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2004 TAX PLANNING IDEAS

A. TAX HELP FOR COLLEGE

There are a number of new tax planning ideas to try to help pay for college.

  1. HOPE SCHOLARSHIP CREDIT - This credit provides for a credit of up to $1,500 per student per year for the first two years of a student's college education. This credit does not apply to room and board expenses or to books. There are income limitations for claiming this credit that may prevent many people from being able to claim the credit.

  2. LIFETIME LEARNING CREDIT - This credit is a maximum of $2,000 per year of qualified tuition expenses for any year that there are qualified college expenses paid. There are the same income limitations for this credit as discussed for the HOPE credit, and the lifetime credit cannot be claimed in addition to the HOPE credit for the same person. Also, if these expenses are incurred by your child, you must be able to claim your child as a dependent for this year. With the income limitation affecting many parents, it may be best to let the student claim himself as a dependent so that the student may then claim the credit. You should review this for your optimum tax savings each year.

  3. COVERDELL EDUCATION SAVINGS ACCOUNT - This special account was available beginning in 1998 which is used to help pay for college expenses. The main drawback to this account is that it was limited to $500 per year for each child through 2001, and it is nondeductible. But when used to pay for college, then the distribution out of this special account is tax-free, including the interest it has earned. There are limitations again on this account based upon income, but the limitations are not as severe as for the other items such as the tax credits mentioned above. Beginning in 2002, the annual limit increases to $2,000 from $500.

  4. STUDENT LOAN INTEREST - If you meet certain qualifications, then interest paid on qualified education loans can be deducted on your tax return up to a maximum of $2,500. This deduction is "above-the-line", which means that you do not have to itemize to claim this deduction. But the deduction must be for the taxpayer who is responsible for the loan. That means that if the child is responsible for the loan, then the parent can not deduct the interest even if the parent makes the payments.

  5. THE 60-MONTH LIMITATION FOR DEDUCTING STATE-SPONSORED QUALIFIED TUITION PROGRAMS - Effective in 2002, distributions from qualified tuition programs will be excluded from taxable income if used for qualified higher education expenses.

  6. QUALIFIED HIGHER EDUCATION EXPENSE DEDUCTION - For 2002, taxpayers will be permitted an above-the-line deduction for qualified higher education expenses paid by the taxpayer during the year. Qualified higher education expenses include tuition and fees. Qualifying expenses up to $3,000 are deductible as an adjustment to income on the front of form 1040. Adjusted gross income limits apply and the deduction cannot be claimed in the same year as a HOPE or Lifetime Learning Credit.


B. HOME BASED BUSINESS

New rules that took effect in 1999 now make it easier to claim a deduction for the business use of your home.

Requirements
  1. Used exclusively and regularly for administration or management activities
  2. No other fixed office location is maintained

Administrative and managerial activities include:

  1. Billing customers
  2. Ordering supplies
  3. Keeping appointments
  4. Maintaining books & records
  5. Writing reports or orders
Pitfalls with this deduction
  1. Most beneficial to self-employed. Employees seeking to use the home-office deduction must meet a "convenience of employer" test. In addition, the deduction as an employee is only as a miscellaneous itemized deduction on Schedule A, which has a percentage of income limitation. Also this might make the taxpayer subject to the alternative minimum tax.

  2. Interaction with Sale of Residence. Another pitfall to claiming the office-in-home deduction may be when it is time to sell your residence. Normally there is no taxable gain to report anymore upon the sale of a residence. However, this may not be true if a portion of your home has been claimed and depreciated as office-in-home expenses.

This deduction, while changed beginning in 1999, should be reviewed carefully to properly plan for the ultimate tax effect it will have on your situation.



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