Tax Benefits for Seniors

When you grow old, you are signed up for a lot of perks that you really don't want.  Some of these can be grey hair, wrinkles, aches and pains, and perhaps even health problems.  This article is going to go through some of the tax benefits of growing old.  These are some of the benefits that the government gives away for free that are actually things that senior americans actually are looking forward.

Tax deductions for seniors. People age 65 and older are eligible for larger than usual standard deductions.  If you are single, head of household and over 65 you get to add $1,550 to the standard deduction if you are older than 65 and blind.  If you are married, you only get to add $1,250 but you can add it up to 4 times.  Two questions for each spouse.  If an individual or at least one member of a married couple is age 65 or older, you can deduct medical expenses that exceed 7.5 percent of your adjusted gross income, compared to 10 percent for younger taxpayers.  This would only be if you itemize your deductions.

Relaxed tax filing requirements. People 65 and older can bring in $1,550 more (or $1,250 more per spouse age 65 and older if filing jointly) than younger people before they are required to file a tax return. Seniors can have a gross income of up to $11,850 as individuals or $23,100 as part of a couple where both members are 65 or older before they are required to file a tax return.

Bigger retirement account limits. Workers age 50 and older can defer paying income tax on as much as $24,000 that they contribute to a 401(k) plan, $6,000 more than younger workers. The IRA contribution limit is also $1,000 higher for workers 50 and older, or $6,500 in 2016. The catch is that you are typically required to withdraw money from traditional retirement accounts and pay the resulting tax bill after age 70 1/2. However, retirees age 70 1/2 and older can avoid paying income tax on any amount up to $100,000 that they transfer directly from an IRA to a qualifying charity. Let me repeat that:  The money must transfer directly from an IRA to a qualifying charity.  It can't go into your checking account and you write a check.

No more early withdrawal penalty. Once you turn age 59 1/2, there's no more 10 percent penalty to withdraw money from your IRA.   If you leave your job at age 55 or later, you can begin taking penalty-free 401(k) withdrawals from the account associated with the job you left at an even earlier age.

Social Security payments. You can sign up for reduced Social Security payments as early as age 62 or claim the full amount you have earned at your full retirement age of 66 or 67, depending on your birth year. If you delay claiming your payments past your full retirement age up until age 70, you will earn delayed retirement credits that will further increase your monthly benefit.

Affordable health insurance. Retirees don't need to worry about finding a job that provides health coverage or the sometimes high out-of-pocket costs of health insurance plans purchased through state health insurance exchanges. Once you turn age 65, you can sign up for Medicare. Most retirees don't pay anything for their Part A hospital insurance. The premium for Medicare Part B, which covers doctor's visits and medical services, is $104.90 per month for most retirees in 2016 (although some beneficiaries pay more), which can be deducted from your Social Security check so you won't get a bill. Retirees can fill in some of the co-payments and deductibles by purchasing a supplemental plan and get their prescription drugs covered through Medicare Part D.

Earned Income Tax Credit for the State of California

The State of California now has its own version of the Earned Income Tax Credit (EITC).  The tax credit is refundable.  It can either help pay the tax that you owe or give you a refund from the leftover credit.  This tax credit starts with the 2015 tax year.

This credit is available to California households with adjusted gross incomes of less than $6,580 if there are no qualifying children, less than $9,880 if there is one qualifying child, or less than $13,870 if there are two or more qualifying children.  Your investment income, such as interest, dividends, royalties, and capital gains cannot exceed $3,400 for the entire tax year.  If you do not have a qualifying child, you (or your spouse if you file a joint return) must be between 25 and 65 years old at the end of the tax year.

You qualify for Cal EITC if:
•You have wages and adjusted gross income within certain limits, AND
•You, your spouse, and any qualifying children each have a social security number issued by the Social Security Administration that is valid for employment, AND
•You do not use the “married/RDP filing separately” filing status, AND
•You lived in California for more than half the tax year.

Your qualifying child must meet 3 criteria:

• Relationship - Is the taxpayer’s child, stepchild (whether by blood or adoption), foster child, sibling or stepsibling, or a descendant of any of them.
• Residence - Had the same principal residence as the taxpayer in California for more than half the tax year. Certain exceptions apply.
• Age - Child must be younger than the taxpayer and either a) under the age of 19 at the end of the tax year, or b) under the age of 24 if a full-time student for at least 5 months of the year. A permanently and totally disabled child may be included at any age

Personally, I do not think that many taxpayers are going to be able to take advantage of this tax credit.  I think that the income limits for California are too low.  I think that the California taxpayers should convince the legislature to raise the income limits to closer to what the Federal EITC limits are.

