been reduced in 2008.

4. Buy energy-efficient equipment. Use computers, office machines, etc., that meet energy-saving standards -- they are less costly to run. Information: Visit the Energy Star Web site, www.energystar.gov, and click on “Office Equipment.”

Tax breaks: There are no special tax breaks for energy-efficient office equipment, but small businesses can choose to fully expense the cost of up to $128,000 of equipment purchases in 2008. If total equipment purchases for the year exceed $510,000, then the $128,000 is reduced dollar for dollar by each one dollar of excess purchases (i.e., no deduction once purchases exceed $638,000). If a business doesn’t qualify for expensing or chooses not to use it, the business can depreciate the cost of equipment over a five-year, seven-year, or longer period fixed by law.

5. Make commercial space energy efficient. Energy usage in commercial buildings accounts for 40% of US global warming emissions (excessive amounts of carbon dioxide pumped into the atmosphere). Making buildings more energy efficient can contribute significantly to conservation efforts.

Tax breaks: Companies that own their facilities (buildings, factories, etc.) can qualify for a special tax deduction if their space meets certain federal energy standards. The deduction is $1.80 per square foot of space for buildings that achieve a 50% energy reduction from the target for that type of building (60¢ a square foot for more modest energy-efficiency improvements). You get the deduction for being energy efficient -- it doesn’t matter how much it cost to achieve that efficiency. See IRS Notice 2006-52 for the rules for qualifying for this break.

There may also be state tax breaks and other incentives (loan programs, property tax exemptions) available. In Maine, there is a utility rebate program for half the installation costs and a portion of the equipment costs for energy-efficient water heaters, building insulation, and certain other equipment in commercial and industrial buildings.

6. Convert to solar energy. It can cost thousands to millions of dollars to convert to solar energy, depending on the size of the facility, but it may take only seven years before savings start to materialize.

Tax breaks: There is a 30% federal tax credit for converting to solar power that applies to equipment used to generate electricity, or heat or cool a building, as well as to equipment that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight. Details: See the instructions to Form 3468, Investment Tax Credit.

There may also be significant state-level breaks. In California, there is a utility rebate program for installing solar units (also called photovoltaic cells) to convert sunlight into electricity in commercial and residential property. Details: EcoBusinessLinks, which links to solar energy retailers by state, www.ecobusinesslinks.com/solar_wind_power.htm.

________________________________________________________________

Tax Hotline interviewed Carolyn R. Turnbull, CPA, MST, senior tax manager, Grant Thornton LLP, Atlanta, www.grantthornton.com, and a member of The Tax Adviser editorial board, American Institute of Certified Public Accountants. She has recently been named to the IRS Advisory Council.

Tax Term of the Week

Deductions: An expense subtracted from adjusted gross income when calculating taxable income, such as for state and local taxes paid, charitable gifts, and certain types of interest payments or business expenses.


Further Reading:
Tax Deductions: A Compilation of Articles

Can I Still Claim My College Student On My Taxes?

First, I'd like to thank Beckie Leone at TaxConsultant4U for the facts of this post...

So, they've registered, bought books, packed up, and moved out. But how does this transition from high schooler to college student affect your taxes? Here's the long & short of it:

Children under 24 can be claimed if...

• He/she is a full time student.
• Parents pay 50% or more of the student's expenses.
• He/she is living temporarily away.
  

Children over 24 can be claimed if...

• He/she meets the above criteria.
• He/she does not make over $3,400.

Little Known Ways to Deduct Moving Expenses

Commuting situation changed recently? Your new expenses may be tax deductible. From the desk of the IRS:

"How far you moved and the amount of time you spend on the job will have a major impact on whether you qualify for the tax break. Moves that are only short hops and jobs that are short-term or part-time generally do not qualify. However, if you can satisfy the distance and time tests then job-related moving expenses that you incur may be tax deductible."

So what move qualifies?

-Your new workplace is at least 50 miles further from your former home than your previous workplace was from that home.

Translated into normal English, this means...

a. If you do not move homes but your job moves to an office buildings at least 50 more miles away, you can deduct the expense.

b. If you move and your new job is 5o additional miles away from your old home, you can deduct the expense. (i.e. If your old job was 5 miles from your former home, your new job must be at least 55 miles from that home.)

-You are a W-2 employee and you worked full-time for at least 39 weeks during the 12 months immediately after your move.

Translated into normal English, this means...

If in the 12 months immediately following your move you worked full-time for at least 39 weeks, then you can deduct the expense.

-You are self-employed and you worked full-time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months after your move.

Translated into normal English, this means...

During the 12 months following your move you worked full-time for at least 39 weeks AND a total of 78 weeks the 24 months following your move.

