The Taxable Downside of Debt Forgiveness

Jennifer Waters for the Wall St. Journal writes: You may have shored up your finances by settling most nonmortgage debt with creditors in 2012, but there's no escaping the tax man: The Internal Revenue Service expects you to pay taxes on that dodged debt, which is now considered "income."  "When you borrow money it's not a taxable event because it's assumed you will pay it back," says tax attorney John Foley, a partner with Tatooles, Foley & Associates in Chicago. "But with any type of debt relief, you do have income because it's an enhancement to your balance sheet."  That's true even if it's purely on paper as an accounting item and not cold, hard cash in your hands. The IRS considers any forgiven debt of $600 or more as taxable income. There are exceptions, but they're limited and require more paperwork.

Consider it this way: You ran up $15,000 in credit-card debt and have only paid back $5,000. If the lender is unable to collect the remaining debt and writes it off as a loss, you're expected to pay the taxes on the $10,000 that has been forgiven.

The IRS considers that $10,000 of debt relief as a revenue windfall because you used that money to buy stuff, like clothes, dinners at nice restaurants or a new bike, and you no longer have the obligation to repay it.

Lenders must report the amount of the irrecoverable debt to the IRS and to you on Form 1099-C, cancellation of debt. If you got debt relief in 2012, the lender should have mailed you this form, which must show the amount of the debt forgiven and the amount of the original debt or, in mortgage cases, the fair-market value of the home. You must report this on your tax return.

"Many people either don't think they have to [report] it or don't know about it," says Bill Hardekopf, founder of credit-card information site LowCards.com. "Chances are they never noticed the form and just tossed it out."

Also make sure the 1099-C form is correct. Nina Olson, head of the IRS's Office of the Taxpayer Advocate, has warned Congress that financial institutions have issued 1099-Cs for debts they haven't even tried to collect for some time or have forgiven. Some taxpayers have received duplicate 1099-Cs for the same debt and have found it difficult to reconcile with the IRS, according to Ms. Olson.

Debt cancellation isn't always a taxable event. The Mortgage Forgiveness Debt Relief Act of 2007, which excludes certain types of mortgage debt from taxes, got spared in the final hours of the so-called fiscal-cliff negotiations and was extended to the end of this year.

As a result, mortgage debt that was partly or entirely cleared from 2007 through 2013 isn't taxable. But this is only with mortgages that were used to "buy, build or improve" your principal residence, according to the IRS. It must be the home you live in most months of the year and it doesn't include second or vacation homes.

For example, if a home carrying a mortgage of $600,000 was sold for $250,000 in a short sale, the $350,000 remaining obligation that was canceled isn't taxable under the law. The same is true if the mortgage was restructured to a lower rate or forgiven in a foreclosure. Mortgages restructured under the Home Affordable Modification Program, or HAMP, follow the same general rules, according to the IRS.

The IRS maxes out the qualified home indebtedness at $2 million for couples filing jointly.

For divorced couples, the rules on canceled mortgage debt are uniform but applied differently. Using that same example, if $350,000 of the value of the debt is canceled, both homeowners will get the 1099-C. What they must do then is decide how they will split the responsibility. The easiest, of course, is a simple 50-50 cut, which means each will report $175,000 in canceled debt.

If you've used a home-equity line of credit for home improvements and the like, that too is spared of tax consideration if canceled. Be prepared to show documentation supporting those claims. Home-equity lines of credit used to pay off credit cards or buy a new car are taxable if canceled.

Though debt cleared on second homes, rental property, business property, credit cards or car loans doesn't pass the tax-forgiveness threshold, the IRS says that other tax-relief provisions—say, insolvency or bankruptcy—could be applicable. For example, if credit-card debt was absolved in a bankruptcy petition, the IRS won't consider that income.

Credit-card debt relief also can be tax-free if you're insolvent, meaning your total debts exceed the total fair-market value of all your assets—that includes everything you own, such as your home, car, furniture, jewelry, stocks, life-insurance policies, pension or other retirement accounts and investments.

