I started to write a quick post about the IRS giving extra
filing time because of the recent weather and discovered that Taxgirl has a
great post about just that. I can’t think of anything to add to her post, so
read all about it here.
First, let’s look at sales taxes. This weekend 10 states will have sales tax holidays on selected items that a parent with a back to school list might be purchasing. The actual exempt items and their costs vary by state so check the rules for your state. Taxgirl has put together all the relevant info along with links. She also mentions several other sales tax holidays later in the month. Unfortunately, Kansas isn’t having a sales tax holiday but both Missouri and Oklahoma are. Who knows, if it cools a little this weekend, I might slip over the border and look for some new shoes for tax school.
Next up are income taxes. Specifically, I want to talk about records and receipts for your back-to-school expenses. Nope I’m not talking about that cute dress or awesome backpack you bought for the first day of school (hopefully with no sales tax.). I want to talk about college expenses; tuition, fees, books, supplies and room and board. (And in some cases K-12 expenses.) And it doesn’t matter if the student is a young person going full time or a parent picking up a class or going back part time, you should to keep records of what you spend for your education and what you receive in the way of grants and scholarships. Congress has created several tax programs to help parents and/or students with college expenses. There are credits like the American Educational Opportunity Credit and Lifetime Learning Credits, the Higher Education Tuition Deduction, educational IRAs and the Qualified Tuition Program (QTP). All of them have different qualifications and cover different expenses. And I’m not going to cover them right now. I want to get you thinking about keeping track of school expenses and income while you’re spending the money. The basic ideas apply to most and should get you set come tax time. Then we can figure out which program you qualify for.
Now a word of warning, some of these programs were allowed to expire at the end of 2011 and several others will expire at the end of 2012. Right now, we don’t know what Congress will do when they decide to work. They could reinstate programs, let them die, or come up with all new education programs. No matter what they do, the burden of proving you qualify for the programs rest with you and you need to keep records. It doesn’t matter if you might qualify for a credit or deduction or need to show that withdrawals are for educational expenses, you need to be proactive about keeping records. Don’t rely on the 1098T that the college will send out. Schools have gotten more accurate completing the 1098T but they can be misleading. What do you need to keep?
Receipts for books, supplies needed for school and tuition and fee payments. Don’t rely on credit card statements, keep the receipt. Right now this can include a computer (but not school tee shirts or beer.)
Receipts from textbook buy back and other returns.
Amounts for scholarships, grants and student loans even if the school is handling the money. (Actually, especially if the school is handling the money.)
What money is being pulled out of educational IRAs and QTPs.
If money is coming from Ed IRAs and QTPs, room and board needs to be tracked too.
If there is more than one student, keep expenses for each separate.
Most schools have account info online and that can be helpful but don’t rely on it. It may not have everything and you still need the receipts for bookstore purchases.
And teachers, don’t forget your classroom supplies receipts (hopefully this will be back.)
These records will allow me (or your tax preparer) to accurately calculate the different educations programs and how they affect your taxes and use which program is best for your situation. Believe me; it’s better to put the info aside as you get it than to try to find it in February. Especially if you need your taxes prepared ASAP because you forgot the FASFA deadline.
I really wish I had written this post but Kelly Phillips Erb (Taxgirl) did. So I'll share her post instead. Kelly shows us what we in the US are paying in taxes and how that compares to other countries. It might be an eye opener for you.
I see this all the time. A client will be complaining about how much they are paying in taxes until I point out both their marginal rate (the highest rate they are taxed at) and their effective rate (the average of all their rates) and the rates turn out to be much lower than they assumed.
I covered how marginal and effective tax rates are computed last year. Voting Tax Rates.
A reader should seek advice from an independent tax adviser with respect to the information on this blog based on the reader’s particular circumstances. This advice is intended to be general information and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS regarding the transaction or matters discussed here.