**You can deduct your moving expenses on your tax return even though you have not met the time test by the date your return is due if you expect to meet the 39-week or the 78-week test as required.**

-Members of the armed forces do not have to meet these tests if the move was due to a permanent change of station.


What Can I Deduct?

Reasonable moving expenses.

-The cost of moving your household goods and personal effects to your new home.

-The expenses of traveling to your new home, including lodging costs.

What Can I NOT Deduct?

1. Meals eaten while in transit between your old and new homes.

2. No part of the purchase price of your new home.

3. Moving expense for expenses covered by reimbursements excluded from income. (i.e Moving expenses that are already paid for by someone else, like your new company.)

For additional information on moving expenses, including an extensive list of deductible and non-deductible expenses, download Publication 521.

What's A Standard Deduction Anyway?

One thing you can always count on is the standard tax deduction. This deduction is one almost everyone can take advantage of it is an amount that is taxable as a flat amount. Those who may not be able to take advantage of the tax reduction are those who may benefit more by an itemized tax deduction. Because of laws you can only do one or the other, not both. Those who go with itemized deductions can take advantage of medical expenses, charity and such while those who go with the reduction cannot.

Commonly the brackets for the standard tax deduction are updated every year, so the maximum advantage can be taken, that reflects current inflation. But the deduction that actually gets taken into consideration can vary with the filing status of each individual taxpayer. This means that the tax reduction can vary depending on if you are married filing single or jointly or as single head of household. It can vary by several thousand dollars, so you should take into consideration how you file very carefully if you are going to go with the standard tax deduction.

Those who are considered senior citizens, age 65 or older, have additional advantages when it comes to the reduction. For these individuals they are allowed a higher deduction. This higher deduction can also apply to those people who are legally blind. Yet another group of people who claim this higher deduction in the standard deduction are spouses of the blind or individual who is 65 or older.

Medical Deductions: A Handy Not-So-Little List

I've recently found a cute, handy-dandy little list to decipher medical expense deductions, which I previously blogged about.

TaxGirl has a Medical and Dental Expenses A-Z list on her blog. I'd like to point out that the first "A" is abortion. Wow.

Anyways, have a go and see what else you can squeeze out in your tax filing this year.

See my deductions tag for more info on deductions.

See my filing tag for info on the best ways to file your taxes.

And see my tax returns tag for any other tidbits you should know about filing your tax return.

Going Green Could Pay Off...Literally

We have finally reached the point where being environmentally friendly is trendy. Well, there is now another reason to jump on the bandwagon and go green: money. It would appear that being environmentally minded could save you a couple hundred or a few thousand dollars come tax time.

If you've made energy-saving improvements to your life in the past year, you may get some tax credits on your federal and/or state income taxes.

Let’s start with automobiles. The federal government is now giving you credit off your income tax when you purchase a fuel-efficient hybrid. The specific amount you earn will actually depend on the hybrid you bought. You can reference this IRS chart to find your vehicle. And to think that you bought that hybrid simply to save gas and pollute less. Well, now there’s a tax break in it for you as well.

And the tax break doesn’t stop at the federal level. There are some states that give you a tax break for buying a hybrid car as well. If you have questions regarding what incentives your state might provide, the Department of Energy keeps a database of state incentives and laws related to alternative-fuel vehicles.

The other big area where you might be able to take advantage of a tax break is home energy. Making your house more efficient saves money on your utility bills in the long run, and now can earn you some cash during tax season.

If you upgraded your home's insulation, windows, doors, metal roof, water heater, or heating or cooling system in 2007, you may get a credit of up to $500 off your taxes. The new items have to meet energy-efficiency codes -- this Energy Star chart shows what qualifies.

If you decided to go solar and install solar panels and/or solar water heaters in your home, you are looking at a bigger tax break that could earn you a credit of up to $2,000 off your taxes from the federal government. As far as the state income tax return, many states now offer an array of tax deductions for adding solar energy to your home. The Database of State Incentives for Renewable Energy lists tons of credits, rebates, grants, and more ways to cut the cost of green power.

There are 101 reasons to go green and save our planet. Why shouldn’t money be one of them?

Cheers!
-Taxus

AH, Medical Expenses... at least if you can't kick the flu, you can deduct it!

Deducting medical expenses---one of my most fulfilling tax deductions come tax time. Nothing is quite as rewarding as sticking it to, er.... um... Well, I'm not sure who exactly I'm sticking it to, but it feels good nonetheless. At least you get some kind of retribution for being sick.

So, you know you have medical expenses to deduct. Now what?

How 'bout you take advice from the experts:

Pat Harker did a good post recently on what medical expenses are deductible. But, how much is a little more fuzzy. How do I figure out the amount of my medical and dental expenses that's over 7.5% of my adjusted gross income? Tippy Taxes explains.