Quickbooks Online Comparison

Quickbooks Onlne allows business owners to be able to access Quickbooks via apps, either on a notebook, cellphone or other mobile device.  You, your employed bookkeeper or your Quickbooks accountant can login to your Quickbooks account from most web browsers.  Quickbooks does suggest using Google Chrome.  The online service helps many businesses that are service based.  Product based businesses may not be a good fit for the online service, but they can utilize other apps to help them streamline the shipping process.

QuickBooks Online benefits include:

• Both your employees and your accountant can share in the same data
• Quickbooks online updates itself constantly
• Online chat with help center
• e-mail of invoices and statements is automatic
• e-mail of reports can be setup to run automatically
• Your data is on the cloud.  No need to backup data - Intuit takes care of it
• Bank and credit card transactions download nightly
• iPad and iPhone apps are free with automatic sync
• Option to receive payments by credit card and ACH electronic payments

Three Subscription levels for Quickbooks Online:

Simple Start:  

• Track income and expenses
• Create estimates and invoices
• Sync bank accounts2 and apps

Essentials

• Track income and expenses
• Create estimates and invoices
• Sync bank accounts2 and apps
• Manage and pay bills
• Instant sales and profit reports

Plus

• Track income and expenses
• Create estimates and invoices
• Sync bank accounts2 and apps
• Manage and pay bills
• Instant sales and profit reports
• Track Inventory
• Prepare and print 1099s

I am a Quickbooks Proadvisor.  If you are interested in talking about getting Quickbooks Online started for your company, I am available to talk about it.  I can be reached via email at ricksmobiletaxservice@gmail.com or via phone at 714-723-2694.  Please leave a message if you do not reach me on the phone and I will give you a call back.

Rental Property

Two weeks ago, I worked on a return for a tax client who owned real estate.  She owned a 4 unit apartment building.  She lived in one of the units and rented out the other 3 units.  One of the uses of Schedule E is to report income and expenses related to renal property.

This week, I worked on a tax client that had quite a complicated return.  Part of the complication had to do with the fact that she had a property that she owned and rented out to a relative.  In order to let the IRS know about any rental income, a Schedule E is the form that you need to file with the IRS in order to report it.

Here is a link to the tax form we will be talking about, the schedule E:   IRS Form Schedule E

On a Schedule E, You list the address of up to three properties that you own.  You list the type of rental property, the rental days and personal use days during the year.  Personal use days are days that you use the property for your personal use.  The other days are known as rental days.  You can only deduct expenses for the percentage of the year that the rental property was available for rent.  You then list the rental income.  You then list the expenses that you had for the rental unit.  These are listed on the Schedule E, but I thought I would highlight some of the more popular.  Note that these costs start the day you convert this to a rental property.  This means when you start to offer the unit to the public as available to rent.

Advertising - this includes any costs associated with renting the unit, whether or not they were successful.  Auto and Travel - this can be any mileage or travel associated with collecting rent or showing the property.  It actually can be very lucrative as it is at 57.5 cents per mile.  Mortgage Interest - this is the amount of interest you pay to your bank.  Taxes - This is any taxes associated with the property and is usually Property taxes.  Utilities - these are any costs for utilities that you do not pass onto your tenant.  Management Fees - these are costs that you have to pay in order for your property to be managed.


If you fix something within your building, you need to decide whether it was a repair or it was an improvement.  A Repair can be deducted in one year.  An improvement can be depreciated over 27.5 years.  The IRS has said that improvements are anything that undergoes either a betterment, adaption or restoration.  If you are repairing normal wear and tear to a building, it is a repair.  But if you are making a major improvement and increasing the resale value, you need to classify this as an improvement.  Improvements increase the basis of a property.  The basis is basically what you bought the property for plus any improvements less the depreciation of a property.  Another related expense is depreciation.  You can depreciate the purchase of the building and any improvements.  You need to consider when they were done and depreciate them over 27.5 years.  This is a major write off so it is important to keep good accounting records regarding improvements.

Some advantages of having a rental property are that this is money that you have received.  You can reduce your income on such schedule a deductions as mortgage interest, travel and property taxes without having to have your deductions together be more than the standard deduction.  You also can have your standard deduction on the 1040 and have the ability to reduce your income on the schedule e.  In otherwords you can have both.

