E-File Magic 1099 Software – Blog

I was raised in a small town in Minnesota and big families were common, especially if your family had a farm. However, there was a restaurant in a neighboring town that employed all its’ family members. I believe there were a total of 13 children, employed as hosts, servers, cooks, and dishwashers. It’s been awhile since I’ve been back – the number may have grown. Manny Davis over at allbusiness.com wrote a blog on the tax benefits of hiring family members and I thought all you entrepreneurs out there might enjoy it.

When you own your own business it is important to understand how your tax situation will change and what actions can be taken to reduce your tax liability legally. In the case of family owned businesses, there are certain tax advantages that may be recognized by employing family members as long as the rules set forth by the IRS are followed. Here we look at some of the benefits of hiring family members to work for a family business.

Tax Benefits

There are several ways in which the hiring of a family member to work for a family owned business can be advantageous in the area of taxes.

• Children (under age 18) employed by a parent who is a sole proprietor or business that is unincorporated are not subject to FICA taxes. Since the child in not responsible for their half of the taxes, neither is the business.
• Wages paid to children reduce the net income of the business, in turn reducing the amount the parent pays in self-employment taxes.
• Income paid to the child is taxed in a lower tax bracket than that of the parent. This helps reduce the tax burden across the board.
• Insurance costs and other benefits paid to a family member can be used as a tax deduction by the business owner (parent).

If you are thinking about adding your child or spouse to the payroll, keep in mind that the IRS will pay close attention to how your business is being handled and is a bit more likely to audit your business. It is completely logical to take advantage of any tax breaks you may see by employing your child or other family members, however you must be sure they are bona fide employees. If you are simply attempting to reduce your tax burden without actually providing documentation of hours worked and duties performed, you may find yourself in hot water with the IRS. Another important factor to remember is that when hiring your child to work for a family business, all child labor laws must be adhered to as well. Special privileges are not extended to parents who bring their children into the family business.

Other Benefits

There are many other benefits to hiring family members. Whether you are hiring your spouse or your child, you are bringing them into a very important aspect of your life and the foundation of the family. You can teach your children the importance of having a strong work ethic and they can see both the rewards and hardships associated with self-employment. This may help them make a decision regarding which direction they would like to go when the time comes to choose a career path. Children of self-employed parents often have greater confidence in their ability to follow their own dreams or in some cases, follow in their parents footsteps as successors in the family run business.

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Kay Bell at Bankrate.com posted an informative blog on Reporting Gambling Winnings. E-File Magic can help you with each document needed to report winnings – read on to see what you need to or don’t need to do.

Here’s a look at the federal tax forms you’ll need to share your good fortune with the Internal Revenue Service. And if you lost a few rounds before your numbers came up, there’s a way you can turn those losses to your tax advantage.

Winning amounts matter

Requirements for reporting and withholding from a winning bet depend on the type of gambling, the amount won and the ratio of the winnings to the wager.When you pocket $600 or more (and that amount is 300 times your bet) at a horse track, win $1,200 at a slot machine or bingo game, or take $1,500-plus in keno winnings, the payer must get your Social Security number and let the IRS know that you came into the extra income.

And while poker aficionados argue that the card game isn’t gambling, but a game of skill, the IRS still wants details on how well you played Texas Hold ‘Em. The IRS now requires all poker tournament sponsors to report competitors’ winnings of more than $5,000.

The bottom line is if you are lucky enough to rake in a decent jackpot on a gambling transaction, you’re going to have to give the IRS your tax information and, in many cases, you’re not going to walk away with all the cash you won.

In addition to telling Uncle Sam that you were a winner and how much, the payer in these situations generally will reduce your payout by withholding federal taxes at the 25 percent rate. If you try to shortchange the IRS by refusing to furnish your Social Security number, the payer could take as much as 28 percent of your winnings right off the top to send to the tax collector.

In either instance, you’ll get a Form W-2G showing the amount you won and, if applicable, how much in taxes you paid on it upfront.

When you have to report it

Even if you didn’t win enough to trigger W-2G filing, you do want to be a diligent taxpayer and report those gambling winnings, right? The casino, track or lottery agent might not have reported that $25 you won, but it’s still taxable income. It’s ultimately the taxpayer’s responsibility to tell Uncle Sam about his good fortune.You report your winnings — from the W-2G or those smaller jackpots — on line 21, Other income, of Form 1040. In addition to gambling proceeds, this is where you’d report any prizes or awards (cash or the cash value of merchandise) you won. All this money goes toward your total income amount.

