Military life can be tough on your pocketbook, especially if you have a family back home that depends on your financial support. Here are some ways to save money before and during deployment, and take advantage of the benefits that the military provides you.

Memorial Day

Eliminate rental expense. Your basic food and shelter needs are taken care of while you are deployed. If you are single, pack up your household items and put them in storage while you are gone, so you won’t have to pay rent. If you are leaving a family behind, government housing or a Basic Housing Allowance may provide assistance for their needs.

Reduce home ownership expense. If you are single and own a home you’ll have ongoing costs, but there are still ways to reduce housing expense. Turn off utilities, or if that is impractical in your climate, adjust the thermostat and turn off your electronics rather than leaving them in standby mode. Empty your refrigerator and prop open the door to prevent odor.

Check your insurance. If your car will be sitting idle, to save money put your vehicle into storage or vacation status with your insurance company. Ask whether there are any other savings that might be available on other policies, such as homeowner or renter insurance.

Get relief. The 2003 Service Members Civil Relief Act provides for an interest rate reduction to 6% for any debt incurred before you enlisted and delays any civil legal actions against you. Until you return home it bars landlords from evicting your family from rental property costing less than $2400 a month, and allows you to break leases and some contracts without penalty.

Take advantage of benefits. As a military member, you get special postage and email rates, and you and your family can save money shopping at the exchange and commissary. There are many medical benefits available for your family, so explore those thoroughly before you go. Families of military members are also eligible for free or reduced childcare.

Save, save, save. While you are deployed, you will receive extra pay and tax free benefits. Use this opportunity to stash funds away for future needs.  That will ease your life when you return, and your eventual transition to civilian life.

Interactive by Column Five

What forms of payment do you prefer?

Saving Tips

After you file your tax return, it’s a good time to step back and consider your options. Your tax filing provides you with an opportunity to reflect on your financial situation, and decide what moves you can make going forward.

First Things First: Consider Adjusting Your Withholding

Once your taxes are filed, and you know how much money you owe, or how much money the government owes you, it’s the perfect time to evaluate your income tax withholding. If you have a huge refund, you might consider reducing your withholding by filling out a new Form W4. That way, you have more money each month to use to your advantage, rather than simply giving an interest-free loan to the government. While it might be nice to get a fat refund check, the reality is that you are simply giving your money away to the government. Forced savings is better than no savings, but discipline will trump all that.

If you underpaid by quite a bit, you might consider increasing your withholding so you don’t owe as much next year. While it’s not terrible to owe at tax time, if you owe too much, the IRS will assess penalties and take even more of your hard earned cash. Planning to owe is a fine line to walk, and it’s one to consider carefully. If you are self-employed, and you owe quite a bit, increase what you pay each quarter so that you don’t as much next year.

Smart Moves for Your Tax Refund

If you are receiving a tax refund, you need to figure out what you will do with the money. Some of the smartest things you can do with your tax refund include:

1. Pay down high-interest debt – If you have high interest debt, such as credit card debt, you should make it a priority to pay some of it down with your tax refund. High interest debt is like an anchor on your finances, help yourself out by paying it down as much as you can afford.
2. Increase your retirement account contributions – Saving for retirement should be second on your list, behind paying down debt. Make a contribution to your Roth IRA or IRA, increase your contributions to 401(k), or simply put a little extra away in a savings account. You won’t see the benefits of these savings for many years but the earlier you start, the better.
3. Contribution to a Health Savings Account – An HSA, if you are eligible, is a great way to save for your future medical costs. While it’s not a priority, like the first two are priorities, it is smart and something to consider if you are eligible.
4. Use some of the money to start a passive income stream/invest – If you’re fortunate enough to have avoided debt, juiced up your retirement accounts, start looking at ways to invest those funds to create an income stream for the future.
5. Make home improvements that can add to the value of your home – This one falls into the category of treating yourself while doing something financially smart. If there have been some home improvements you’ve had your eye on, like redoing your kitchen or bathroom, take some of the cash to do the job. It’ll improve your enjoyment of your home plus increase it’s value.
6. Take a vacation – Finally, try to enjoy some of it. If you’re responsible enough to pay down some debt, increase retirement savings, and do all of the other responsible things on this list, take some of the cash and enjoy it. Take a vacation, buy something you’ve had your eye on, and live life. Think of it as an investment in yourself. You know what they say about all work and no play!