"Your adjusted gross income is $40,000, 7.5% of which is $3,000. You paid medical expenses of $2,500. You cannot deduct any of your medical expenses because they are not more than 7.5% of your adjusted gross income."

Making it a little bit clearer ECUSkully02 explains that you can only deduct the medical expense amount that EXCEEDS 7.5%. Therefore, in the example above, it your medical expenses were $3,500 you'd be able to deduct $500.

So, break out those receipts, sharpen that pencil, and go to town!

Free Money in '08?

Well, nothings really free. There's no free lunch remember? But although it comes from somewhere, the important point is that it comes to your wallet.

The specifics

In order to stimulate a waning economy, the government is proposing a tax rebate. The rebate is being issued in hopes that people will spend the money and breathe some life into the economy. Whether this happens or not or whether an actual plan is decided on remains to be seen. But let's get to what the rebate means to you.


Senate Version

$500 per Individual
$1,000 per Joint return
$300 per Child
And there is no limit on income


Congress Version

$600 per Individual
$1,200 per Joint return
$300 per Child
Limitations: Filers must have more than $300 in Adjusted Gross Income and there will be a 5 cent deduction in the rebate per $1 over an AGI of 75K for individuals and $150K for joint filers.


**And if you have tax debt, don't get excited. That rebate money goes to the government!**


But It's January!

If you're worried the Senate and House won't get their act together until it's too late, don't worry. In 2001 when this was done Bush signed the dotted line and 4 months later the checks was given out--this would mean if the bill is signed during February, the money would come out in June. Not that bad...



Additional Resources...

Is a Tax Rebate Coming Your Way??

Bush Calls For 'Direct and Rapid Stimulus'

Tax Rebates: Where's Your Check?

Which one: Roth 401k vs. Traditional 401k? The truth is in your pay stub.

The first point to understand is, "What's the difference?"

A Traditional 401k is a tax-deferred retirement plan. Contributions are made up to a specified limit with the contribution being tax deductible. Money invested and earned in a Traditional 401k are subject to income taxes at the time of withdrawal.

Roth 401k contributions can be made up to a specified limit on a non-deductible basis. This means a contribution can be made to a Roth account but no deduction can be taken from income tax. Withdrawals at the time of retirement are tax free within certain limitations.

Many companies are starting to offer both a Roth and Traditional 401k. So why should you choose one over the other? Well, first I'll say discuss this issue with your financial planner. However, if you're looking for a basic explanation, here it is:

First Point-to-Ponder
Traditional 401k's allot you a tax shelter at the end of the year. Roth 401k's don't. Therefore, if you have enough money to need a shelter, a Traditional 401k is a good way to go. If you don't make enough to reap the benefits of a tax shelter or an additional deduction, then I'd allow my money to grow tax-free in a Roth until the time comes that getting that deduction outweighs the tax-free growth rate.

Another point to remember is tax brackets. Traditional 401k's allow you a tax deduction during your earning years and then you pay tax on that money when withdrawn. The deduction during your earning years is important since your tax bracket is projected to be higher during this time (meaning more tax paid), making the deduction worthwhile financially. When you retire your earnings naturally go down so that you're in a lesser tax bracket (meaning less tax paid). This means that although at retirement you'll pay tax, you're likely to pay less tax during this time than had you paid tax on those monies when earned. Therefore, Traditional 401ks can give you money back at the end of the tax year during your earning years and allow you to pay less tax on your money during your disbursement years, which could equal more disposable income for your overall.

Second Point-to-Ponder
Use of a Traditional 401k assumes that at retirement you will be earning less than when you were working. If you plan a lofty, extravagant retirement, the benefits of a Traditional 401k may not apply to you. In this case, a Roth 401k may seem smarter.

Third Point-to-Ponder
The first two points assume a static tax system with no change. Now both you and I know this is untrue, but we don't know how the tax system will change. If you would like to work with the tax brackets of today and not bet on tomorrow, a Roth is for you. If you're not too worried about tax law changes or are the gambling type, a Traditional 401k would be a better option.

In Conclusion
So, you've got some hefty decisions to make. In all, if I were young and just starting out I'd go with a Roth, keeping an eye on my paycheck. Once those raises and bonuses come in, it may be time to transition into a Traditional 401k. Oh, and a word of caution... once invested, money in a Roth cannot be rolled into a Traditional. So know that when deciding too.

Additional Resources:

Roth & Traditional 401k's per Wikipedia

Leave That 401k Alone, Or Else!

Traditional vs. Roth IRA

Roth IRA- Distributions Taxable or Not?