However, you don’t have to pay taxes on all your earnings, regardless of how you got them. You can reduce the amount of money the IRS will tax by reporting your losses as part of your overall itemized deductions. Check out line 28, Other Miscellaneous Deductions, on Schedule A. That’s where you report any gambling losses. You can claim up to the total amount of winnings you entered on your 1040, effectively wiping out any taxable gambling income.

But make sure that this deduction, along with your other itemizations, is more than the standard amount. You always want to use the method that will provide you a bigger deduction.

Even though technically you might be able to avoid taxes on $3,000 you won by claiming $3,000 in bad bets, that’s still less than the standard deduction of $5,700 allowed a single taxpayer on 2009 returns. If you have no other deductions to itemize, it doesn’t make sense to forfeit the standard deduction’s other $2,700 just because you can claim gambling losses.

If, however, your wagering losses are large enough to help boost your already substantial itemized deductions, then fill out the Schedule A.

Keep track of your gaming losses

When you do claim your gambling losses on your tax return, it’s a good idea to keep a record of them. While you don’t have to send your loss data in with your return, documentation could come in handy if the IRS ever questions the claim.Acceptable gambling-loss record keeping could include a written log detailing the date of your wagers, the location, amount bet, type of gaming, and wins and losses. You should also hang on to losing lottery tickets or bingo cards.

The good thing about deducting gambling losses is that, unlike some other deductions, you don’t have to meet a certain level before you can claim them. But then again, they aren’t completely unlimited.

You can only count as much in losses as you won. So if you spent $100 on lottery tickets and won $75, you can only deduct $75. The other $25 is just part of the price of playing the game.

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The IRS Newsletter issued this tax tip on February 5, 2010. It may help you understand which income is taxable and which is not.

While most income you receive is generally considered taxable, there are some situations when certain types of income are partially taxed or not taxed at all.

To ensure taxpayers are familiar with the difference between taxable and non-taxable income, the Internal Revenue Service offers these common examples of items that are not included in your income:

• Adoption Expense Reimbursements for qualifying expenses
• Child support payments
• Gifts, bequests and inheritances
• Workers’ compensation benefits
• Meals and Lodging for the convenience of your employer
• Compensatory Damages awarded for physical injury or physical sickness
• Welfare Benefits
• Cash Rebates from a dealer or manufacturer

Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your income are:

• Life Insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are not taxable unless the policy was turned over to you for a price.
• Scholarship or Fellowship Grant If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.
• Non-cash Income Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

All other items—including income such as wages, salaries and tips—must be included in your income unless it is specifically excluded by law.

These examples are not all-inclusive. For more information, see Publication 525, Taxable and Nontaxable Income, which can be obtained at IRS.gov.

For assistance with 1098, 1099, 5498 and W-2G Forms – contact E-File Magic! Download our Free 1099 Software here!

On February 5, 2010, the IRS Newsletter posted an article about Frivolous Tax Arguments. Over the past few years there have been claims that it’s voluntary to file a tax return and whatnot. This article points to a document that is an interesting read against some of the myths about filing a tax return and has the legal findings against some claims.

WASHINGTON — The Internal Revenue Service today released the 2010 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws.

Anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read the 80-page document, The Truth about Frivolous Tax Arguments.

The document explains many of the common frivolous arguments made in recent years and it describes the legal responses that refute these claims. It will help taxpayers avoid wasting their time and money with frivolous arguments and incurring penalties.

Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.

IRS highlighted in the document about 40 new cases adjudicated in 2009. Highlights include cases involving injunctions against preparers and promoters of Form 1099-Original Issue Discount schemes and injunctions against preparers and promoters of false fuel tax credit schemes.

E-File Magic – Your source for 1098, 1099, 5498 and W-2G Forms. Download our Free 1099 Software now!

IRS Newswire posted some new information regarding donations to Haiti, in case you are interested:

WASHINGTON — People who give to charities providing earthquake relief in Haiti can claim these donations on the tax return they are completing this season, according to the Internal Revenue Service.

Taxpayers who itemize deductions on their 2009 return qualify for this special tax relief provision, enacted Jan. 22. Only cash contributions made to these charities after Jan. 11, 2010, and before March 1, 2010, are eligible. This includes contributions made by text message, check, credit card or debit card.