Consider How to Pay What You Owe

Many people find that they are unable to pay their taxes. Once you file, it’s important to figure out how you discharge your obligation. The good news is that the IRS and most state governments offer payment plans. This can make it more affordable for you to pay what you owe. If you find yourself overwhelmed, the smart play is to set up an installment plan. You’ll pay interest, but it’s usually a better option than being charged fees due to late payments or paying high interest by putting it on a credit card or taking a payday loan.

Prepare for Next Year

Once you are squared away with this year’s taxes, the smart move is to prepare for next year. Plan ahead for specific spending that can result in a deduction, or a tax credit. You should also consider organizing your finances so that you are keeping track of your tax-related receipts throughout the year. This will help you minimize your tax liability and help you avoid the last-minute rush each year.

Facebook

Well, I would be excited too. Many of the employees became instant millionaires as a result of Facebook going public since as part of the company’s incentive plan, they were given Restricted Stock Units.

What Does This Mean for Overnight Millionaires and Their Taxes?

If you are ever so lucky to receive Restricted Stock Units, they are a promise to grant shares of stock, which are granted on a vesting schedule or meeting of certain milestones by you or company.  When vesting occurs, the value of the stock is included in your income as ordinary income and the employer is required to withhold taxes as soon as the RSU is vested whether you sell your shares or not.  If you later sell the shares, the change in value is a capital gain or capital loss.

Employee Stock Purchase Plans, on the other hand, are shares that you buy at a discount so you don’t have to pay taxes until you sell the stock.  When you sell the stock, the discount you received when you bought the stock is generally considered additional compensation to you and will be taxed as regular income.  If you sell your stock in less than one year, your gains will be considered compensation and taxed as ordinary income.  If however, you sell your shares after one year, your profit will be taxed at the lower capital gains rate.

If you are lucky enough to become an instant millionaire and you receive Restricted Stock Units you may be subject to higher taxes than under an Employee Stock Purchase Plan. Either way cha-ching. I really don’t think this would be a bad problem to have.  Stock options give you a chance to make more than your salary and they also give you a sense of ownership in the company.

Have you ever received employee stock options?  What type were they?

Interactive by Column Five

How much did you spend on your last date?

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Weddings

Charitable Donations

While it is your special day that you’ll never forget, have you thought of how you can make it a special day for others by donating? For many people, their wedding wardrobe, decorations, and other items are only used for one day and then packed away, sometimes forgotten in the attic. Why not see if you can part with a few of these dear items afterward and support worthy causes close to your heart?

Wedding Dress, Flowers, and Food

While you won’t get a tax deduction for buying your wedding dress, you can donate it and deduct it as a charitable contribution, provided it’s to a qualified organization. Make sure you keep all receipts and documentation for when you file your taxes. Please note, if the value of the items you’ve donated is more than $5,000 you must also get an appraisal.

If you think you may have plenty of food leftover from the reception, consider having someone take it over to a local homeless shelter. Ask them to get a receipt if possible. You could also donate the reception flowers to the shelter – it can brighten others’ day along with giving you a deduction.

Wedding Venue

Where you get married may mean that your venue payment could be tax deductible. Some possible locations to consider on your list of places to tour include your church, state park, or your local museum. Check with your venue to see if you qualify.

Thoughts on Weddings and Tax Breaks

Of course your wedding day planning shouldn’t just be focused on getting the most tax deductions you can; however it doesn’t hurt if you can do some good and get a tax break.  Also, don’t forget if you give any generous donations, you can track them with ItsDeductible year round.

