Education Tax Benefits

Even if you don't itemize your tax deductions, you could save money with these education credits and deductions.

* American Opportunity Credit or Hope Credit — You can claim either the American Opportunity Credit or the Hope Credit. The American Opportunity Credit is equal to 100% of the first $2,000 and 25% of the next $2,000 per student for tuition and related fees, with a credit maximum of $2,500 per student. It's restricted to the first 4 years of college and can be claimed only 4 times per student. Up to $1,000 of the credit may be refundable. It generally will be advantageous to claim the Hope Credit only if a student is attending an education institution in a Midwestern disaster area. The credit for these students is equal to 100% of the first $2,400 and 50% of the next $2,400 per student for tuition and related fees, with a credit maximum of $3,600 per student. However, if you choose to claim the Hope credit, you must use it for all students and the credit for students not attending a school in a Midwestern disaster area is only 100% of the first $1,200 and 50% of the next $1,200 per student for tuition and related fees, with a credit maximum of $1,800 per student. In addition, the Hope credit can't be used for a student if you've already claimed it for that student more than once.
* Lifetime Learning Credit — A credit of 20% of your annual tuition and related fees, with a credit maximum of $2,000 per return. The tax credit may be claimed for an unlimited number of years.
* Tuition and Fees Deduction — You can deduct up to $4,000 per student for tuition and fees.
* Student Loan Interest Deduction — Deduct up to $2,500 per return for interest paid on student loans.
* Exclusion for Savings Bond Interest — Some or all of the interest received from eligible bonds issued after 1989 may be excludable if qualified higher education expenses for the year are at least as much as the proceeds of the redeemed bonds.

Note: You can't use the same expenses to claim more than 1 of the above benefits, and other restrictions apply.

 
Saver's Credit

If you qualify, you could get a tax credit for up to half of what you contribute to a qualified retirement plan or IRA. Claim the Saver's Credit if you meet all the qualifications:

* You're age 18 or older.
* You aren't a full-time student.
* You aren't claimed as a dependent on someone else's return.
* Your AGI doesn't exceed $27,750 ($55,500 if Married Filing Jointly, or $41,625 for Head of Household).

 
Child Tax Credit

You can claim $1,000 for each child. The 2009 Child Tax Credit begins to phase out when your AGI is more than these limits:

* $75,000 if Single, Head of Household or Qualifying Widow(er)
* $110,000 if Married Filing Jointly
* $55,000 if Married Filing Separately


If your income tax is reduced to zero and your earned income is more than $3,000 (for 2009), you may be eligible to claim the additional Child Tax Credit.

 
Earned Income Credit (EIC)

The EIC is designed to offset the burden of Social Security taxes for low-income workers. You can claim this tax credit even if you have no tax liability.

You may qualify for the EIC if your earned income and adjusted gross income are less than:

* $13,440 ($18,440 if Married Filing Jointly) with no qualifying children.
* $35,463 ($40,463 if Married Filing Jointly) with 1 qualifying child.
* $40,295 ($45,295 if Married Filing Jointly) with 2 qualifying children
* $43,279 ($48,279 if Married Filing Jointly) with more than 2 qualifying children.

 
Itemized tax Deductions

If total itemized tax deductions are more than the standard deduction, it's usually a good idea to itemize. For most taxpayers, purchasing a home makes it worthwhile to itemize deductions because they can deduct interest, real estate tax, and, for loans taken out after 2006, certain mortgage insurance premiums. Here are some popular (and commonly overlooked) itemized deductions not related to home ownership:

* Medical expenses — In addition to what you've spent on doctors, hospitals and medicine, other tax deductible items include health insurance premiums, prescription eyeglasses and contact lenses, hearing aids, medical transportation, equipment for disabled people, and nursing home expenses.
* State and local income taxes — This category includes income tax or sales tax and personal property tax. For 2009, you can also deduct sales or excise tax paid for a new vehicle purchased after Feb. 16, 2009. Some limitations apply.
* Charitable contributions — These include cash and property such as new and used household goods and items, securities, and vehicles donated to qualified charitable organizations. Volunteer expenses also can be deducted.
* Casualty losses — If you suffered a loss because of theft, fire, storm damage or other casualty, you can deduct an unreimbursed loss if it is more than the sum of $500 and 10% of your adjusted gross income.
* Unreimbursed out-of-pocket job expenses — Tax-deductible expenses include vehicle expenses (other than commuting), travel expenses, uniforms, union dues and continuing education expenses.
* Miscellaneous expenses — Safe-deposit box fees, investment expenses, tax preparation fees and certain legal fees are examples of miscellaneous tax deductions. The tax deduction for this category of expenses is allowed only for the total of these expenses and unreimbursed job expenses that is more than 2% of your adjusted gross income. Note: There are a few miscellaneous tax deductions that are not subject to the 2% floor. These include repayments of amounts exceeding $3,000 that you previously included in your income, gambling losses, estate tax on income in respect of a decedent, and a decedent's investment in a pension.

 


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