“Americans have opened their hearts to help those affected by the Haiti earthquake,” said IRS Commissioner Doug Shulman.” This new law provides an immediate tax benefit for the many taxpayers who have made generous donations.”

Taxpayers can benefit from their donations, almost immediately, by filing their 2009 returns early, filing electronically and choosing direct deposit. Refunds take as few as ten days and can be directly deposited into a savings, checking or brokerage account, or used to purchase Series I U.S. savings bonds.

The new law only applies to cash (as opposed to property) contributions. The contributions must be made specifically for the relief of victims in areas affected by the Jan. 12 earthquake in Haiti. Taxpayers have the option of deducting these contributions on either their 2009 or 2010 returns, but not both.

To get a tax benefit, taxpayers must itemize their deductions on Schedule A. Those who claim the standard deduction, including all short-form filers, are not eligible.

Taxpayers should be sure their contributions go to qualified charities. Most organizations eligible to receive tax-deductible donations are listed in a searchable online database available on IRS.gov under Search for Charities. Some organizations, such as churches or governments, may be qualified even though they are not listed on IRS.gov. Donors can find out more about organizations helping Haitian earthquake victims from agencies such as USAID.

The IRS reminds donors that contributions to foreign organizations generally are not deductible. IRS Publication 526, Charitable Contributions, provides information on making contributions to charities.

Federal law requires that taxpayers keep a record of any deductible donations they make. For donations by text message, a telephone bill will meet the recordkeeping requirement if it shows the name of the donee organization, the date of the contribution and the amount of the contribution. For cash contributions made by other means, be sure to keep a bank record, such as a cancelled check, or a receipt from the charity showing the name of the charity and the date and amount of the contribution. Publication 526 has further details on the recordkeeping rules for cash contributions.

This year’s special Haiti relief provision is modeled on a 2005 law that, in the wake of the Dec. 26, 2004, Indian Ocean tsunami, allowed taxpayers to deduct donations they made during January 2005 as if they made the donations in 2004.

Remember to use E-File Magic for all your 1098, 1099, 5498 and W-2G Forms. Download our 1099 Software now!

My heart goes out to all the victims and their families involved with the Earthquake that occurred in Haiti earlier this week. The television and internet are flooded with organizations committed to providing support for those in need. Your donations may be tax deductible – however you need to be sure the organization you are giving money to is in fact a qualified charity. This is what the IRS webpage says about your charitable donations:

Contributions to domestic, tax-exempt, charitable organizations that provide assistance to individuals in foreign lands qualify as tax-deductible contributions for federal income tax purposes, provided that the U.S. organization has full control and discretion over the uses of such funds. Contributions to foreign organizations generally are not deductible. Contributions to benefit specific individuals or families are also not deductible.

Contributions are deductible in the year made. To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions.

IRS Publication 526, Charitable Contributions, provides information on making contributions to charities. Pub. 3833, Disaster Relief: Providing Assistance through Charitable Organizations, explains how the public can use charitable organizations to help victims of disasters

Donors should ensure that their contributions go to qualified charities. Taxpayers who have a specific charity in mind can make sure it’s a qualified charity by doing a search on IRS.gov. Some organizations, such as churches or governments, may be qualified even though they are not listed on IRS.gov.

E-File Magic’s Print and Mail Order Deadline for Tax Year 2009 is January 18, 2010. Download the Free 1099 Software now to get started!

Gina’s Tax Tips posted a blog Wednesday on 1099s - not very often I see this so I am celebrating by re-posting it here.

Business owners and landlords are required to give a Form 1099-MISC to any service provider (independent contractor) you paid $600 or more for services provided to your business (or rental property) during the year.  It’s also advisable if you are claiming the home office deduction to provide a Form 1099 to anyone who provided a home service that you intend on claiming as an expense as part of your home office deduction.  The deadline is January 31.

In general if your service provider is a corporate entity then you do not have to send them a Form 1099.  The main exception is attorneys.  No matter what type of entity your attorney happens to practice under you are required to send them a Form 1099 for the services they provide to your business, rental property or home office.

The main benefit of preparing Form 1099s is that it protects your business, rental and/or home office tax deduction. If you fail to prepare a required Form 1099 and later get audited, your deduction of the fees paid to the service provider will most likely be disallowed.  This means additional taxes, interest and penalties.

Please note….Form 1099 cannot be used for workers who should properly be treated as your employees (this includes household employees – please see IRS Publication 926). You must provide them with a Form W-2 instead.

