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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
Pitfalls with this deduction
- Used exclusively and regularly for administration or management activities
- No other fixed office location is maintained
Administrative and managerial activities include:
- Billing customers
- Ordering supplies
- Keeping appointments
- Maintaining books & records
- Writing reports or orders
- 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.
- 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