Take Advantage Of Education Breaks

Offset Tax With Child-Related Credits

While deductions and exemptions lower taxable income, credits actually offset income tax, dollar for dollar. In 2012, you can claim a child tax credit of $1,000 for each qualifying child who is under age 17 on December 31. This credit begins to be phased out with modified AGI in excess of $110,000 for married taxpayers filing joint returns, $75,000 for unmarried taxpayers, and $55,000 for married taxpayers filing separately. Be aware that the child credit IS slated to drop to $500 in 2013.

Look into claiming the household and dependent care credit if you pay child care expenses so that you (and your spouse) can work. Up to $3,000 of expenses ($6,000 for two or more dependents) can qualify, and the minimum credit rate is 20%. Your child must be under age 13. This credit is also allowed for household and other expenses of canng for a disabled spouse or other qualifying adult while
you work. As the tax law stands, the credit will be less generous beginning In 2013.

Take Advantage Of Education Breaks

The tax law also has a few breaks to help taxpayers with qualifying higher education expenses. OUf accompanying table compares the American Opportunity Credit with the Lifetime Learning Credit. Looking ahead to 2013, unless Congress legislates otherwise, the American Opportunity Credit will be gOing away to be replaced by the less generous Hope Scholarship Credit.

  • If you are eligible to claim your student child as a dependent, but choose not to, the child may be able to claim an Amencan Opportunity or Lifetime Learning Credit for qualified tuition and related expenses you paid. This move can be a family tax saver if you earn too much to claim the credit yourself and your child has enough income to owe taxes. Note that the child cannot claim the personal exemption you've given up.
  • Paying tuition for your child's first semester of 2013 in 2012 might Increase your education credit(s) for this year.

Contribute the 2012 maximum of $2,000 per beneficiary to a Coverdell Education Savings Account (ESA) if you meet income requirements. This amount IS scheduled to be cut to $500 In 2013. In 2012, tax-free distributions are allowed for certain elementary, secondary, and extended day program expenses, as well as for qualified higher education expenses. As the tax law currently stands, tax-free distributions will be limited to qualified higher education
expenses starting next year.

Tuition Breaks For The Year
  American Opportunity Credit Life time Learning Credit
Maximum amount $2,500 per student 2,000 per tax return
Qualifying education First four years of Undergraduate undergraduate graduate, job training courses
Income limits No credit if modified AGI reaches $90,000 (unmarried) or $1 80,000 (married joint) Phaseout applies No credit If modified AGI or reaches $62,000 (unmarried) 5124,000 (married joint) Phaseout applies
Note. You may not cJaim both credits In the same year for the same student's expenses, Other restrictions apply.

If you've been saving for a child's or grandchild's college expenses in a Coverdell ESA and that child has qualified elementary or .secondary school expenses in 2012, consider withdrawing funds from the account to pay those expenses before year-end 2012. You might also consider making a contribution to a Section 529 plan* to restore the college savings you withdraw, especially If you've already made the maximum ESA contribution for 2012. like a Coverdell ESA, a Section 529 plan offers the potential for tax-deferred growth and plan withdrawals for qualifying higher education expenses are tax free.

Review Your Estate Plan

And, while you're considering taxes, you may want to review your estate plan. The current glft- and estate-tax exclusion amount allows you to transfer up to $5.12 million gift- and estate-tax free. In 2013, this exclusion amount is scheduled to be cut to $1 million. In addition, the "portability" rules permitting a surviving spouse to use a deceased spouse's unused exclusion amount are slated to expire at the end of 2012.

*CertaIn benefits may not be available unless specific requirements (e.g., residency) are met. There also may be restrictions on the timing of distributions and how they may be used. Before investing. consider the investment objectives. risks, and charges and expenses associated with muniCIpal fund securities. The issuer's official statement contains more information about municipal fund securities, and you should read it carefully before investing.

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