I’d love to hear your thoughts. How many of you are getting married this year? Have you decided on the venue, the dress, and the guest list yet? What tax deductions do you think you’ll qualify for?

Interactive by joshritchie

What are your travel plans this year?

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Record Keeping

According to the IRS, you must keep the records needed to substantiate all your income and deductions available for inspection. You don’t have to spread them out on the coffee table in case someone from the IRS knocks your door.  But upon reasonable notice from the IRS, you must be able to produce the records for an audit.

Except in the case of fraud, the IRS must audit your return within three years from the due date of the return or the date of filing, whichever is later. That statute is extended by three years if you misstated your income by 25% or more, and indefinitely if you file a fraudulent return, or no return at all.

Even if you filed your tax return on time and reported all your income, you should retain the following records for a longer period of time even though the statute of limitations has expired:

Prior Tax Returns – Keep copies of all tax returns you have filed in the past. These returns are helpful in preparing future tax returns, and they provide an interesting road map of your financial history that may be of interest to you down the road.

Payment of Taxes – Keep canceled checks that prove that you paid your taxes when due. The IRS records are not always what they should be, and sometimes they misplace your payment.

Basis of Property – Records relating to the cost of property and improvements to that property should be retained as long as you own that property or a replacement property. If you sold your residence, but deferred the tax on the gain by reinvesting in a new house under the old rules in effect before 1998, you will need to retain the records for both the new house and the old house.

How Should You Keep Your Tax Records

You should always keep a set of backup records safely away from the original set.  To ease your pain, keep in mind that financial institutions provide documents and statements electronically via the internet and these documents can be downloaded to backup storage devices or burned to a CD.

One of the benefits of using TurboTax is your tax information is safely and securely stored so you can access it and transfer it to the next tax year.  Although your tax information is saved when you complete your tax return, it is best to also save your tax return as a PDF file.  This step can save you valuable time if you need to access information such as your adjusted gross income or if a copy is required to obtain a loan.  In addition, if you use TurboTax Free edition, you need to save a PDF file.

TurboTax apps for your mobile or tablet device also will store your tax return, however you should back up your completed tax files for your records before deleting the apps.

Of course, if you want to keep all your records forever, there’s no rule against it if you have the room. We know many people who like to pore over old records, and seem to derive as much enjoyment from it as some of us do looking at old photographs.

But when the neighbors complain that your burgeoning collection of bank statements, checks and receipts are blowing out your windows and flying around the neighborhood, it’s time for some spring cleaning.

Amended Tax Return

But what if we were wrong? What if we missed a form? What’s the procedure for that? In that case we may need to amend our tax returns.  For anyone who thinks that may have to do that, here is some information to help it be as painless as possible.

How Do I Amend My Tax Returns?

First off, make sure you need to amend your return . If you’ve made minor math errors, the IRS states that the service center will be able to handle that without requiring a 1040x. However if you need to change your filing status, credits, tax deductions, or income, then you do need to amend your tax return.

You’ll need to fill out a 1040x Amended U.S. Individual Income Tax Return, print and sign it, and then mail it in since you can not e-file it. It takes about 8-12 weeks for the IRS to process it after they have received the amended tax return.

If you’re amending a tax return and are expecting a bigger tax refund, the IRS advises that you wait for the original tax refund check to come in before sending in your 1040x (you may cash the check you received). If you need help with amending your tax returns, TurboTax can guide your through the process.

But wait, don’t hit the amend button so fast!  There is another situation where you do not have to file an amendment.  Did you already e-file your tax return and just receive a K-1 or 1099?  If you did, but your tax return was rejected by the IRS you may not be happy about the IRS rejection, but you should be happy to know, you don’t need to amend your tax return.  All you need to do is fix your tax return and resend it.  And if you used TurboTax, there’s more good news. TurboTax will guide you through fixing your tax return.