A new year means a starting over in keeping track of certain records such as medical expenses. Here is a cute story just posted by TaxGirl  on her website www.taxgirl.com about her recent adventures with her daughter. Within this story she has a link to medical expenses you can deduct (it’s quite long).

Those of you who follow me on Twitter (or in real life) know that one of my children has been sick for about a month. My middle child, Amy, has a form of vasculitis known as Henoch-Schonlein Purpura. It is a nasty and invasive – but fortunately not contagious – illness that attacks the joints and blood vessels in your body. The result is a horrific rash (you can Google it to see – I thought about posting an actual photo but it is really not a pretty sight), occasional fever and vomiting, swelling of the joints (sometime to the point of her not being able to walk) and blood in the urine. Again, not pretty. And not fun for a five year old.

We have been lucky in that, save for an experiment with raw milk gone awry, our children have been mostly healthy. I can’t imagine what it is like to have a child with a serious, long-term illness.

One of the things that I have learned over the last few weeks is how quickly medical expenses can add up – and I have good insurance. I have written post after post about what you can deduct in medical expenses but have rarely been in the position to take my own advice. My oldest daughter spent the first few days of her life in the NICU at Children’s Hospital of Philadelphia (CHOP); my youngest two have had minor surgeries (tonsils and adenoids); and my little boy – all boy – has seen to it that I’ve seen the inside of the ER (stitches at 2!). But those things were more or less one or two trip events.

With Amy and HSP, we’ve found ourselves driving back and forth to the doctor several times a week for testing – and once to CHOP to have the specialists in nephrology check out her kidneys. And the expenses are adding up. I thought it would be a good time to revisit the idea of medical expenses and what things are deductible… for me and for my readers.

I’m actually framing this post in terms of things I can deduct with respect to my daughter’s illness. If you’re looking for something more comprehensive, there is a more extensive list of medical expenses which may qualify for a deduction here.

A couple of quick things out of the way first: 1, Amy is my qualifying dependent so I can deduct medical expenses paid on her behalf and 2, I understand that I can only deduct those expenses which exceed 7.5% of my adjusted gross income (AGI).

So what can I deduct?

Co-pays. We have decent medical insurance but we are still subject to co-pays. I pay $20/visit to the doctor (a few of those trips this month) and $100/visit for the ER (one of those trips just last week when her labs came back with blood in her urine and an elevated white blood cell count).

Lab fees. My insurance covers some of our lab fees, but not all. She’s had several tubes of blood work and many cups of urine (four of those in one day last week) analyzed for protein counts, white blood cell counts and other abnormalities. Those fees not covered by our insurance, those that we pay out of pocket, are deductible.

Transportation costs. Luckily, my pediatrician’s office is walking distance from my house (about 2.5 miles) but in really cold or snowy weather, we’ll take the bus or drive. The bus fare is deductible – as is the mileage to and from the doctor. The standard medical mileage rate for 2009 is 24 cents per mile. Yes, I could also take the actual expenses associated with driving but I’m just not that organized at times like these.

CHOP is in the city, so we generally take a bus, train or drive to the hospital. The bus fare, train fare or car mileage is deductible.

Also deductible? The ridiculous cost of parking in the city.

And if I lived in New Jersey (shudder) and had to pay the toll to come into the city, that would also be deductible.

Lucky for us (and my record keeping), parking fees and tolls are deductible regardless of whether we use the actual expenses method or the standard medical mileage rate.

Even though I’m tagging along with Amy, the cost of my transportation is also deductible, since transportation expenses of a parent who must go with a child who needs medical care are deductible. My friends who often go with me for moral support to these things? Much appreciated, but not deductible.

We didn’t have to stay overnight (thank goodness) but if we had, we could deduct up to $50 for each night per person. My expenses would have been covered for same reason my transportation would have been included (because I’m the mom) – but only to $50. You and I both know that I couldn’t stay anywhere in Philadelphia that wouldn’t cause my mother to cry for $50… Considering that the best medical facilities for children, like Children’s Hospital of Philadelphia and Children’s Hospital of Boston, tend to be located in metropolitan areas, you’d think that those numbers would push up a little higher (Congress, a little help on this one, please?).

Thankfully, we don’t need any longer term options – like retrofitting our house with ramps, etc. Amy is a little gimpy now but the prognosis is 100% back to normal. But for parents who have to make accommodations or renovations in their home for sick or disabled children, it’s deductible.

So, what can’t I deduct?

