Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.
Here are a few non-obvious considerations.
The NY State 529 College Plan: College isn’t cheap, but you can save a few dollars with the NY State 529 college plan, even if you or your child is presently in college, and you are paying the expenses. The plan allows you to contribute up to $5,000 each year, and an equal amount from your spouse. If you are going to pay tuition, fees, books, supplies, even room-and-board within a few months, just make a contribution to the plan now, and then take out the money in a couple of weeks. Many of you are in the eight percent to 10 percent effective tax range for New York. That means that, by following this suggestion, you can save eight percent to 10 percent on your contribution to the plan, and get the savings back on your tax return. Can you use an extra $800 or $1,000? To compute your effective tax rate, divide your total tax (Form IT-201, line 61) by your taxable income (Form IT-201, line 39). Attention grandparents, aunts, uncles, friends of the family: This savings is available even if the student is not your dependent. (If anyone would like to help me out with my kid’s college, please contact me.)
Series EE Or I Bonds: Did you receive a 1099 from your bank for cashing in series EE or I bonds? Did you cash in those bonds to pay for you, your spouse, or your kid’s college? (Many non-professionals miss this deduction.) Here are the rules:
- The bonds had to be issued after 1989,
- In your name (not in the name of your child),
- You had to be age 24 or older before the bonds were issued, and
- Your adjusted gross income has to be is less than: $86,100 if single or head of household; $136,650 if married filing jointly or qualifying widow(er) with dependent child.
In addition to knowing the tuition and scholarship amounts, you will need:
- The total amount (principal and interest) you received, and
- The face amount of the bonds cashed in, or the interest received.
Tuition Deduction: If you cannot use the “American Opportunity Credit,” you must prepare both your federal and NY State tax return using the “Lifetime Learning Credit” verses the “Tuition Deduction.” This is because the “Tuition Deduction” also affects your New York State tax return. Using good tax software, this will only take a few minutes to compute, and the savings can be several hundred dollars.
Employee Business Expense vs. the Lifetime Learning Credit vs. the Tuition Deduction: If the educational courses were for you or your spouse to maintain or improve your skills at work, your computation comparison has to also include deducting these as part of your employee business expenses. This also is a comparison which includes the state results.
NY State College Tuition Credit Or Itemized Deduction: Your choice here is between a $400 per student credit, or an itemized deduction of $10,000 per student. The itemized deduction may produce a better savings if you itemized on your federal return. Using a withdrawal from the 529 plan is allowable for this computation, and only undergraduate tuition qualifies. If you are a non-resident, or part-year resident of New York, you can only claim the tuition itemized deduction, and only if you itemized your deductions on your federal return.
Next Question: What if I do not claim my child as a dependent, (s)he has income, and files on their own? Which deductions or credits are I and my child entitled to claim?
Final question: Do you really want to prepare your own tax return?
(Worried about an IRS audit? Avoid what’s called a red flag. That’s something the IRS always looks for. For example, say you have some money left in your bank account after paying taxes. That’s a red flag.)
Have a good week.
Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.