Thoughts on Amending Tax Returns

I’d love to hear about you and how you did with taxes. How many of you had to amend a tax return? How did the process go for you?

Interactive by joshritchie

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Natural Disaster

If you haven’t already filed your taxes and were a victim of recent severe storms, flooding, or disasters you may have more time to pay taxes and file your tax returns if you were affected and in counties designated as federal disaster areas qualifying for individual assistance.

The extended dates are specified by county and may give you an extension to file your 2011 tax return as late as May 31, 2012 (the postponement applies to the normal April 17 tax deadline for filing 2011 individual income tax returns, making income tax payments, and making 2011 contributions to an IRA if you were an affected taxpayer)

You can consult the FEMA website to see if your area was declared a Federal Disaster Area. That web address is http://www.fema.gov/news/disaster_totals_annual.fema

Who May Be Entitled to Relief

Taxpayers affected by disaster and eligible for relief include:

• Individuals whose principal residence and any business entity whose place of business is located in counties designated as disaster areas.
• Any individual who is a relief worker assisting in a covered disaster area, regardless of whether they are affiliated with recognized government or philanthropic organizations.
• Individuals whose principal residence, and any business entity whose principal place of business is not located in a covered disaster area, but whose records necessary to meet the filing or payment deadline are maintained in a covered disaster area.
• Estates or trust that have tax records necessary to meet filing or payment deadlines in a covered disaster area.
• Any spouse of an affected taxpayer with regard to a joint return of the husband and wife.

Claiming Casualty Loss for Disasters

Whether or not your area was declared a federal disaster, you are entitled to claim casualty losses as an itemized deduction on your tax return.  A casualty loss is officially defined as “the damage, destruction or loss of your property from any sudden, unexpected or unusual event such as a flood, hurricane, tornado, fire, earthquake or even volcanic eruption.”  The loss can be from a natural or man-made disaster.

You’ll claim your loss on Form 4684, which is  filed with your tax return. The first $100 of loss is not deductible, and the remainder of the loss is deductible to the extent that it exceeds 10% of your adjusted gross income. Of course, any losses reimbursed by insurance or covered by federal disaster funds aren’t deductible.  TurboTax walks you through, step by step, and makes all the computations for you.

Though a casualty loss is usually deductible in the year it happened, you have the option of taking the deduction on your prior year’s return so you can reap the benefit quickly.  The deadline for choosing in which tax year to claim the loss is generally the due date of your current-year return.  If you’ve already filed, use TurboTax to amend your return on Form 1040X, writing in red at the top of the return  “Disaster” and the name of your city, county or state that was declared a disaster area.

Other Relief Available

The IRS will also waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Though a tax deduction doesn’t reimburse your loss dollar for dollar, it does reduce your taxable income, resulting in a lower tax bill or bigger refund.

We explore the data to offer some answers below.

States With The Highest Gasoline Taxes

Source

Contrary to general assumptions, gasoline taxes vary widely from state to state, and this explains a great deal of the variance between per-gallon prices in different areas. Here are the ten states with the highest gas taxes (combining both the 18.4 cents federal tax and the individual state tax) in 2010:

• California: 67.0 cents/gal
• Hawaii: 63.5 cents/gal
• New York: 63.3 cents/gal
• Connecticut: 61.0 cents/gal
• Illinois:  58.8 cents/gal
• Washington:  55.9 cents/gal
• Michigan:  54.2 cents/gal
• Indiana:  53.2 cents/gal
• Florida:  52.8 cents/gal
• Nevada: 51.5 cents/gal

Note that the mean state gasoline tax was 29.3 cents/gal at time of reporting.

States With The Lowest Gasoline Taxes

Source

Meanwhile, these were the ten states with the lowest cumulative gasoline prices:

• Virginia: 38.0 cents/gal
• Arizona: 37.4 cents/gal
• New Mexico: 37.2 cents/gal
• Mississippi: 37.2 cents/gal
• Missouri: 35.7 cents/gal
• Oklahoma:  35.4 cents/gal
• South Carolina:  35.2 cents/gal
• New Jersey:  32.9 cents/gal
• Wyoming:  32.4 cents/gal
• Alaska:  26.4 cents/gal

Are Gasoline Taxes Used to Reduce Transportation?