Tax Preparer Requirements and things to watch out for

When you selected the tax preparer that you currently use, what type of questions did you ask this person?  How did you find out whether this person who is trustworthy or not?  In the last few weeks, I have read many articles that are stating that Enrolled Agents are the only people who you can trust to do your taxes.  In my opinion, you need to go a little deeper than only looking at the training of the person.  You need to find out the person's journey as well as his history.

The IRS has a new program that started in 2014 called the Annual Filing Season Program.  This is a voluntary program that all tax preparers who are not attorneys, certified public accountants or enrolled agents are eligible to join.  To be eligible for this program you must register with the IRS as a tax preparer and obtain a PTIN or Preparer's Tax Identification Number.  You must also take at least 18 hours of a refresher course.  (I live in California, my state requires 20 hours in a CTEC approved educator course).

In California, the state that I am licensed in, in order to become a tax preparer, you must do the following.  First, you must take a 60 hour course from a CTEC approved provider within 18 months of applying.  Second, you must purchase a $5,000 tax preparer bond from an insurance/surety agent.  Third, you must obtain a Preparer's Tax Identification Number.  This requires you pay a fee to the IRS of $50.  Lastly, in California you must register with CTEC and pay their $33 fee.  Each year in order to renew, we are required to take a 20 hour refresher course.

By requiring all of the fees and education, the IRS and CTEC in my state, have done all that they can in order to make sure that unqualified preparers and preparers who are dishonest are weeded out.  However, you know just as well as I do that there will be ones who get through and are going to be out there.  There are dishonest people in all of the designations that the IRS has - Attorneys, CPA, Enrolled Agents and Tax Prepaerers.  In my opinion, you need to protect yourself by asking questions.

Check the person's qualifications - Does your preparer have a PTIN?  All preparers are required to have a PTIN.

Check the preparer's history - Does the Better Business Bureau have any reports of questionable returns or shady dealings with any clients?  For those with a licensing board, you should check whether or not his/her license is current and whether he/she had had any complaints.

What is the preparer's fee structure?  Watch out for any preparer who's fees are a percentage of your refund.  Reputable preparers have fees based on the documents that they prepared.  Also, you need to watch out for preparers who tell you that they can get a greater refund than others.

Check to make sure that the Preparer is accessible after tax season.  If the preparer is going to leave the country or move after that date, make sure you have a forwarding phone number and/or address.  Flying the coop is against the law.  It also is a red flag as to whether you want to use that person as a preparer.

The preparer should require information from you in order to do your return.  They should ask for forms you have recieved in the mail.  They should ask for your financial records or should ask for summary of your financial records when they interview you.  If they do not, it is a sure sign that they are making numbers up and might be falsifying records.

The preparer should never ask you to sign a blank return.  The preparer can be assessed a fine just for asking you to do this.  Besides, how do you know what the preparer is going to fill in the blanks?  By signing the return, you are agreeing that you agree with it and are responsible.

Make sure you review the entire return before you sign it.  The preparer also must sign the return and put his PTIN on the form.  If the return is being electronically filed, the EFIN must put a pin on the return that only they know.  This is called their electronic signature.

Current CTEC Regulations

Estimated Tax

According to the IRS website, estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.

Estimated tax is used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

There are different forms that you need to use in order to figure out estimated tax.  If you are a sole proprietor, partner, S-corporation shareholder or self-employed individual, you need to use form 1040-ES in order to figure out and pay your estimated tax.  If you are a corporation, you will need to fill out form 1120-W.

The basic idea is that whichever entity that you are, you need to estimate your taxes for the next year.  You figure out what the deficit will be based on the income that you projected.  If the deficit or the amount of tax owed is going to be greater than $1,000, you need to make payments of 1/4 of the deficit each quarter.  If you end out owing greater than $1,000, you will be penalized for not paying enough estimated tax.  For corporations, this number is greater than $500.

If you have a W-2 job, you can get around having to pay estimated tax by asking your employer to take more taxes out of your paycheck to compensate.

You do not have to pay estimated tax for the current year if you meet all three of the following conditions.
•You had no tax liability for the prior year
•You were a U.S. citizen or resident for the whole year
•Your prior tax year covered a 12 month period

In order to figure out how much estimated tax you need to pay, you need to use the appropriate form to figure out your estimated tax.  To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.  Either you can do this or you can ask your tax professional.  The form will list the amounts that you need to pay the Federal Government and on which due dates.  Each quarter has its own due date that is listed on the form.