Why Do Small Businesses Hate QuickBooks?

Amanda Andonian for  Business-Software.com writes One of the most common questions that we receive in our Community is what alternatives exist out there for small businesses that don’t want to use QuickBooks anymore. In fact, we even put together a list of QuickBooks alternatives for easy reference since so many people ask us that question. Seeing this plea for other software solutions so many times, we wondered why users seem to hate QuickBooks so much. Given the fact that it’s one of the biggest accounting solutions on the market, why are so many users so dissatisfied with it?

What Do QuickBooks Users Have to Say?

To answer that question, I looked for opinions online to find out what it is about this software giant that has so many of our visitors asking, “What’s a good alternative to QuickBooks?” Of course, part of that answer almost always has to do with the fact that one solution cannot be everything to everyone; but there does seem to be a disconnect between what small business owners want out of an accounting solution and what Intuit is delivering with QuickBooks.

So where do people go to complain about bad experiences with products and companies? Social media of course! A few examples of frustrated QuickBooks users on Twitter:

L. Daniel Nordstrom @mrnordstrom

And more than anything, I hate QuickBooks. Shouldn't be so negative, but it needs to be said.

8:26 PM - 04 Mar 13

-

Roxanne King @CyclingRox

Not cycling related, but I'm looking forward to the day when I no longer want to strangle someone at Intuit over QuickBooks 2013.

7:15 PM - 04 Mar 13

-

Jeremy Carter @Jer_Car

Is there an alternative to QuickBooks? You know, one that's intuitive and not awful.

5:50 PM - 04 Mar 13

-

There’s no question that QuickBooks is an extremely robust and feature rich accounting solution, but that doesn’t make it an easy-to-use solution–quite the opposite, in fact. Although accountants seem to have very little issue with QuickBooks, business owners are frustrated and fed-up with the software. If you search for “QuickBooks” on Twitter, you’re just as likely to see frustrated user tweets as CPAs advertising the fact that they offer consulting services centered around QuickBooks, a testament to the fact that there’s so many people floundering with the system that a thriving business in QuickBooks consulting has emerged over the years.

Is QuickBooks Really for Small Businesses?

All of the frustration surrounding QuickBooks raises the question, “Is this really an accounting solution for small businesses?” Intuit has certainly marketed it as such over the years, but there’s a huge difference between a 10-person small business and a 100-person small business when it comes to accounting concerns. I asked Rob Maurin, VP of Brand Engagement at Wave, why he thought so many small businesses had a tough time using QuickBooks, and he had this to say:

“The reality of traditional accounting software – and I think we can put companies like QuickBooks into that bracket – is that they do a solid job for people who already understand the way that kind of software is supposed to work, but they don’t really solve the pain for the small business owners who don’t have an accounting background….The average person cannot just install a traditional accounting application like QuickBooks and be off to the races.  There’s a huge gap between what people inherently know and what they need to know in order to use traditional tools effectively.”

So even though an accountant might be able to navigate QuickBooks with relative ease, a small business owner with no accounting background will likely be at a loss when it comes to using QuickBooks. For example, in a small, 10-person company where it’s probably the owner who’s managing bookkeeping tasks, QuickBooks is incredibly difficult to use and navigate because there are things like batch invoicing, forecasting, balance sheets, etc. that people without accounting expertise don’t know how to handle. Not only that, but most small businesses don’t need a fraction of the features that QuickBooks offers, and so using the software becomes a chore that business owners would rather avoid. In fact, Maurin noted that 92% of small businesses in the US are 10-person operations or smaller, which is a staggering number users that QuickBooks is apparently not suited for.

According to Allan Branch, co-founder and CEO of LessAccounting, part of the problem with QuickBooks is that Intuit stopped innovating and building a product for its users, instead depending upon their enormous market share to keep them on top. In his opinion, though, Intuit will soon lose that lead to competitors like Xero, Freshbooks, and Outright because they aren’t embracing change:

“Intuit built tools for accounting practices that were standard 30 years ago. They’ve fought back the urges of their customers to move forward with better interfaces, instead they cling to old practices that are slowly crumbling as new technologies and new practices push the accounting industry forward.”

