New Federal Tax Rules Can Boost Tax Savings & Reduce Debt

CCCS OFFERS VALUABLE TIPS FOR KEEPING MORE MONEY IN YOUR POCKET AT TAX TIME

While consumer confidence is at an all-time low, some tax refunds could reach an all-time high, due to recent changes in federal tax regulations. From earned income and home sales to education and child adoption credits, new federal tax rules could put more money back into the household budgets of many individuals and families.

Consumers can benefit from several advantageous tax changes and the local Consumer Credit Counseling Service recommends consumers investigate various tax credits that could be profitable to their bottom line, including state income tax credits that may have changed. CCCS of South Texas is a member of the National Foundation for Credit Counseling, Inc. (NFCC TM), a nonprofit organization that provides quality credit counseling, debt reduction services and financial wellness information.

"There are several changes in the federal tax laws that offer consumers new opportunities to pay down debt and increase savings," said Kim Womack, director of community relations. "Helping consumers understand beneficial tax regulations is one of many ways CCCS is working with consumers to improve their financial knowledge and money management skills. Our goal is to help consumers get more mileage out of their tax refunds and enhance their financial wellness."

CCCS suggests consumers check tax forms or consult with IRS representatives or tax specialists on eligibility for these and other federal tax credits:

Among the new federal tax reforms are adjustments to Earned Income Tax Credit (EITC), a tax credit for individuals and families intended to offset the cost of Social Security taxes and provide an incentive for low-income taxpayers to work. To be eligible for a full or partial credit, a single taxpayer with two or more children must have an adjusted gross income of less than $33,178. The income level is different for those with one child or no children and couples who are married, filing jointly. Eligible foster children must live with a guardian more than half a year, reduced from a one-year rule. Earned income no longer includes nontaxable income such as supplement military payments for housing or combat pay. Consumers are encouraged to speak to a professional regarding other tax changes and eligibility under the EITC. Taxpayers who qualify for the EITC may also be eligible for free income tax preparation and electronic filing by participating tax professionals.

The Home Sale Exclusion Rule, which applies to excluding gain on the sale of a principal residence, is available for qualifying sellers. Under this rule, the maximum exclusion amount of $250,000 ($500,000 for a married couple filing jointly) is limited to the percentage of the two years that individuals fulfilled the requirements. Thus, a qualifying seller who owns and occupies a home for one year (half of two years) - and who has not excluded gain on another home in that time - may exclude half the regular maximum amount, or up to $125,000 of gain ($250,000 for most joint returns). The proportion may be figured in days or months.

Consumers should also be aware of changes to education related tax incentives, including an increase in the contribution limit for Coverdell Education Savings Accounts. Though ESAs, formerly known as Education IRAs, do not give immediate tax benefit, they allow beneficiaries to accrue tax-free earnings for qualifying educational expenses. Several changes to the contribution rules have occurred, most notably, the increase of the annual contribution limit to $2,000 per beneficiary, up from $500. The income eligibility for most married contributors filing jointly is now $190,000. Corporations, tax-exempt organizations and other entities may now contribute to Coverdell ESAs, regardless of income level.

Additionally, three education deductions, under the new Education Incentives, are now available adjustments for taxpayers filing either Form 1040 or 1040A. Specifically, Tuition and Fees Deduction - which allows most taxpayers with adjusted gross incomes up to $65,000 ($130,000 on a joint return) to deduct up to $3,000 for tuition and fees paid to attend an accredited college, university or vocational school. There are restrictions and consumers should be careful to review the changes. Also new is the Student Loan Interest Deduction - where interest on student loans for higher education may now be deducted whenever paid and regardless of the age of the loan. Prior to 2002, only payments made during the first 60 months of the required repayment term counted. Voluntary payments, for example, that were made prior to the student's graduation, did not previously qualify. Now this deduction is available to most taxpayers with incomes up to $65,000, with the deduction amount phasing out as income increases above $50,000. For married couples filing jointly, the phase-out range is from $100,000 to $130,000. Finally, educators who work at least 900 hours during a school year as a teacher, instructor, counselor, principal or aide, may take advantage of a Deduction for Educator Expenses whereby they may deduct up to $250 of qualified out-of-pocket expenses for books and classroom supplies. Persons in public or private elementary or secondary schools (including kindergarten) can apply. Educators must reduce qualifying expenses by any nontaxable earnings received from Coverdell ESAs, qualified tuition programs or educational savings bonds.

Among the other federal tax law changes consumers should also review is the Adoption Credit for qualified adoption expenses doubled to $10,000. More taxpayers will be eligible for this credit as the modified adjusted gross income (AGI) limit was increased. Now a taxpayer can have a modified AGI of up to $150,000 without having a reduction in the adoption tax credit. Qualified adoption expenses include reasonable and necessary adoption fees, court costs, attorney fees, travel expenses and other expenses directly related to the adoption of an eligible child. Standard Mileage Rates were increased to 36.5 cents a mile for business miles and 13 cents a mile for travel related to qualified medical and moving expenses. And, consumers may now take advantage of Higher Contribution Limits for Roth and Traditional IRAs. Taxpayers may contribute up to $3,000 ($3,500 if age 50 or older prior to year's end) to either traditional or Roth IRAs. This figure is an increase from a $2,000 limit in the prior year. Contributions can be made until the due date for filing your return for that year, not including extensions.

All federal tax forms, instructions and publications are available by calling 1-800-TAX-FORM (1-800-829-3676). The IRS TaxFax offers forms and instructions by return fax - call 703-368-9694 from a fax machine.

Expecting a Tax Refund? Don't blow it on unnecessary spending. Seek helpful money management advice on ways to reduce debt and save more money in the future from CCCS of South Texas. This United Way agency has certified credit counselors who offer financial management and debt reduction services that are low-cost - and free. For more information on CCCS, call 800-333-4357 or visit www.cccsstx.org.