Some things to remember is that if you estimated your income incorrectly in the beginning of the year, you need to figure out the estimates again.  There is no need for you to over pay your estimated taxes, especially when the current year does not match your estimates.  If you were owing taxes for last year, you may also have to make payments on last years taxes owed.

Tax Information for new parents

You and your wife are expecting a child before the end of the year?  That is great!  Welcome to the wonderful world of parenthood.  With parenthood comes a lot of changes including diaper changes, putting a baby car seat in the car, and tax advantages.  What?  You had a child because you loved your wife and you didn't know that there were really great tax reasons to have a child?  

To get ready for tax time, the first thing that you need to do is request a social security number for your new bundle of joy  Without the social security number, you will not be able to claim your new son or daughter on your taxes.  Most hospitals have the forms on hand in order for you to apply for the social security number.  They usually hand you the form right after they had you the form for the birth certificate.  It is easiest to do at the hospital.

 Another benefit is the child tax credit.  Put simply, the government gives you $1,000 per child as a tax credit.  Tax credits are good.  This is money that will either pay any tax that you owe or add to your refund.  A second benefit is the dependent exemption.  This lowers your tax base, or the amount of money that you will have to pay taxes on.  You get to lower your tax base $4,000 per dependent.  Dependents are you, your wife, your son/daughter among other members of your family who depend on you to provide for them.

If you are not married, having a child could change your tax status.  Your tax status could change from Single to Head of Household.  In order to be head of household, you need to have a dependent and you need to provide at least 50% of what they need in order to survive.  The advantage of being in the Head of Household status?  Head of Household gives a better tax rate than single.  Don't get me wrong, it is not as good as Married Filing Jointly, but it is an improvement over Single.

Another benefit would be the Child and Dependent Care Tax Credit. Again, tax credit is good.  It means money to pay off the taxes the government says that you owe or money that will be added to your refund (This is referred to as a refundable credit).  The Child and Dependent Care Tax Credit requires you have a son or daughter and that you pay someone to watch him or her.  You will be able to get a credit of some of that money back as a credit.  It is a percentage that changes based on the amount you make.

One last tax benefit would be the Earned Income Tax Credit.  This tax credit requires you to work and make money.  You get a tax credit based on your income and the amount of dependents that live with you.

Taxes for same-sex couples, commonly referred to as registered domestic couples

In 2013, the Federal Government changed the way that same sex couples who are lawfully married are treated.  For federal tax purposes, the IRS looks to state or foreign law to determine whether individuals are married. The IRS has a general rule recognizing a marriage of same-sex spouses that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.

For the tax year 2013, the IRS held that same-sex couples must file using a married filing separately or married filing jointly status.  The same-sex couples were allowed to admend their 2012 and 2011 tax returns after the ruling to married filing separately or married filing jointly status.  

What does this mean for same-sex or registered domestic partners going forward?  It means that if the same-sex couple was married in a state that recognizes same-sex marriage, they are married and need to file their tax returns under the status of married filing separately or married filing jointly.  Whether the state that they live in recognizes same-sex marriage is not an issue.  The determining factor on whether or not they are required to file as a married couple is which state they were married in and whether or not that state recognizes same-sex marriage.

A few questions have come up regarding this ruling.  One is whether or not one spouse of the same-sex marriage can be the dependent of the other.  The other question is whether or not one same-sex spouse can file head of household.  The answer is really very simple.  Look at the rules for traditional couples.  Traditional couples can not be the dependent of the other.  One member of a traditional couple can not file head of household.  Therefore, same-sex couples are the same and the answer to both questions is no.

The basic fundamental to bear in mind is that the rules that are currently applying to traditional couples are now going to also apply to same sex couples.  This will go for such questions as which parent will be able to claim the child on their tax return for a couple that files married filing separately.  The answer is the one who the child lives with a greater percentage of the time.  If this is equal, the tiebreaker is whichever parent has the greatest adjusted gross income.  If one spouse itemizes his or her deductions, then both spouses must itemize their deductions.  This is just the same as traditional couples.  

Tax Considerations for Active Military Personel

You are an active member of the military.  You and your spouse both work for the armed forces.  You have a family and you are stationed stateside on the same base as your spouse.  Being a typical military person, there are some considerations that you are probably not aware of or did not think of that you can deduct because of the expectations of your superior officers as well as the general public.