In our interview with Branch a few weeks ago, he also mentioned that most small businesses are either trying to do everything themselves with the help of spreadsheets and shoe boxes, or else they avoid doing accounting altogether. That definitely doesn’t sound like the kind of user base that can download QuickBooks to their computers and start plugging away at accounting tasks.

Intuit is trying somewhat, though, as evidenced by their announcement a couple weeks ago regarding the release of a new QuickBooks iPad app, but that doesn’t really address the core issue that many small businesses have with QuickBooks–it just wasn’t built for them. Although QuickBooks 2013 came with a major UI overhaul, no doubt meant to rejuvenate the interface and make it seem more up-to-date, most users hated it, as demonstrated by the Amazon reviews of QuickBooks 2013.

Should QuickBooks Tout Itself as a “Small Business” Solution?

Perhaps the real answer to this question depends upon what kind of “small business” we’re talking about. The software giant is really for mid-sized to large businesses, and that’s where they seem to be focusing their efforts anyway. What small businesses actually need is simple software that does pretty much everything for them, and QuickBooks is not that in the least. While many businesses out there still don’t depend upon accounting software for their bookkeeping needs, instead using spreadsheets and keeping receipts in shoe boxes, they’ll no doubt end up turning to easy-to-use online accounting solutions instead of bothering with the headache of QuickBooks. The challenge is for accounting software competitors to get the word out to users that there are other solutions besides QuickBooks.

Abdicating Citizenship: A Tax Strategy to Approach With Caution & Should You Renounce Your Citizenship?

Frost & Associates writes: There are a lot of tax-saving strategies that individuals can employ. Some work well. Others need to be examined really carefully before being tried to make sure the individual doesn't wind up proverbially shooting themselves in the foot.

Particular to that latter category could well be the issue of whether an American citizen should renounce their U.S. citizenship and move out of the country to some haven where their money will be more protected. This is a question that definitely falls into the category of complex tax issues that need to be discussed with an attorney.

Readers of this Washington, D.C., tax law blog may be interested to learn that, according to the U.S. Treasury Department, the numbers of Americans giving up their citizenship has risen significantly since 2008. In that year, some 231 people renounced their allegiance to the U.S. In 2012, that number had jumped to more than 1,780. The data doesn't specifically say that the reason people have started to leave is because of taxes, but observers say it's a good guess that it has something to do with it for many.

One financial services provider to expatriates says he's seen inquiries regarding the tax implications of changing citizenship and moving funds overseas have gone up nearly 50 percent. A 2012 study of the world's billionaires by the Research Institute of Industrial Economics also found that more than two thirds of them have picked up stakes and moved to lower capital gains tax countries in the past 20 years.

Before one gets too enamored with the idea of becoming an ex-pat, here are some things to consider. While the process isn't hard (simply signing an oath of renunciation in front of a U.S. consular official in a foreign country), the effects are permanent. You can't change your mind later. Also, getting visas to travel to the U.S. could become difficult.

Most critically, however, is the fact that a person giving up citizenship doesn't avoid taxes. Individuals with a high net worth or long record of high annual income earnings have to pay exit taxes. There's a liability on capital gains over a certain amount, and on retirement accounts. There may be other liabilities depending on individual circumstances, so consulting with an attorney is a must.

Should You Renounce Your Citizenship?

Caroline Kim for Yahoo Finance writes:  Would you renounce your U.S. citizenship if it meant you’d be sending less of your hard-earned dollars to Uncle Sam? 

As Americans face higher taxes and stricter enforcement, a growing number of them are, indeed, deciding to turn in their US passports. As of 2013, 77% of Americans will pay higher federal tax rates because the cuts in Social Security payroll taxes expired when Congress passed its tax package on New Year’s Day. 

But the wealthiest households face the highest tax increases. From 2009 to 2011, the number of expatriates, or those who renounced their U.S. citizenship, doubled to 1,781. 
 
