I receive the following email the other day and I am posting it to see if anyone else has some advice for a fellow reader with regards to his situation:

From: Dave
Subject: Tax Breaks for Student Loan
Hi Jim,

I’ve got a question on a difficult situation.

My girlfriend’s brother exited an Indiana university early with a 4.0 GPA several years ago, and when he wanted to go back he didn’t have the resources to get started. My girlfriend got a $3k student loan for him, as well as a laptop she put on her Discover card, with the idea that he would buy books and give her the rest back to immediately pay back Discover. Long story short, he never paid her back, ended up running away to the Southwest, and pawned her laptop. There’s not much that the authorities can do, since she applied for the loan and essentially gave him a gift on her credit card, but I was wondering if there was anything that she could redeem from the student loan on her taxes. All police reports have been filed at present.

Any help, as you could imagine, would be an enormous help. We have a mortgage to pay and would like to afford to have a child. I just want to see some of that back, if at all possible.

My response:

Thanks for the email and that’s unfortunate what’s happened between your girlfriend and her brother, but sometimes that’s life. In general, student loan interest is deductible if you make under $50,000 (after adjustments) and I would think that since she is a cosigner on a student loan, she could claim the deduction as long as she’s not a dependent on someone else’s claim (her parents?). If she just got a regular loan from the bank (not a student loan), and lent it to him, she may not have any options in terms of deductibility.

Anyone have any thoughts?

Thanksgiving is over (even though the leftovers are still packed into the fridge), the Happy Holidays are just around the corner, now is the time to make those end of the year tax decisions before you get overcome with all the craziness of the holidays. So, I dove into the archives and saw that last year I wrote a whole bunch of posts related to year-end tax moves that still apply (most of them) to this year, so I thought I’d link to them so I’d know where they were:

• Offsetting Your Stock Gains With Loses & the Wash Rule
• Claiming the Energy Savings Tax Credit - This refers to the tax rebate you can get if you make certain home improvements that increase the energy efficiency of your home.
• Home Office Deduction for Businesses - Started a business this year? I researched everything I could find about home offices.
• Six Great Tax Breaks - Some of which no longer apply, but others do.
• 10 Common Tax Filing Mistakes - It’s a little early for this article but it’s nice to keep this in mind (here are 15 more mistakes to avoid).
• More Tax Deduction Talk - Charitable donations, refinancing points, and education related deductions.
• Deduction Donations - IRS Tax Rules - I take an untrained look at deductions for charitable donations.
• Retirement Savings Credit - If you earn under $25k, give this article a read.
• Understanding Capital Gains and Losses
• Understanding AMT
• Education Credits!

And, if you don’t like taxes, read this argument about how the tax system will collapse in ten years.

Like most folks out there, I don’t like owing anyone money. I don’t like owing the bank money on my first mortgage, I didn’t like owing the bank money on my second mortgage, and I don’t like owing the lender money on my student loans. Here is my dilemma… back in September I wrote a relatively straightforward article titled “Don’t Save, Pay Off Debt!” in which I said that you should list the interest rates of your cash and of your debts in descending order. If you happen to have any cash in an account listed lower than a debt, you should pay off the debt with that cash unless it’s earmarked for a specific purpose (down payment, emergency fund).

Many of us who have student loans probably locked them in at rates way under the 5% you can get any online bank. Personally, I have about $24,000 in student loans at 3.25% (currently in deferral because I’m taking classes) which would put the debt underneath the cash I have in the 5%. Logic, and math, would indicate I should just pay the minimum payment on the student loans and keep the rest of it in my HSBC Direct account (even if you factor in that I have to pay taxes on the 5% interest). In fact, since my first home mortgage is at 5.75% (fixed) I should actually be paying that debt off first before I even consider paying the student loans because it’s at a higher interest rate. And on the first mortgage, I have exactly zero chance of paying off my mortgage (over $200k) anytime soon.

I want to pay off the student loan because it’s satisfying to write a debt off the “books” but I have to keep reminding myself it’s not the smart thing to do.

