WASHINGTON (AP) Saving for retirement? Sending a child to college? Paying steep medical bills? Tax laws offer an almost dizzying array of tax-advantaged accounts and credits that can help you meet those goals.
Each account and credit comes with restrictions and requirements that taxpayers should know before using them. Tax-advantaged accounts typically eliminate taxes on money either as it is deposited or withdrawn from the accounts. Credits reduce a taxpayer's tax liability dollar for dollar.
Here's a list of common accounts and credits available for retirement, education, child care and other sometimes costly endeavors.
- Individual Retirement Arrangements, or IRAs. Traditional IRAs let taxpayers put untaxed money aside and invest it for retirement. The money is taxed when taken out of the account. Alternatively, taxpayers can contribute after-tax dollars to a Roth IRA and avoid taxes on earnings and withdrawals.
- Simplified Employee Pension IRAs and SIMPLE IRAs. These retirement arrangements let employees of small businesses and self-employed taxpayers save for retirement.
- 401(k)s. Named for their place in the U.S. Tax Code, these retirement accounts allow employees to save for retirement through accounts established by their employers. The accounts are funded with pretax money drawn from the employee's paycheck.
- Coverdell Education Savings Accounts. Parents can set aside $2,000 per child each year into an ESA and avoid taxes on the account's earnings. Withdrawals are tax free as long as the money pays for a child's education.
- Medical Savings Accounts. Recently expanded, MSAs allow those with high-deductible insurance plans to set aside money to pay medical expenses. Contributions and investment earnings are never taxed as long as the money is used to pay qualified medical expenses.
- Flexible Spending Accounts. Employees whose employers offer the accounts, sometimes as part of so-called cafeteria plans, can set aside pretax dollars to pay for medical expenses and/or child care. Specific rules and limits apply to each type of FSA. Any money left at the end of the year must be forfeited.
- Child and Dependent Care Credit. Working parents with one or more children in day care may qualify for a tax credit worth 20 percent to 35 percent of child care costs, up to specific limits. The credit is available to parents of children under 13 and to those with a spouse or dependent who is physically or mentally incapable of self-care.
- Child Tax Credit. Parents can claim a credit worth up to $1,000 per child under age 17. Lower income families, along with wealthier married couples, may not qualify for the full credit.
- Hope Credit. Parents of a student in a degree program may be able to claim this credit during the student's first two years of study. The credit covers up to $1,500 of qualified tuition expenses.
- Lifetime Learning Credit. This credit is worth 20 percent of the first $10,000 in tuition and related expenses for a taxpayer, spouse or dependent. Students do not have to be in a qualified degree program.
- Credit for the Elderly or Disabled. Available to individuals who are age 65 or older, or younger than 65 and retired on permanent and total disability. Recipients must meet income requirements.
- Adoption Credit. Taxpayers who adopt a child may qualify for a credit of up to $10,160 for qualifying adoption expenses.
- Retirement Saving Contributions Credit. Refunds 10 percent to 50 percent of a contribution to a qualified retirement plan, up to $1,000. Recipients must meet income requirements.
On the Web:
Internal Revenue Service - http://www.irs.gov
Publication 17 Your Federal Income Tax - http://www.irs.gov/pub/irs-pdf/p17.pdf
Publication 524 Credit for the Elderly or the Disabled - http://www.irs.gov/pub/irs-pdf/p524.pdf
Publication 968 Tax Benefits for Adoption - http://www.irs.gov/pub/irs-pdf/p968.pdf
Publication 970 Tax Benefits for Higher Education - http://www.irs.gov/pub/irs-pdf/p970.pdf
Publication 972 Child Tax Credit - http://www.irs.gov/pub/irs-pdf/p972.pdf
Peninsula Clarion © 2015. All Rights Reserved. | Contact Us