Nigel Green, CEO of deVere Group, which provides financial services for expatriates, said that since the start of this year, 48% more of his clients in January than in a typical month inquired about moving funds abroad and the possible tax implications of changing citizenship.

The income tax rate rose this year to 39.6% from 35% for individuals earning more than $400,000 a year and married couples earning more than $450,000. 

The Tax Policy Center estimated that those who earn more than $1 million would pay an average of  $170,341 more in taxes.

Green said there’s a tipping point for most people with regard to tax issues affecting their choice of location and citizenship. “If there’s only 10% tax [on income], no one would be leaving. But if there’s 90%, then most people would leave,” he said. 

Federal taxes aren’t the only issue, though. Increases in state income tax rates factor into these decisions as well. Recently, California enacted Proposition 30, which raised state income tax rates to 10.3% from 9.3% for individuals making at least $250,000 and 13.3% from 10.3% for those earning at least $1 million. Golfer Phil Mickelson publicly voiced his concern over the tax increases and threatened to leave California because of the higher rates. 

Famous Faces 
In the first three quarters of 2012, more than 1,100 people left the United States, according to the Federal Register, which tracks Americans who renounce their citizenship. (The Federal Register doesn’t make note of why these people give up their citizenships; we can only guess there are financial considerations in many situations.) Among them, one of the most high-profile examples was Facebook co-founder Eduardo Saverin, who filed to relinquish his U.S. citizenship in September 2011; Facebook had its initial public offering in May 2012. Saverin, a Brazil native, had already been living in Singapore for three years after emigrating to the U.S. in 1998. He could reportedly save as much as $100 million in taxes because Singapore does not tax capital gains. 

Saverin isn’t the only famous renunciation. Singer and socialite Denise Rich also gave up her citizenship last year under her maiden name, Denise Eisenberg. She is well-known as the ex-wife of former international fugitive Marc Rich, a commodities trader who was indicted on 50 counts of wire fraud, tax evasion, racketeering and other charges. But on his last day in office in 2001, former president Bill Clinton pardoned Rich. Reports claimed that Eisenberg gave up her citizenship to be closer to her long-time partner, an Austrian citizen. Austria also has tax benefits for nationals who live abroad for more than half the year.

Chinese kung fu star and actor Jet Li held American and Chinese citizenships, but dropped both in 2009 in order to be a citizen in Singapore. (Singapore prohibits dual citizenship.) In interviews Li indicated that he chose Singapore because it was free from paparazzi and provided language opportunities for his children. 

Most recently, actor Gerard Depardieu made headlines for renouncing his French citizenship to become a Russian citizen in order to avoid France’s proposed 75% tax on earned income above $1.4 million. Russia has a flat 13% tax rate. 

Ready to Tear Up Your Passport?
According to a 2012 study published by the Research Institute of Industrial Economics that examined the mobility of billionaires over the past two decades, “70% [of those billionaires] have migrated from higher to lower capital gains tax country … One-third of the billionaires that moved went to small countries defined as ‘tax havens,’” including Switzerland, Bahamas and Singapore. 

If you want to join the pack, the process to renounce your citizenship isn’t very difficult. 

The U.S. Department of State says that in order to do so, one must “appear in person before a U.S. consular or diplomatic officer, in a foreign country (typically at a U.S. Embassy or Consulate); and sign an oath of renunciation.” 

But before you take the plunge, be aware that if you forego your U.S. citizenship, there’s no turning back. The U.S. government won’t reinstate it if you change your mind later — so think it over carefully. 

In 1965, movie star Elizabeth Taylor attempted to expatriate to keep her European income from being subject to American tax law. But she did not get approval from the State Department because she refused to disavow “all allegiance to the United States of America.” 

And you might be saving money in the long run, but you still have to pay an “exit” tax, according to the Heroes Earnings Assistance and Relief Tax Act passed in 2008. This applies to those whose net worth is $2 million or more, or whose annual income tax average for the past five years is $145,000 or more (as of 2008 and adjusted annually for inflation each year). One exception applies to people who were born with dual citizenships. For the exit tax, a 15% tax applies to capital gains above $651,000, and tax on other assets like a retirement account, would be at the normal income rate up to 39.6%. These assets are taxed as if the individual were selling or withdrawing their monetary funds from the accounts on the last day of their American citizenship.