We learned last year that taxpayers who itemize have the option of claiming their state and local income taxes or their state and local sales taxes as an itemized deduction on their 2005 returns and that this year will be the last year you will have that option (on your 2006 returns for your 2005 Tax Year).

The rule is that you can deduct actual state and local sales taxes (actual means you must keep receipts) or you can deduct values taken from the sales tax tables. By using the optional general sales tax tables, you don’t need to keep receipts. When you use the optional tables, you can add the tax on big purchases such as a car, plane, boat, mobile home, or home renovation to the total. So if you read off the table that you are eligible to claim a $779 deduction for sales tax and you just bought a $10,000 car in Maryland, you can add $500 (MD Tax is 5.0%) to the optional table value for a total deduction of $1,279.

Where are the sales tax tables? Where is Publication 600?
The tax tables that were available as Publication 600 last year were rolled into the 2005 Instructions for Schedules A & B (Form 1040) on pages A-10 to A-11.

For more information, please read the press release from the IRS.

CNN/Money reported today that the Presidential Tax Reform Panel has recommended two plans of reform for our complicated federal tax code (they met for the second and last time yesterday). The first is to simplify and modify the current federal tax code while the second adds a “progressive” consumption tax; both include the elimination of the much hated and now miss-targeting Alternative Minimum Tax. A few of the suggestions make great sense while others don’t but for the most part I think they’re worth discussing.

(read full article…)

With my girlfriend wanting to donate a car, my roommate donating old furniture, and minor cash donations, I thought that I’d do a little research into the rules and procedures governing the deduction of donations from your taxes. It’s a little early, considering 2005 tax returns aren’t due for another ten months (tick tock!), but it’s better to know the procedure before crunch time than scrambling last minute.

Eligibility:
In order to deduct charitable donations from your taxes, you basically need to satisfy two conditions:

1. Itemize Your Deductions - Folks taking the standard deduction won’t get a tax benefit for charitable donations.
2. Donate to a Qualified Organization - Normally you can just ask and they’ll tell you, but IRS Publication 78 (it’s been upgraded to a search and is not a PDF) has a list of the common ones.

What You Donate:
The easiest thing you can donate is cash. You deduct the actual cash amount you donate.

The simplest things you can donate is property of some kind - whether it be a car, clothes, furniture, land, or any number of physical item. The general rule is you are able to deduct the fair market value of the item, as governed by the rules of IRS Publication 561 - Determining the Value of Donated Property. The rules for donating cars have changed recently from fair market value being determined by a blue book value to the actual price the car is sold for at auction.

If you donate your time and services, you cannot deduct any of it. You can’t take the fair market value of your service or anything like that, but you can deduct some personal expenses you wouldn’t have incurred had you not donated your services. An example is that you can deduct the cost of transportation to the location you are donating your services but you wouldn’t be permitted to deduct the cost of meals (since you would presumably have eaten regardless of your philanthropic efforts).

When You Donate:
The timing of your donation will affect when you can deduct it. It was easier back before checks and credit cards because you could control when items left your possession. For property, as soon as it leaves your hands you can count it in that year. For cash, the same rule applies as well. For checks and credit cards, you can deduct it the year in which you mail the check or apply the charge - not when the check is actually cashed or when the credit card is paid for.

Deduction Limits:
If you donated less than 20% of your adjusted gross income (AGI), move on, this won’t apply. Otherwise, the rules state that the most you can deduct is 50% of your AGI and, depending on your property, this limit may be capped at 30% and 20%. The rules are pretty extensive and probably don’t affect many people so I won’t go into them, check out pages 9 and 10 of Publication 526 for the rules.

Records:
Since you’ll be reducing how much Uncle Sam gets, they might come ask you about it. For cash donations, if it’s under $250, just keep a receipt of the donation or some other personal record of it. The rules for under $250 are pretty lax since for $20 donation to your church you probably don’t get a receipt. If you donate more than $250, you need to get an acknowledgement from the receiving organization that must meet these criteria: date, donation amount, what you received in return, description and good faith estimate of the value of the donation.