The cost of child care. I have two other children that I did not relish dragging with me to the pediatrician, or to CHOP for goodness knows how long. I am lucky in that we have fabulous friends who were willing to watch my children while my husband and I went to the hospital with Amy. But if that didn’t happen, I would have had to get a babysitter. Believe it or not, that’s not deductible as a child care expense. You cannot deduct the cost of child care, even if it enables you, your spouse, or your dependent to get medical treatment.

Our meals. Since we were at the hospital for most of the day, my husband and I missed lunch. Can we deduct the cost of the munchies that we ended up getting from the hospital snack shop? Sadly, no. You can’t deduct the cost of meals that are not part of inpatient care.

Over the counter medicines. The doctor has recommended – but not prescribed – a number of over the counter medicines to keep Amy’s symptoms at bay. Despite the fact that some of them can run $10/bottle (have you seen the cost of children’s Motrin lately?), they’re not deductible. Except for insulin, you cannot deduct the cost of medicines that are not prescribed.

Personal care products. Amy is also using a number of products that don’t qualify as medicines but are part of keeping her comfortable. She has an itchy, scabby rash all over her body and I mean all over her body. She cries sometimes when she changes clothes and the rash keeps her up for hours and hours (two nights ago, we were up until 5am). Oatmeal baths and certain lotions are quite soothing for her. But since they’re not prescription-based, we can’t deduct them.

A lesson to be learned here? If the costs of these treatments are substantial, you may be able to deduct them by having your doctor write a prescription for them. This varies by drug and by doctor.

Another lesson learned? Many of these expenses may not be deductible as medical expenses but would have been considered “reimbursable items” for purposes of flexible spending accounts (FSA) and health flexible spending accounts (HSA). This is because these expenses are for medical purposes and not for every day or cosmetic use. There are limits and restrictions on these accounts – be sure that you understand them – as well as rules with respect to whether reimbursements may be taxable. So, not a panacea, but definitely worth checking out.

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The last 23 days have been really difficult. I know that we are super lucky because the outlook for Amy is 100% recovery. Not all parents have that outcome. And as a mom, my heart goes out to them.

When children get sick, it can take quite a toll on a family. In addition to all of the worries and practical considerations, it can be quite expensive. Fortunately, with a little bit of tax planning, you can mitigate some of the expense and focus on what really matters: getting those kids better.

Happy New Year from E-File Magic. For all your 1099 needs check out our FREE Software!

The Tax Foundation Blog posted the following article January 2, 2010 on Washington D.C.’s newest tax for plastic bags in an effort to reduce litter. D.C. is calling the tax a fee – This is what The Tax Foundation says about it:

Starting yesterday, shoppers in D.C. must pay a nickel for each plastic bag they receive at businesses that sell food and alcohol. The D.C. city government has launched a campaign to make people aware of the new tax on plastic bags, which they sometimes call a “fee”:

Beginning January 1, 2010, District businesses that sell food or alcohol must charge you 5 cents for each disposable paper or plastic carryout bag.

The business keeps 1 cent, or 2 cents if it offers a rebate when you bring your own bag. And the remaining 3 or 4 cents go to the new Anacostia River Protection Fund. DDOE will administer this fund. We will use it to provide reusable bags, educate the public about litter, and clean up the river.

The District has also partnered with CVS/pharmacy to produce and hand out 112,000 reusable bags.

Putting to one side the question of whether a tax on some plastic bags to fund trash cleanup for one area is wise public policy, the new charge is properly called a selective excise tax. The bill may call the charge a fee, but it’s a tax. If it were up to legislatures, few things would be called “taxes,” and loose definitions help deprive taxpayer protection provisions of any meaning.

A fee funds services directed at those who pay it, or pays for regulating their conduct. Taxes produce surplus revenue for general government programs. Since the latter is what is happening here (most of the trash in the Anacostia is not plastic bags, and plastic bags pollute other things), it is a tax.

Because American antipathy to taxes is so deeply rooted in our nation’s history, lawmakers often seek to raise revenue in ways to avoid the “tax hiker” label even if it requires calling an obvious tax a “fee.” That’s what’s happening here. These shell games undermine transparency by making it harder for citizens to understand the cost of government.

For tax questions regarding 1098, 1099, 5498 and W-2G Forms – contact E-File Magic today. Download our Free 1099 Software now.