Already Living Abroad? 
So is giving up your rights and privileges as a U.S. citizen worth it? If you live and conduct business mostly in the U.S., it may not be the best decision. Renouncing your citizenship isn’t just about taxes— it also means no more protection from the U.S. government; possible issues with travel visas, including traveling and staying in the U.S. for long periods of time.

But it may be worth it if you already live in a foreign country. The U.S. is one of the few nations that taxes its citizens regardless of where you live in the world. As long as you remain a U.S. citizen, you will be taxed on your income even if you’re living abroad. But if you aren’t a citizen and live in a foreign country, you don’t need to pay any income tax. 

“[Renunciation] seems to be more pronounced with Americans, and that’s more with Americans currently living abroad,” Green said. “It’s easier if you’ve already left the country. There are less factors involved [in changing citizenships].”

In the case of Saverin, he was already living in Singapore and did not have deep ties to the U.S. because he hadn’t been here very long. In his case, the financial benefits were clear: he would’ve paid a 35% federal tax rate in the U.S. in addition to 15% on capital gains, while in Singapore his tax rate would be  20% at most and no capital gains tax. 

So how would your tax burden stack up? If you earn $1 million a year, that’s almost $396,000 you’re keeping in your pocket (based on the top 39.6% income tax rate) if you said goodbye to the U.S. and took up residency in a place like Monaco, which doesn’t tax income at all. If you were to earn the median household income of $50,054, according to the Census Bureau, then you’d be saving $12,500 (based on a 25% federal tax bracket).

The chart above shows the growing trend of expatriates in the U.S. The Federal Register first started recording the number in 1997. (The high number of expatriations that year is thought to be a result of Hong Kong reverting back to Chinese sovereignty, according to tax attorney Andrew Mitchel. Chinese citizens are not allowed to have dual citizenship, so many Hong Kong residents renounced their U.S. citizenship prior to Hong Kong joining China in 1997, so they would become fully Chinese citizens.)

When it comes to changing nationalities though, Asia seems to be the popular country of choice, Green said. He sees many clients leaving the U.S., the U.K. and other European nations and moving to Asia. “In Hong Kong a person can be paying as little as 15% for income tax, and in New York it can be 40%,” he said. Many Middle Eastern countries don’t tax income at all. 

“If you don’t mind where you live and the tax becomes excessive, then leaving might be a good choice,” Green said. “Countries have less of a hold on people. Governments have to raise more taxes, but they can’t go too far.”

Investing in New Jersey Tax Liens & Three Ways To Profit From New Jersey Tax Liens

From Property Pilot comes: Investing in New Jersey tax liens is extremely lucrative. Not only do tax liens return high interest rates for the lien holders, but large profits can also be made if an investor buys a property “out of tax foreclosure”. The trick to succeeding lies in finding the properties that provide these money-making opportunities while weeding out the properties that lack sufficient equity. Knowledgeable investors turn to data sources that provide up-to-date information as to the property, the foreclosure and comparable sales before making an investment decision. These same investors also know the rules of the game and know how to profit.

Investing In Tax Liens Can Be Extremely Profitable With The Right Information

In New Jersey, tax liens are sold at public auction when a property owner fails to timely pay the municipal taxes or the municipal sewer and water bill. Investors purchase tax sale certificates (aka “tax liens”) because they generate substantial interest income – usually at 18% interest plus allowable costs and fees. Additionally, when subsequent taxes go unpaid the investor (aka the “tax lien holder”) can also pay such subsequent taxes and roll those amounts into the total amount owed. These, too, gain interest at 18%. Sometimes the initial interest rate on a tax sale certificate is lower than 18%. This is usually done in order for a bidder to outbid the competition in order to acquire the certificate. For instance, the bidding at public auction will start at an interest rate of 18%. But if the bidding is competitive and the rate is bid down to, for example, 10%, the winning bidder will earn only 10% interest on the initial certificate. However, the subsequent taxes paid remain unaffected and this same tax lien holder will generally receive 18% interest on these subsequent amounts.