Source

The popular notion holds that gasoline taxes are set aside and used expressly for traffic projects: road repairs, public transportation, and reducing congestion on America’s roads. Yet while this may have once been the case (and still happens to a limited extent) gasoline taxes appear to be used for a much wider array of purposes.

According to a Tax Foundation report:

“Unfortunately, the years of political pressure have eroded the original intent of gas taxes. In all too many instances, benefit-principle taxation has taken a backseat to political pandering. For instance, current federal highway legislation authorized over 6,000 earmarks from the highway trust fund. Some of these went to legitimate transportation programs, but others were earmarked for items such as the infamous “bridge to nowhere.” Today, gasoline tax revenue is spent on everything from public education and museums to graffiti removal and parking garages.”

In other words: gasoline taxes are increasingly being spent in areas having little or nothing to do with transportation.

Most Cumulative Emissions

Source

Citizens and environmental scholars often wonder if high gasoline taxes actually discourage driving and make a visible dent in a state’s carbon footprint. Evidence is inconclusive, but we can look to the states with the highest and lowest cumulative emissions for clues.

According to a 2009 Greenpeace study, the following ten states had the most emissions from 1960-2005:

• Texas: 25,291
• California: 15,390
• Pennsylvania: 13,160
• Ohio: 12,351
• Illinois: 10,752
• New York: 10,696
• Indiana: 8,950
• Michigan: 8,538
• Louisiana: 8,369
• Florida: 7,405

NOTE: Millions of tons

Fewest Cumulative Emissions

Source

The same study identified the following ten states as having the lowest emissions from 1960-2005:

• Vermont: 256
• Washington DC: 309
• South Dakota: 533
• Rhode Island: 541
• Idaho: 568
• New Hampshire: 646
• Hawaii: 762
• Delaware: 771
• Maine: 848
• Montana: 1,045

NOTE: Millions of tons

Conclusion
While some names appear on opposite lists (such as Hawaii having some of the highest gasoline taxes and some of the lowest cumulative emissions) there does not appear to be a close relationship between gasoline taxes and carbon footprints. Moreover, gasoline tax revenues are not idealistically set aside for transport purposes, but rather, spent broadly across state needs.

Interactive by joshritchie

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Tax Refund

However, what happens if you don’t have to have money withheld from your paycheck? Can you still get a tax refund if you are considered exempt?

What Qualifies You as Exempt?

When you fill out your W-4 from your employer, you add in your exemptions. Normally, there is a standard deduction ($5,090 for single, $11,900 married filing jointly, in 2012), and a personal deduction ($3,800 for 2012). If your income is less than your standard deduction minus your personal deductions (you take one for each dependent, including yourself and your spouse), then you are exempt – you don’t have to pay taxes.

However, if you have any tax liability at all in the previous year, you can’t be considered exempt for the current year, and your employer will automatically take taxes out of your paycheck. Those who are exempt, though, won’t have taxes taken from their paychecks. And, normally, since you didn’t pay taxes, you aren’t eligible for a tax refund. But there are conditions that can result in being able to receive a tax refund, even if you are exempt from paying taxes.

Refundable Tax Credits

Even if you are exempt, you can still receive a tax refund if you qualify for a refundable tax credit. Some tax credits are only applied up to the point that you zero out your tax liability. Refundable tax credits, on the other hand, can result in cash back. These are tax credits that can create negative tax liability, resulting in a refund, even if you haven’t paid taxes.

One of the most common refundable tax credits is the Earning Income Tax Credit. This is a tax credit you receive for working and earning low to moderate income. If you have earned any income at all, even if you are exempt, you can claim this credit if you qualify. And, it can result in receiving a tax refund – even if you didn’t have taxes withheld from your paycheck.