For property donations, the records you must keep are pretty extensive. The rules are basically the same for under $250 (date, location, description of property, and organization) and over $250, except if the property is over $500 but under $5000, you will need to explain: how you received the property, when you received/created it, and your cost basis. If it’s over $5000, then you will need a qualified written appraisal of the property in addition to everything else before it. So to recap, if you donate a $10,000 car you will need to follow the rules for under $250, between $250 and $500, between $500 and $5000, and then the final rule of over $5000 donations. It’s a lot of paperwork!

I hope all this information was helpful and, more importantly, correct. If you notice any inaccuracies or errors, let me know and I’ll fix this post. Thanks!

Helpful IRS Publications:
IRS Publication 526 - Charitable Contributions
IRS Publication 561 - Determining the Value of Donated Property

While doing research for my last FSA article, I came upon an article written by Jeff Schnepper that was listing ideas for cutting your 2004 taxes. I skimmed the article, most of which is common knowledge, until I hit upon something called the Schnepper-Malagoli Charitable Tax Grab. You can read the excerpt in full below but essentially you can rent out part of your home tax free (up to 15 days) to a charity (or anyone really), then donate to the charity, and walk away with extra money (and a warm fuzzy feeling) in your pocket as long as there was no pre-arrangement.

Here’s one you don’t have. It’s called the Schnepper-Malagoli Charitable Tax Grab. You can rent your home to anyone during the year — up to 14 days total — and pay zero tax. (Internal Revenue Code Section 280A (g), for those of you who feel compelled to look it up.)

So your church, synagogue or any recognized charity rents your home for a board meeting. They pay you $500. That money is completely tax-free.

Without any compulsion or prearrangement, you also contribute $600 to the charity. If you’re only in the 25% bracket, you save $150 in tax. You also got $500 tax-free from the rental. That’s a total of $650 more in your pocket, less the $600 contribution. You’re up $50 and the charity is up $100. One meeting per month (12 is less than 15) and you’ve “made” $600 and the charity is up $1,200!

Was it intended when Congress drafted the tax code? Clearly, no. Is it completely within the clear wording of the code? Absolutely, yes! Just because it’s a loophole doesn’t mean you can’t legally do it. And, there’s nothing wrong with doing well as you do good.

It’s brilliant, anyone ever heard of it (it has a doozy of a name)?

So on the front page of Yahoo! Finance there’s an article by Kay Bell from Bankrate.com titled “15 common tax-filing mistakes you can avoid” (article removed from site) that posted yesterday. Most of these errors are simply careless. It’s like when you took that arithmetic test in elementary school and did all the math in your head because you thought you were smart. You are smart… you just mess up sometimes. With Free Tax Filing (endorsed by the IRS!) and lots of free e-Filing methods, there is almost no excuse for any of these “mistakes.”

Here is the list:
1. Making math errors
2. Not including Social Security numbers
3. Not signing and dating your return
4. Not using the preprinted label and envelope from the tax package
5. Forgetting about interest and dividends
6. Forgetting to claim charitable donations
7. Not including all your forms
8. Not properly tracking your investment basis
9. Using the EZ form when a longer form could cut your taxes
10. Making the check out incorrectly — and forgetting to sign it!
11. Forgetting to bunch your deduction
12. Not taking all the credits you’re eligible for
13. Using the wrong tax table
14. Missing the deadline to request an extension
15. Not putting the proper postage on your return package

I put in red every “common mistake” that is automatically avoided as a result of using tax filing programs and using e-file. The only ones I can see that you might mess up on is not bunching your some of your deductions and tracking your investments. It makes no sense not to use a free program (you can even print out a return if you want to tempt fate and try to make errors 3 and 15) and I don’t see a benefit.

TurboTax does everything online so you don’t need to download a program you’ll never use again. (Read a review of TurboTax) Don’t want to send anything unnecessary online? Try TaxAct. Download some software and run it all locally. (Read a review of TaxAct)

There is no reason why you shouldn’t do your taxes electronically and there are at least 15 common reasons why you should.