Retirement Contributions,

Education Costs Can Add Up To Tax Savings

Even though you may be on vacation, the IRS is always at work thinking about taxes. No surprises there.

And while the “Dog Days of Summer” are upon us, and taxes are probably the furthest thing from your mind, the IRS believes now is a good time to takes steps to lower your tax bill for 2008.

Take the “Saver’s Credit” for example.

One way for low- and moderate-income Americans to save on taxes is by saving for retirement. If you make voluntary contributions to an employer-sponsored retirement plan or to an individual retirement arrangement, you may be able to take a tax credit.

Formally known as the “Retirement Savings Contributions Credit,” the Saver’s Credit applies to:

*Married individuals filing separately and singles with incomes up to $26,500 for 2008

*Married couples, filing jointly, with incomes up to $53,000 for 2008

*Head of Household with incomes up to $39,750 for 2008

To be eligible for the credit, you must be at least age 18, not be a full-time student, and cannot be claimed as a dependent on another person’s return.

You may be able to take a credit of up to $1,000 (up to $2,000 if filing jointly) if you make eligible contributions to a qualified IRA, 401(k), and certain other retirement plans. The amount of the credit is determined by filing status, adjusted gross income, and other retirement contributions.

The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.

When figuring this credit, you generally must subtract the amount of distributions you have received from your retirement plans from the contributions you have made. This rule applies for distributions starting two years before the year the credit is claimed and ending with the filing deadline for that tax return.

The Savers Credit is in addition to other tax benefits that may result from the retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan.

For more information, review IRS Publication 590, Individual Retirement Arrangements, and Form 8880, Credit for Qualified Retirement Savings Contributions, which include the instructions.

It is back-to-school time and maybe time for a tax break, too. Education credits can help lower your tax bill for 2008.

The Hope Credit or the Lifetime Learning Credit may help offset the cost of higher education for you, your spouse, and your dependents.

The amount of these credits is based on the qualified education expenses, such as college or vocational school tuition and enrollment fees, that were paid during the year and may be limited by your modified adjusted gross income. Room and board, insurance, or personal living expenses are not considered qualified education expenses.

The Hope Credit, which is up to a $1,800 tax credit per student per year, is available for only the first two years of college or vocational school.

The Lifetime Learning Credit, which is up to a $2,000 tax credit per tax return, applies to undergraduate, graduate, and professional degree courses and there is no limit to the number of years this credit can be taken.

Are you paying student loan interest? You may be able to deduct up to $2,500 from your income per tax return. Student loan interest may be deducted even while your student is in school if you are paying the interest immediately rather than deferring the payments.

You cannot claim the Hope Credit and the Lifetime Learning Credit for the same student in the same year; you will want to choose the credit that provides the greatest benefit. You can, however, claim the student interest loan deduction and one of the credits simultaneously.

Additional information on the Hope and Lifetime Learning credits and student loan interest deduction is available in Publication 970, Tax Benefits for Education.

Both reports can be found on the IRS website at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Remember that for the genuine IRS website be sure to use .gov. Do not be confused by Internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental we site is www.irs.gov.