Another popular credit is the American Opportunity Credit. This education credit is available to help offset certain costs of higher education. The maximum amount of the credit is $2,500. However, this credit is only partially refundable. Only 40% of it ($1,000) will be paid out to you if you don’t owe taxes.

Before you think that you won’t get any back from the government, double check your eligibility for refundable tax credits. There are instances where even being exempt from paying taxes can still result in a tax refund, but you won’t get your money unless you file a tax return.

Overlooked Deductions

1. Moving Expenses for a Job

With unemployment still high, a lot of people have needed to go the extra mile, literally, to find work. What many people don’t realize is that moving expenses related to relocating for a job may be deductible. To qualify, you need to move at least fifty miles away from your old home, and you’ll need to work at your new job for at least 39 weeks after the move.

If you qualify based on the information above, you’ll then be able to deduct transportation and storage expenses. This may include hiring movers, renting moving trucks, storage units, tolls, parking, and so on. In addition, you may even be able to deduct lodging if the move is long and takes a few days to reach your destination.

2. State Sales Tax

The money you pay in state sales tax is a potential deduction, but it isn’t always worth taking. Those who can benefit most from this deduction are people who live in states that don’t have a state income tax. Every taxpayer has the option to choose between deducting state and local income taxes, or state and local sales taxes. Obviously, if you aren’t assessed a state income tax but still pay a sales tax, deducting the sales tax will almost certainly provide the greater benefit.

There are tables that give you deduction amounts based on income levels, but keep in mind that big purchases like cars, boats, and recreational vehicles count as well. So, be sure to keep good records of larger purchases which will help you determine if taking the state sales tax deduction is a better option.

3. The Earned Income Tax Credit

While nobody wants to find themselves in a low income situation, those who do have a nice tax credit available to them that often goes overlooked. The average earned income tax credit, or EITC, is around $2,000. Since this is a credit and not a deduction, that’s essentially like putting $2,000 into your pocket. And you don’t have to be strictly low income to qualify, because just losing a job halfway through the year could bring your income down enough to qualify.

Charitable Travel

First, you have to know whether or not the organization you volunteered for was a qualified organization. No matter what you gave, be it time or money, the IRS only allows you to deduct when it’s been given to a qualified organization. The good news is that most public and non-profit private organizations are qualified, but it is up to you to find out if you aren’t sure.

Now when it comes to travel incurred while volunteering there are a few things to consider. First, the IRS says that generally you can claim a charitable contribution deduction for travel expenses necessarily incurred while you are away from home performing services for a charitable organization only if there is no significant element of personal pleasure, recreation, or vacation in the travel. The good news here is that most travel expenses will qualify, but keep in mind that you can’t turn one way of volunteering into a week-long vacation with the family and expect to write off all the airfare and lodging costs.

Deductible Travel Expenses

Most common expenses related to travel are allowed. Here is what the IRS defines as deductible travel expenses:

• Air, rail, and bus transportation,
• Out-of-pocket expenses for your car,
• Taxi fares or other costs of transportation between the airport or station and your hotel,
• Lodging costs, and
• The cost of meals.

When it comes to using your own car for travel you can do one of two things. You may deduct the actual cost of gas used to get to and from the volunteer site, or you can deduct the IRS standard rate of 14 cents per mile. Unlike using your personal car for business, you cannot deduct expenses such as insurance, maintenance, or depreciation.

As always, it pays to keep detailed records regarding all expenses related to the trip. You may need to substantiate your expenses so keep a log of the miles driven, keep all receipts for meals and lodging, tolls or parking, and anything else related to your time volunteering.

Making Work Pay Credit

The Making Work Pay Credit was replaced by the Payroll Tax Holiday and will not impact your tax return.  The Payroll Tax Holiday gives you a tax benefit in the form of higher paychecks with the reduction in the amount of Social Security taxes(reduced by 2-percentage points) taken out of your paycheck.