On December 9, 2009 Gina Gwozdz posted this excerpt from Stephanie Miles, a freelance writer for Guide to Online Schools on her blog “Gina’s Tax Tips.” I thought this was helpful in understanding the various programs and tax breaks out there for students.

Remember E-File Magic offers free customer support when managing your 1098, 1099, 5498 and W-2G forms. Download our FREE 1099 Software today!

Tax Breaks for University Students

When you’re studying for midterms, writing thesis papers, and dealing with the day-to-day drama of dorm life, understanding the federal and state tax codes is probably the last thing on your mind. In an era where every dollar counts, though, it may be worth it to gain a little more understanding of which tax breaks you qualify for—and which you don’t—as a university student.

Thanks in large part to the Taxpayer Relief Act of 1997, a number of student loan tax credits have been created to reduce the financial burden on undergraduate students and their parents. A few of the most popular of these options are the Lifetime Learning Tax Credit, the Hope Scholarship Tax Credit, and the Tuition and Fees Tax Deduction, all of which help reduce the tax liability for those going through the stressful years of post-secondary training.  The American Opportunity credit replaces the Hope credit for 2009 and 2010, and provides a partially refundable credit.

The Lifetime Learning Tax Credit
Lifetime Learning credits are nonrefundable tax credits that are given out to eligible students or their parents. If you paid any expenses to attend an accredited university during the past year, then you may be able to subtract the amount you paid in tuition and fees—up to $2,000—directly from your taxes owed. Unlike deductions, which simply reduce your tax burden, tax credits will specifically lessen the amount of taxes you owe in a given year. In addition, Lifetime Learning credits are available for all years of a student’s postsecondary education, which makes them an especially attractive option for many taxpayers. To obtain this credit, students or their families must report the amount of tuition and fees paid on an IRS Form 8863. The university itself will also be required to fill out a 1098-T statement listing all fees and payments made, copies of which will be sent to both the taxpayer and the IRS.

The Hope Credit (for 2008)
Despite the name, the Hope credit is not actually a traditional scholarship.  Instead, it is a nonrefundable credit that is subtracted from a student or family’s taxes at the end of the year. Students and their families can claim this credit, which varies in amount based on how much income each family earns, for the first two years of that student’s post-secondary education. After this, they are no longer eligible for the credit. Just as with the Lifetime Learning credit, though, families hoping to qualify for the Hope credit must fill out the IRS Form 8863 with information provided by the university on a separate 1098-T statement.

The American Opportunity Credit (previously Hope Scholarship Tax Credit)
The American Opportunity Tax Credit is a refundable tax credit for undergraduate college education expenses.  This credit provides up to $2,500 in tax credits on the first $4,000 of qualifying educational expenses.  Forty percent of the credit (up to $1,000 maximum) is refundable.  Just as with the Lifetime Learning credit and Hope Credit, though, families hoping to qualify for the Hope credit must fill out the IRS Form 8863 with information provided by the university on a separate 1098-T statement.

Tuition and Fees Tax Deduction
For those who may not qualify for the Lifetime Learning, American Opportunity or Hope credits, the tuition and fees tax deduction can serve as a way to reduce a student or family’s taxable income by as much as $4,000 a year.  Unlike credits, which are directly taken off the top of the amount you owe in taxes, deductions are a way to lower your overall taxable income. To qualify for the deduction, students must be enrolled in one or more courses at an eligible education institution. In addition, anyone planning to take this deduction must make sure to receive a 1098-T statement stating the amount of tuition and fees paid during the past year from the student’s institution.

Whether you are a student or a parent, it’s worthwhile to learn about the tax benefits that are available to those who are paying for a higher education. After all, just 10 minutes of research could end up saving you thousands of dollars on your taxes each year.

Notes from Gina:
The American Opportunity credit replaces the Hope credit for 2009 and 2010.  The Tuition and Fees Deduction is scheduled to expire at the end of 2009.

You may be eligible for the any of these deduction or credits; thus my suggestion is to calculate how much tax benefit you would obtain for each and then go with the one that will ultimately put more cash back in your pocket.  Qualifying expenses include amounts paid for tuition and required educational fees.

You must reduce your qualifying expenses when figuring your tax credit by the amount of financial assistance received from grants, scholarships, or reimbursements from your employer.

If your son or daughter is going to college, and you claim him or her as a dependent, then you can claim the education credits on your tax return. If your son or daughter is no longer a dependent, then he or she should claim any education credits on his or her own tax return. If you pay the college expenses for someone who is not your dependent, you cannot claim any education credits.