Educational Tax Credits for College Tuition

For most people paying tuition, the American Opportunity tax credit is the best of several choices. Other special breaks are also available for filers with education bills.

Paying for college? You may be able to claim a big tax break, even if you've never before qualified. That's because the Obama administration replaced an old break with a new and improved one but only for a limited time. To take advantage of it, you'll have to negotiate the often wacky world of tuition tax write-offs.

What are the breaks? Who gets them? And how can you best take advantage of them?

First you have to choose among a trio of tax credits and one tax deduction that offset your cost of tuition. Then you have to look at "income exclusions" for profits pulled out of savings to pay college bills and see if you can write off student loan interest.

Breaks for tuition
The latest and greatest of the college write-offs is the American Opportunity Tax Credit. This can reduce your tax or increase your refund by $2,500. To claim the full credit, you must have paid at least $3,000 in eligible college bills and you must meet some income restrictions.

Eligible bills include college tuition, fees and books for you, your spouse or a dependent. Also important for lower-income taxpayers, this break is partly refundable. What does that mean? Most breaks just give you back the tax that you paid through withholding. They typically stop benefiting you once your tax bill is reduced to zero.

Write-offs, exclusions
There are other special breaks for paying education bills that can be used in conjunction with these tuition credits.

For instance, if you take money out of a 529 savings plan, all the investment income (and the principal, of course) is tax free, as long as you use the money to pay for qualified education expenses. If you've already used up your tuition write-offs by claiming a credit against those expenses, don't worry. The 529 money gets tax-free treatment even if it's used to pay for room and board for a full-time student.

Tax Preparation Software

Doing your taxes can be so grueling that it's tempting to let software do the hard work, and simply accept the final result.

Be aware: Popular products such as TurboTax and H&R Block At Home can produce errors, particularly if customers use a feature that imports stock information from brokerage accounts. Tax professionals say filers should watch for common errors and know how to fix them.

The bottom lines the software is largely effective, but keeps in mind Ronald Reagan's Cold War-era advice, Trust but verify.

The stock-related errors can arise because of the way brokerages and financial institutions keep transaction records. Most firms can provide a stock's selling price and the date it was sold, but for a number of reasons, not all firms provide the purchase price.

That can lead to errors when the information is imported into tax software. Some taxpayers say the software has interpreted their empty data as a $0 cost price, leading to calculations that are way off.

The major brokerages and tax-software companies don't dispute the problem exists. But since brokerages aren't currently required to provide cost data, and software simply reflects the information it's given, it's up to filers to make sure the results of the import are accurate.

Brokerages don't always provide a cost basis because maintaining the figure can get tricky. Complications arise when a stock split, an investor reinvests dividends or the company gets acquired. So some brokerages leave that information blank.

But some customers say they didn't receive any error messages. Several caught the error on their own, and others found out only after receiving letters from the Internal Revenue Service.

If you suspect you had an error in previous tax returns, you can file an amended return. But don't wait too long amended returns must be filed within three years of the date of the original return or within two years of the date you paid the tax, whichever is later.

Tax Credits Advantages for Business

The Michigan Economic Development Corporation awarded more than $156.7 million in tax credits Thursday to fund 11 job-generating ventures across the state.

The tax credits will help 10 Michigan companies and back a brownfield redevelopment project, creating an estimated 17,321 new jobs and generating more than $804 million in new state investments, according to a statement released by Gov. Jennifer Granholm.

Projects include a Northville Township development facility that will supply materials for lithium-ion battery cells, solar shingle production at a Midland Dow Chemical Company and cell and battery manufacturing for electric and hybrid vehicles at a new Dow Kokam facility in Midland.

“Companies are choosing to invest and grow in Michigan because we are a great state in which to do business.” “From solar shingles and advanced batteries to boats and scrap-tire recycling, we are creating a diversified economy where firms across a wide spectrum of industries are finding success and growing new jobs.”

The new measure includes a payroll tax credit for businesses that hire unemployed workers, an extension of the federal Highway Trust Fund, expense deductions for small businesses, and an extension of the two-year Build America bond program to fund state and local infrastructure projects.

Job Bill With Tax Incentives

Hiring Incentive to Restore Employment Act (HIRE), passed three significant tax incentives for employers included in this bill. They are as follows:

Hiring Tax Incentives - Social Security requires employers to pay 6.2 percent payroll tax on employee wages. This tax ends once an employee receives $106,800 in wages. This is in addition to the 6.2 percent paid by employees for a combined total of 12.4 percent. Medicare adds another 2.9 percent combined tax to the employer and the employee. The projected legislation would exempt employers from paying their portion of Social Security tax of 6.2 percent on qualified employees who start employment after February 3, 2010 and before January 1, 2011. A qualified employee is defined as someone that has not been employed for more than 40 hours during the 60 days prior to commencement of employment. The new employee cannot replace a currently employed person (unless the current employee quit voluntarily or is terminated for cause.) This could potentially save employers up to $6,622 in payroll taxes ($106,800 x 6.2 percent) for each new hire. It should be noted that employers would concurrently lose their tax deduction for these payroll taxes, which could create a partial increase in income taxes.

Employee Retention Credit - Employers that hire a "qualified employee" and keep them employed for one year will be eligible for a $1,000 tax credit. This is in addition to the reduced payroll taxes paid for the employee. This credit would be available for each qualified employee hired. This credit would be taken on the employer's 2011 tax return.