I wanted to go ahead and ask some of the more popular questions to help tax filers get the most up to date information.

What is the Making Work Pay Credit?

The Making Work Pay credit was just one piece of the American Recovery and Reinvestment Act of 2009. What made it popular with tax fliers was that it was a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers (provided that filed jointly).

Tax credits are important because they directly reduce your tax liability. Most tax credits we’re familiar with, like the earned income tax credit or the lifetime learning credit taken as we file our taxes and meet the qualifications.

However with this credit, changes were made to the federal income tax withholding tables.  Many workers saw this tax credit reflected as an increase in their paychecks through the year. (Self-employed workers could claim this credit when they filed their taxes.) It was meant to be a micro-stimulus for families as the United States government was hoping households would spend more.

Who Could Claim Making Work Pay Credit?

Like many tax credits, there are specific criteria that had to be met for tax filers to get this credit. The credit was not available for individuals who had a modified adjusted gross income that was $95,000 or higher and married couples (filing jointly) who had a modified adjusted gross income of  $190,000 or higher. Those receiving the credit were also required to have a valid Social Security number.

Can I Get the Making Work Pay Credit for My 2011 Tax Filings?

No, it has expired. fortunately there other other options. While you can’t use the Making Work Pay Tax Credit, there are plenty of deductions and tax credits out there that can help you lower your tax burden and possibly increase your tax refunds.

The big benefit of using tax software and sites like TurboTax  is easily finding which tax credits you qualify for without poring over all the updates from the IRS. You also have tax experts you can contact to get answers to your tax related questions.

Thoughts on Tax Credits

Even if you’re not a fan of filing taxes, it’s really to your advantage to make sure you try to get every tax credit you can qualify for when you file your taxes.

Education Credits and Deductions

• American Opportunity Tax Credit – (A modification to the Hope Credit) This tax credit is for up to $2500 per eligible student. It is available for couples filing joint with income up to $180,000 or $90,000 if single. 40% of the credit may be refundable, this means that if this tax credit is greater than your total tax for the year, you may get a check from the IRS for up to $1000 in addition to the tax you already paid.

Other requirements for this education tax credit include the fact that the student must be enrolled at least half time for at least one academic period during the tax year, and as of the end of 2011, the student must not have any felony drug convictions. Last, note that qualified expenses include not only tuition, but any enrollment fees, and required course material.

• Lifetime Learning Credit – The rules for this credit are a bit different from the American Opportunity Tax Credit. The credit is worth $2000 per return (not per student) and there is no limit to number of years it may be taken, so long as it’s in effect. The credit may be taken for couples with income up to $122,000 or single filers with income up to $61,000. All years of post secondary school qualify for the credit as do any courses to acquire or improve one’s job skills.

The student doesn’t need to be registered for any number of classes, even just one class qualifies for the credit. Besides the tuition, fees, and books, both “supplies and equipment” also qualify. Felony drug conviction is not a disqualifier for this credit. Last, the credit in not refundable. It can only offset your tax bill, not refund in excess of what you paid.

• The Student Loan Interest Deduction – for some time, personal interest (credit cards, car loans, etc) has not been deductible, but student loan interest might be. For those with modified adjusted gross income (MAGI) of $150,000 or less for joint filers, $75,000 if single, interest up to $2500 per year may be taken as a deduction. This is a deduction directly against your income, not subject to the need to exceed the standard deduction to get on schedule A. The interest deduction is available until the student loan is paid off, or until canceled by congress.

• Tuition and Fees Deduction – This deduction is against income, skipping the Schedule A, and helping to reduce your taxable income if this benefits you more than either the American Opportunity Tax Credit or the Lifetime Learning Credit. The deduction is available for Joint filers whose MAGI is less than $160,000, $80,000 if single. The eligible expenses include Tuition and fees, but specifically exclude room and board.