After 2 years, if the property owner has not paid back the amounts due (principal, interest and costs) then the tax lien holder can institute a foreclosure action. In some instances, such as with “abandoned properties”, the foreclosure action can be filed earlier than 2 years. In essence, the foreclosure action contains a demand that either (a) the homeowner pay back the amounts due (principal, interest and costs), or (b) the homeowner and all inferior lien holders will be stripped of any and all interest in the property and title will transfer to the tax lien holder.

Tax Liens Are Generally Superior To All Other Liens.

With few exceptions (for example, an environmental spill fund lien), in New Jersey tax liens are superior to all other liens and judgments, regardless of the timing of such liens and which came first. This means that a tax lien holder who bought a tax lien in 2009 and forecloses in 2012 will strip title from an owner who bought the property in 2005.

Moreover, if this same owner obtained a mortgage loan from Bank A in 2005 and a second mortgage loan from Bank B in 2007, the tax lien holder’s judgment (based upon the 2009 tax lien) will strip both mortgages from the property, too.

How could this large gain occur for a minimal investment that was held for only 3? Simple: if no one redeems (pays off the tax lien by the Court-established deadline in the foreclosure action) then judgment will be entered.

Mortgage lenders and banks generally have the right to pay the tax lien and then roll the amounts paid into their loan balance due; but with so much financial mismanagement occurring due to banks merging and mortgage portfolios being repackaged, bought and sold, it is not uncommon for mortgage lenders to miss the important foreclosure deadlines, and thereby forfeit their liens. The key to profiting is to watch these actions, have updated data and have a plan of action.

Three Ways To Profit From New Jersey Tax Liens

1. Bidding On A Tax Lien. The first and most straightforward way to profit with the tax lien industry in NJ is to attend the public auctions and competitively bid to acquire a tax lien. You will earn the rate of interest originally bid on the initial investment (as stated above, competitive bidding may drop this rate below 18%) and you will earn 18% on subsequent taxes paid.  You can also claim certain costs and fees (for example, the cost of recording your lien). If your tax lien is not redeemed within 2 years, you can foreclose. This will cost you attorney fees for filing the court action, but you can claim a portion of attorney fees and costs in your redemption amount. And of course, if no one redeems then you own the property once you obtain your judgment.

2. Acquiring a Tax Lien Through Assignment

Tax liens are freely assignable. You can buy a tax lien that is ripe for filing a foreclosure action from an investor who bought it years ago. You might also find a tax lien holder who is named as a Defendant in another foreclosure action but has failed to keep active on paying the subsequent taxes, or who has decided to cash in now rather than invest more time and money for a potential larger return in the future.

Often investors will sell and assign their tax liens for redemptive value plus a small “premium”. This alternative allows an investor to avoid tying up their money for the early years of the investment, and requires a financial outlay only after the tax lien becomes ripe for a foreclosure.

3. Buying A Property “Out Of Foreclosure”

The third way to profit is to actually buy the property facing foreclosure. Owners will often sell for less than market value in order to reap some gain before all equity is lost. The key to succeeding here is to identify those properties that have equity, and then to legally satisfy all debts and obtain title and possession for less than market value.

Let’s explore the three options set forth above in further detail, because there are pitfalls to be avoided in order to profit within the tax lien industry. The first option is quite simple, but there are still considerations to be made when bidding. How much are the yearly taxes? How valuable is the property? What do the recent sales in the neighborhood indicate?

FIND TAX FORECLOSURE DATA USING PROPERTYPILOT

All of this data could be obtained through the use of PropertyPilot.com. An investor who buys a tax lien will likely have to pay an initial 6 months or 1 year of taxes for acquisition of the tax lien, plus an additional 2 years of subsequent taxes before foreclosure can be filed. A foreclosure action could typically cost an average of $1,500 to $3,000 depending on how many defendants are required to be named (which would be determined through a title search – an additional $300 cost).