Capital Expensing - In 2009, the tax code allowed small and mid-size businesses to take a tax deduction for capital purchases up to $250,000. This is often referred to as a Section 179 deduction. Under current legislation, this deduction declines to $125,000 in 2010. The Senate's bill would extend last years provisions and allow for up to $250,000 in capital expenditures to be treated as a deduction in 2010.

While this legislation has passed in the Senate, it still needs to be reconciled to the House's version of the jobs bill which was passed in December.

Senators Tax and Budget

The New York Senate has passed a resolution against delaying income tax refunds as a way to ease the state's financial pinch.

The measure Democrats and Republicans adopted by voice vote Tuesday follows Government suggestion to lower the cap on income-tax refunds paid out before March 31 from $1.75 billion to $1.25 billion. Budget officials say some refunds would be delayed by up to three weeks.

Normal refund processing takes 45 days, that money belongs to taxpayers and it's unacceptable for the state to keep it longer. Nonbinding Senate measure is meant to build support.

The Senate’s solution is to switch the obligation for paying the tax from buyers to sellers, technically transforming the “use tax” into a “sales tax.” Obviously, few online merchants are eager to increase the cost of what they sell by 8.25 percent, the state’s base rate, plus however much more local governments add to the rate where the buyers reside.

Warning! Tax Scam Alert

Have you ever been contacted by someone claiming to know a secret that will help you significantly reduce your tax bill or avoid paying taxes altogether? Have you ever received an e-mail from the IRS asking for personal information? If you've answered yes to either of these questions then you've probably had an encounter with a tax scam. We will look at seven common scams to help you avoid becoming a victim. Examining these scams will make you aware of what to look for if other scams come your way.

Impostor Web sites
The official IRS Web site is http://www.irs.gov/. Any other Web site claiming to be an official IRS Web site is a fake. Unfortunately, there are a lot of impostor sites out there, and many of them are engaged in identity theft. Some bogus sites are easy to spot for the seasoned Internet user because of their cheap appearance, but that same site may seem legitimate to someone who is less Internet savvy. Other sites may be difficult for even experienced users to sniff out, because they steal content from the real IRS Web site. To help all types of users, the IRS Web site has several pages dedicated to identifying fake IRS sites, including directions on how to report them.

E-mail Scams
E-mail scams are in a similar category. An e-mail scam may try to get your personal information by asking you to click on a link to a phony IRS site or another phishing site that will ask for personal information. E-mail can also contain damaging attachments that, if opened, can give hackers access to the personal information on your computer. The IRS does not initiate contact by e-mail, so if you receive an e-mail that appears to be from the IRS, you can assume it's a scam.Fake Tax Forms
One tax scam the IRS uncovered in 2008 involved a fake tax form purporting to be from a legitimate organization, the Taxpayer Advocate Service. This scam involved asking recipients for detailed personal financial information such as their bank account numbers, ATM PINs and credit card numbers, all in the name of getting tax refunds. In this case, the fake form arrived as an e-mail attachment. Just because this particular scam was uncovered doesn't mean that a similar one won't appear in your inbox or mailbox in the future, so be on the alert for any e-mail that requests person information.

Tax Protester Schemes
One longstanding tax scheme is the notion that you don't have to pay income taxes, because paying taxes and/or filing a return is "voluntary." The worst part is that if you are caught, not only will you owe back taxes, interest and penalties, you will also be fined an additional $5,000 penalty as outlined in IRS Notice 2007-30 for filing a "frivolous tax return" or failing to file based on a "frivolous position." The "voluntary" aspect of the tax code refers to the fact that it is up to individuals to calculate their tax liability and to arrange their finances in such a way as to legally minimize their tax liability. In other words, the government does not send out bills every April telling people how much they owe.

Fake Home Businesses
Some tax-scammers want to sign you up for a work-at-home business that they claim will allow you to take substantial deductions for personal expenses by turning them into legitimate business expenses. You would probably already identify most of these business setups as scams. For example, ads that say "Make $500 a week stuffing envelopes from your couch!" The scammers make money by selling you a kit that tells you how to make these supposedly legitimate deductions, or by selling you their tax preparation services.

America's VAT(Value Added Tax)

The gigantic deficits the Administration is projecting are appalling, and they provide a chilling look at our future America is hurtling towards a fiscal trap that is forcing us into the only option have to restore budgetary sanity A Value-Added Tax.

It's not an option Americans understand, or ever hear debated much. In fact, most folks probably never heard of it. And if they had, they probably wouldn't want it; since it's the bulwark of an economic system alien to the American model the social democratic economies of Europe.

But the sheer scale of the expected numbers makes it practically inevitable that the U.S. will soon adopt a big VAT. It's the only vehicle capable of raising the money to cover the gigantic projected increases in spending and deficits.

Briefly, a VAT resembles a sales tax passed in the end onto the consumer at the register. But the government collects most of the money during the stages of a product's manufacture. Since manufacturers are writing the checks, it's an extremely efficient, virtually fraud-free way to collect money.

But it's never gotten much support in the U.S. for two reasons. First, it's a regressive tax: Low-earning families pay a bigger portion of their incomes than the wealthy. And second, the VAT first introduced by a French civil servant in 1954 has fueled the rapid growth of government in France, Germany, and even Japan. In fact, no other country spends the kind of money were planning to spend without a VAT.

The government wants to see the legally signed XML customer's invoice that is accepted by both sides so that companies cannot cheat on the VAT. Therefore every single invoice and movement of goods, from either inside or outside the country, needs to be approved by the government before shipment. Government auditors have a quota and mine the database to fine companies for non-compliance. VAT countries are moving to this Brazilian NF-e model.