No discussion of tax savings for college should ignore the savings accounts targeted for college expenses. Let’s take a look at the two popular ones.

• Coverdell Education Savings Account – When first introduced, this account was called the “Education IRA” which was a bit of a misnomer as the account has nothing to do with retirement. On the other hand, it bears a striking resemblance to the Roth IRA. The deposits to the Coverdell are not tax deductible, but grow and are withdrawn tax free if used for the beneficiary’s qualified education expenses. The deposit limit is $2000 per year, and there is a limit of MAGI of $220,000, $110,000 if single to make the deposit. Any funds not used for qualified expenses must be withdrawn by the time the beneficiary turns 30. Distributions that don’t qualify for college expenses are subject to tax as well as a 10% penalty. This account may be combined with the credits and deductions above, but not for the same exact expenses.

• Qualified Tuition Program – Commonly known as the 529 plan, this account has no income restrictions at all for deposits. The account deposit limit is currently $300,000 which is well over the amount that would be needed for any 4 year degree. Practically speaking, it’s common to limit deposits to the $13,000 gift limit ($26,000 if both parents deposit.)

One is also permitted to gift ahead up to five years with no gift tax due and not tapping into the unified lifetime gift tax amount. Withdrawals for qualified expenses are withdrawn tax free, but as with the Coverdell, tax and penalty apply if withdrawn with no qualifying expense.

One choice is to take the remaining balance and change the beneficiary for the account. Any close family member up to first cousin is eligible for the transfer. For those who are trying to get money out of their estate, this opens up the possibility to move significant sums of money out of their name to set up 529 accounts for their extended family.

There is no age restriction, so no rush to transfer funds. You can wait until your new graduate has children of her own and make them the new beneficiaries to educate the next generation. This account may be combined with the credits and deductions above (including the Coverdell), but not for the same exact expenses.

Savers Credit

What is the Retirement Savers Credit?

The Retirement Savers Credit is a tax incentive to save for retirement. In exchange for you putting money in a qualified retirement account such as a 401(k), IRA, Roth IRA, or 403(b), the government reduces your taxes.  You might already know that the government allows an immediate deduction for contributions to many retirement plans—separate from this credit.  For example, every dollar you put in your 401(k) plan may reduce your taxable income, immediately saving you taxes.  One would think that would be enough of an incentive to save; and it is, for many.

Yet, possibly disappointed by how little most taxpayers save for their futures, the government created an additional incentive–the Retirement Savers Credit. What’s more, the credit is in addition to (not instead of) all the other existing tax incentives to save.

How Does the Credit Work?

Depending on your income level, a certain percentage of the amount you save for retirement is eligible for a credit.  The maximum savers credit may be as much as $1,000 ($2,000 for married couples).

Who Qualifies for the Credit?

Only those who save for retirement qualify for the credit.  Married savers filing jointly with an Adjusted Gross Income (AGI) below $56,500 qualify for the credit, as do Heads of Households with an AGI less than $42,375 and singles with an AGI less than $28,250.

What is the Credit Worth?

Unlike tax deductions which reduce your taxable income, credits reduce your tax–dollar for dollar. Said another way, whereas a $100 tax deduction for a low-income taxpayer might save him $10 or $15 in tax, a $100 credit saves him $100.  Note, however, that the Retirement Savers Tax Credit is not refundable.  This does not mean you can’t get money (e.g,. a refund) when you file your taxes if you take the credit. Rather, a tax credit’s status as nonrefundable simply means the credit cannot reduce your overall tax liability (including what you pay throughout the year via federal income tax withholding) to below zero.

If you’re skeptical about the credit and your ability to double-dip (i.e., take a deduction and a credit for the same savings), I hear you.  Twice benefiting (three times if you count the additional retirement security you create by saving) from the same decision is a true tax rarity.  If you qualify, take a few minutes to consider saving for retirement.  Although you might feel financially stretched and unable to save, the Retirement Savers Credit just might make saving within your reach.

Interactive by joshritchie

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