Is there any additional information known about the property, such as whether the owners have died, moved, abandoned the property, etc., so as to improve the odds of the tax lien holder completing the foreclosure rather than merely being paid back their interest? Is the property listed on the NJ Department of Environmental Protection’s list of contaminated properties, possibly adding subsequent costs for clean-up? Are there any visual aspects of the property that cause alarm?

In the end, an investor will have to decide whether the estimated return outweighs the costs, both known and potentially unknown. To minimize risk, savvy investors seek to acquire the most information possible. As stated above, PropertyPilot.com allows a user to obtain mounds of data regarding a property including its assessed value and estimated market value, yearly taxes, contact data for the owners, mortgage data and even neighborhood information.It also provides comparable sales data of like-kind properties with adjustable and searchable limits as to radius of search area (from .25 of a mile to 3 miles radius) and sales dates (from 3 months to 3 years).

Planning for Your Future: Education and Retirement Saver’s Tax Credit

Joe Ferreira for Intuit writes: As taxpayers, we are always looking for ways to maximize our income. The Internal Revenue Service (IRS) offers certain tax credits to help us with our expenses and savings surrounding two financial issues that are of great importance to our future: our education and retirement. These are some of the credits for which you may qualify and be one step closer to your financial success. 

Education Tax Credits

If you, your spouse or one of your dependents paid for higher education or post-secondary expenses in 2012, you may qualify for one of these education tax credits (below this article): The American Opportunity Tax Credit or the Lifetime Learning Credit. These credits are available to help you pay for tuition or other related school expenses, as long as you didn’t pay for them with tax-exempt scholarships. The American Opportunity Tax Credit covers expenses during the first four years of post-secondary education. To qualify, the student must be studying towards a degree; enrolled in school at least part-time during the academic period; and not have been convicted of any drug-related offense.

The Lifetime Learning Credit is not as generous as the American Opportunity Tax Credit, but it is available for students who paid for any expenses related to qualified post-secondary education, whether it was a four-year program or not. Similar to the American Opportunity Tax Credit, this credit can be claimed for tuition and enrollment expenses. You can also claim expenses for required books or equipment if you paid the school directly for them.

	American Opportunity Tax Credit	Lifetime Learning Credit
Maximum Credit	$2,500 per student	$2,000 per household
Maximum Modified Adjusted Gross Income (MAGI)	$90,000 if single, widow or head of family ( $180,000 if married and filing jointly )	$62,000 if single, widow or head of family ($124,000 if married and filing jointly)

Some expenses that are not eligible for these credits include expenses related to housing, insurance, transportation, medical expenses and others that are not directly related to the completion of any type of post-secondary studies. TurboTax can help you determine which credit will provide you with more benefits and which expenses you can include when claiming the credit.

Saver’s Credit

If you have  followed the wise advice of saving for your retirement and you have low or moderate income, the IRS could reward you with up to $1,000 ($2,000 if married and filing jointly) to help you save for your future. Contributions to investment accounts for retirement such as an IRA, Roth IRA, 401 401(k), 403(b), 457(b) and other voluntary contributions could help you meet the requirements to receive this credit, including:

• You must be at least 18 years old
• You cannot be claimed as a dependent by someone else
• You cannot be a full-time student
• You can claim up to 10%, 20% or 50% for the first $2,000 you saved
• The credit amount depends on your adjusted gross income, which cannot be more than:
  • $28,750 if you file as single, married filing separately, or widowed
  • $43,125 if you file as the head of a family
  • $57,500 if you file as married filing jointly

Jim Wang for Intuit writes: Back-to-School: Education Tax Benefits to Offset Education Costs

College is expensive. With student loans rivaling mortgages and other debt for most young professionals, it’s easy to see why it’s a big subject of discussion. Tuition, fees, books, housing, food, and the costs of attending universities are on the rise. My own alma mater, Carnegie Mellon University, was “only” $30,000 when I enrolled in 1998, a princy sum even back then (generous grants and student loans helped a lot). Today, it costs over $60,000 a year! That’s insanity.