Itemized Deductions

The following will be a list of deductions that military personnel do not think about but are actually write offs due to the fact that they are not reimbursed for these job related expenses.  One of these is your appearance and how you must get a haircut more often than most people.  You have to keep yourself looking like a military person.  Another big ticket item is your uniform.  You are required to purchase your uniforms, boots, socks and all other parts of your uniform but are not reimbursed.  Another item is all of the patches that need to be sown on.  Many of our military people I find get the patches professionally sewn on.  The cost of paying a tailor or other professional to sew this on to your uniform can be claimed.  Another cost is dry cleaning.  You can write off the amount of the dry cleaning bill for the uniform.  This is because it is a job expectation and reasonable for your profession.

Special EITC Rules

You do not have to report your nontaxable pay you receive as a member of the Armed Forces as earned income for EITC. Examples of nontaxable military pay are combat pay, the Basic Allowance for Housing (BAH), and the Basic Allowance for Subsistence (BAS). The amount of your nontaxable combat pay is on your Form W-2, in box 12, with code Q.  But, you and your spouse can each choose to have your nontaxable combat pay included in your earned income for EITC. Including it as earned income may decrease the amount of tax you owe and may mean a larger refund. Calculate your taxes with the combat pay as earned income and without to find out what's best for you.  If you make the election, you must include in earned income all nontaxable combat pay you received. You can't choose to include only a part of the nontaxable combat pay in earned income.

Special Tax Considerations for Veterans

Disabled veterans may be eligible to claim a federal tax refund based on either an increase in the veteran's percentage of disability or the combat-disabled veteran applying for, and being granted, Combat-Related Special Compensation, after an award for Concurrent Retirement and Disability.

To do so, the disabled veteran will need to file the amended return, Form 1040X, Amended U.S. Individual Income Tax Return, to correct a previously filed Form 1040, 1040A or 1040EZ. An amended return cannot be e-filed. It must be filed as a paper return. Disabled veterans should include all documents from the Department of Veterans Affairs and any information received from Defense Finance and Accounting Services explaining proper tax treatment for the current year.

It is only in the year of the Department of Veterans Affairs reassessment of disability percentage (including any impacted retroactive year) or the year that the CRSC is initially granted or adjusted that the veteran may need to file amended returns.

 As you can see, there are many things to consider when you are serving in the military.  There are a lot of deductions that you might not think about.  I also included some special EITC rules and Special Tax Considerations for Veterans.  The important thing, especially for the deductions is to keep good records of what you are spending so that you can make sure to write off the total amount.

Business Expenses

Super bowl weekend, what were you doing?  I am specifically talking about Sunday afternoon to early evening.  If you were like the average American, you were either in a bar watching the big game or you might have been at a friend’s house watching the game with your buddies.  Several images come to mind when you talk about the Super Bowl.  First, the obvious is the football game itself, this year with the Denver Broncos taking on the Carolina Panthers.  Second, especially if you are at a friend’s house, the image is the food.  Usually everybody brings their best dish.  Images of Pizza, Pasta, Hot Wings, Burgers and other foods come to mind.  One last image that I want to talk about this week is the commercials.

I read a survey last week that stated that over 25% of people who watch the Super Bowl game do not actually watch the game.  They are there to watch the commercials.  With so many people paying attention to the hype of the commercials, it is understandable how Fox Sports is able to get companies to ante up an average of 4 million dollars per 30 second commercial spot.

Because of this, and with so many people starting new businesses this year, I thought that it would be good to go over what the rules are for deductions.  To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.  This rule can actually apply to any of the expenses in part II above. 

To take Advertising as an example, as a large company such as Coca-Cola, you should be able to deduct the 4 million dollar Super Bowl spot.  This spot would be a pretty hard sell if you are a mom and pop company.  You get the idea, it needs to be ordinary and necessary in your business environment.  It also needs to be directly related to your business.  Keep in mind that Super bowl commercials are not the only advertising that could be included.  You can deduct as advertising any expense that helps get your goods or services out to the public.  You can also deduct any signage that helps the general public know where you are.  Don’t forget about any advertising in the newspaper, or the person who distributed leaflets that you had printed.  If you signage is expected to last more than a year, you may need to depreciate this over more than one year.

These rules may change by the next super bowl.  I understand that there is a proposal to cut the amount that will be allowed to be deducted by 50%.  It is part of the nation and the tax reform that is going on as of late with this congress.  It will be interesting to see if this does take place.  The advertising dollars have significant positive influences on the companies selling advertising media.  It will also mean that the companies shelling out the large dollar ads during Super bowl.