If you are looking for a way to offset some of your education costs, the government offers some tax credits and deductions designed to help students and their parents. While these tax breaks won’t completely cover the cost college, they can reduce some of the pain involved.

American Opportunity Tax Credit

The American Opportunity Tax Credit is offered to students who pay qualified tuition (and aren’t claimed as dependents elsewhere), as well as to parents who pay expenses for their dependent students or themselves. Replacing the Hope Credit, the American Opportunity Credit offers some modified rules, which make it available to more students. Normally, the Hope Credit only allowed you to use it on the first two years of post-secondary education, and the modification allows for up to four years, as well as raising the income limits, and expanding qualified expenses.

The popular American Opportunity Credit was set to expire at the end of 2010. However, it has been extended through the end of 2012. This tax credit allows you to claim up to $2,500 per student. The full credit is available for individuals with a MAGI(Modified Adjusted Gross Income) of $80,000 or less, $160,000 for married filing jointly. It is 40% refundable, meaning that you can get up to $1,000 back even if you don’t owe taxes.

Lifetime Learning Credit

Rather than limiting your ability to get tax credits for education expenses for the first four years of college, it’s possible to use the Lifetime Learning Credit to offset your expenses even in graduate or professional school. As long as the educational institution is qualified, undergraduate or beyond, you can qualify for up to $2,000 in tax credits for your expenses. It’s figured on 20% of your tuition and fees, up to the first $10,000. There is a phase out as you reach certain income levels. Parents can claim this for dependent students.

Deduction for Tuition and Fees

Unlike the credits, which are dollar for dollar reductions in how much tax you owe, deductions reduce your income. You still receive a benefit; it just isn’t as pronounced. You can take a deduction for up to $4,000 spent on college tuition, and on related expenses.

Limitations to These Tax Breaks

Realize that there are limitations to the tax breaks you can take. If you claim the Tuition and Fees Deduction, you can’t take any of the credits. Additionally, you can’t claim the American Opportunity and Lifetime Learning credits for the same student in the same year. If you are a parent with multiple dependent students, you can spread these credits around a little bit to maximize your return.

Carefully consider your tax situation as you decide what is best. Remember that a credit is far more valuable than a deduction. For example, a $2,000 tax credit means a direct $2,000 reduction in tax liability. A deduction reduces your taxable income, so assuming you are in the 25% tax bracket, you would need a $8,000 deduction to get the same reduction in liability as a $2,000 tax credit.

Hurricance Sandy Tax Seminar Coming to Toms River Library on March 18

Gregory Kyriakakis from the Patch informs us a tax assistance seminar aimed at helping those affected by Superstorm Sandy will be held at the Toms River branch of the Ocean County Library on March 18. 

Organized by the state Treasury Department's Division of Taxation, the March 18 program from 6 to 8:15 p.m. will bring together representatives from that department, the governor's office and IRS together to help residents as they navigate the reporting of their Sandy-related losses.

"These tax assistance events will provide New Jersey residents with the opportunity to obtain free in-person guidance from tax professionals from the Division and the Internal Revenue Service on a wide range of Sandy-related issues," said State Treasurer Andrew Sidamon-Eristoff in a statement.

Representatives will also provide assistance to recover lost tax documents and reconstruct lost personal or business records. Office of Unclaimed Property personnel will be on-hand to aid with searches for such items as forgotten stock money, lost paychecks, and bank lock box contents.

Additionally, the state’s Division of Taxation, Local Property Tax office will answer questions about property tax and appeal rights due to damages caused by Sandy, according to the library.

A mobile computer lab with eight computers and free WiFi access for those who bring their own laptops or mobile electronics will be available for use, according to the library.

Registration can be completed online, through email, or by calling 609-633-6015, though walk-ins are also welcome. 

Locally, the program will also come to Brick's Ocean County Library branch on Tuesday, March 26 from 6 to 8:30 p.m.