Now that the Super Bowl is over, the world will concentrate on the next big sporting event for advertising.

Self Employment Income and Self Employment Tax

Everybody knows about the W-2 type of employees.  These employees work for a company and make a certain wage.  They get paid once every two weeks and taxes are taken out of their wages and they receive a check for the difference from the company.

Today, we are going to talk about Self Employment.  These are people who provide goods and services for a company or private citizens and get paid a flat rate without taxes being taken out of the amount that they are paid.  The IRS calls people who are self employed "independent contractors".  These people control the methods and means by which they provide services to others. The independent contractors are paid based on invoices that they send to companies.  The company pays the invoices based on the terms that are agreed upon between the independent contractors and the company or private citizen.  

At the end of the year, companies are required to send 1099s to these independent contractors if they pay them over $600.  The independent contractors are actually businesses if you think of it.  The simplest of companies is just the one individual working who is referred to as a sole proprietorship.  This just means that it is just a single person working.  The sole proprietorship that is owned by just one person files his taxes using the 1040 form but also includes the Schedule C to list his income and expenses.  He will be taxed based on his profit from the business that is listed on the Schedule C.  Self employment profit increases the income that will be subject to tax.  Self employment losses decrease the amount of income that will be subject to tax.  The following are some of the self employment expenses that will reduce the income on Schedule C:  advertising, car and truck expenses, commissions paid, insurance, interest, legal and professional services, office expenses, rent or lease expenses, repairs and maintenance, supplies, taxes, business travel, business meals and entertainment, and utilities, including telephone expenses.   

Self employment tax is calculated on Schedule SE (Self Employment Tax).  It is attached to the 1040 form.  Before adjusted gross income is calculated, there is an adjustment on the 1040 form that reduces the income that is subject to tax by 1/2. The self-employment tax is paid on self-employment profit. You need to pay self-employment tax if you had net earnings from self-employment of $400 or more.  The self-employment tax rate for self-employment income earned in calendar year 2015 is 15.3% (12.4% for Social Security and 2.9% for Medicare).  Taxpayers pay self-employment tax on 92.35 percent of their self-employment profit up to net earnings of $118,500.  The self-employment tax increases the total tax on Form 1040. 

Tax Benefits for Students

One of the many questions that I get asked is what are the tax benefits for today's students who go to the colleges and universities?  The answer is there are two tax credits:  American opportunity tax credit and lifetime learning tax credit.  There are also two deductions, which are not as good as tax credits:  tuition and fees deduction and student loan interest.  I will discuss all four of these below.

In order to be able to quality for the education credits, three things need to happen.  First, you, your dependent or a third party pays qualified education expenses for higher education.  Second, the student needs to be enrolled at a eligible educational institution.  Third, the eligible student must be you, your spouse or a dependent on your tax return.

American Opportunity Tax Credit - In order to take this credit, the student must be enrolled at least half time at least one semester in a program leading to a degree, certificate or another recognized educational endeavor.  The student must not have a 4 year degree already, so Masters and higher degrees are ineligible.  You can receive 100% of the 1st 2,000 of the expenses and 25% of the next $2,000 of the expenses for a total of $2,500.  Only 40% of the credit is refundable, which means if you owe no tax you only receive a maximum of 40% of the credit.  The qualified expenses must be tuition and other expenses of a qualified educational institution that are required for enrollment.

Lifetime Learning Credit - This credit is a little easier to receive.  You cannot receive both credits.  It is either one or the other.  You do not have to be enrolled in any type of program.  You only receive 20% of the first $10,000.00.  This credit is not refundable, in other words if you don't owe any tax, you don't receive the credit.  The does not have to be an educational institution.  It can simply be for improving job skills.

Tuition and Fees Deduction - This deduction is a little different.  You must not have received either of the two credits above.  This is a deduction which reduces your taxable income.  A tax credit reduces the amount of tax you owe.  Tax credit is much better.  You can receive up to $4,000 that you spent in the tax year as a deduction.  The student must be enrolled in a qualified program of an eligible institution.

Student Loan Interest - This is an after college benefit.  It allows you to reduce your taxable income by the amount of student loan interest that you paid during the tax year.  It must be a qualified student loan that you are legally obligated to pay.  You cannot take this an file Married Filing Separately.