Another special situation deals with mutual funds that invest in state obligations. Most states do not tax income from their own obligations, whether held directly or through mutual funds. On the other hand, the majority of states do tax income from the obligations of other states. Thus, in most states, you will not pay state tax to the extent you receive, through the fund, income from obligations issued by your state or its municipalities.

TABLE OF CONTENTS 

You can't take two different kinds of relief for the same item.  You can sometimes take one type of relief for one education item and another type for another item.

Some benefits have income ceilings that bar or limit the relief as taxpayer's income rises. 

TABLE OF CONTENTS 

The lifetime learning credit fits any undergraduate or graduate study, but study less than half- time must be work-related. The credit ceiling is $2,000 (20% of expenses up to $10,000) per taxpayer per year.

Your family may be able to save tax by foregoing the education credit and taking an available exemption for program distributions instead. 

TABLE OF CONTENTS 

TABLE OF CONTENTS 

• No more than $2,000 a year can be contributed to any single 530 account in any year, and contributors are subject to income limits. 
  
• Contributions aren't deductible and excess contributions are subject to penalty.
  
• Withdrawals are tax-free to the extent used for qualified education expenses. 
  
• Contributions can't be made after the student reaches age 18, and the account generally must distribute all funds by the student's age 30.

Unlike other plans, 530 accounts may be used for primary and secondary education, including paying for room and board of children in private schools, and for computers and related materials whether or not away from home.

TABLE OF CONTENTS 

The original student beneficiary for the Section 530 account can be changed to another family member, such as a sibling--for example where the original beneficiary wins a scholarship or drops out.

Funds can be rolled over tax-free from one family member's Section 530 account to another's--for example, to avoid distribution when the first family member reaches age 30.

The education tax credit (where applicable) can be waived in favor of tax-free treatment for Section 530 account distributions. 

TABLE OF CONTENTS 

TABLE OF CONTENTS 

TABLE OF CONTENTS 

Business expense deduction is allowed, without dollar limit, for education that serves the taxpayer’s business, including employment. Deduction is also allowed for student loan interest. A taxpayer may not take more than one deduction for the same item.

TABLE OF CONTENTS 

TABLE OF CONTENTS 

1. You must be the person liable on the debt and the loan must be for
   education only (not an open line of credit).
   
2. Your income can't exceed $130,000 on a joint return or $65,000 on a single return; married couples filling separately cannot deduct.
   
3. You can't deduct if you're claimed as a dependent.
   
4. Deduction ceiling is $2,500.

TABLE OF CONTENTS 

TABLE OF CONTENTS 

TABLE OF CONTENTS 

TABLE OF CONTENTS 

When you hire a household employee to work for you on a regular basis, he or she must complete the employee part of the Immigration and Naturalization Service (INS) Form I-9, Employment Eligibility Verification. You must verify that the employee is either a U.S. citizen or an alien who can legally work here and then complete the employer part of the form. Keep the completed form for your records.

TABLE OF CONTENTS 

• If you pay cash wages of $1,400 or more in 2005 to any one household employee, withhold and pay Social Security and Medicare taxes.
  
• If you pay total cash wages of $1,000 or more in any calendar quarter of 2005 to household employees, pay unemployment tax.

TABLE OF CONTENTS 

TABLE OF CONTENTS 

TABLE OF CONTENTS 

If you withhold the taxes but then actually pay the employee less than $1,400 in Social Security and Medicare wages for the year, you should repay the employee.

TABLE OF CONTENTS 

TABLE OF CONTENTS 

TABLE OF CONTENTS 

If you pay cash wages to household employees totaling $1,000 or more in any calendar quarter of 2005, the first $7,000 of cash wages you pay to each household employee in 2005 and 2006 is FUTA wages. If you pay less than $1,000 cash wages in each calendar quarter of 2005, but you had a household employee in 2004, the cash wages you pay in 2005 may still be FUTA wages. They are FUTA wages if the cash wages you paid to household employees in any calendar quarter of 2004 totaled $1,000 or more. 

Do not withhold the FUTA tax from your employee's wages. You must pay it from your own funds.

TABLE OF CONTENTS 

You figure federal income tax withholding on both cash and non-cash wages you pay. Measure non-cash wages by the value of the non-cash item. Do not count as wages any of the following items:

• Meals provided at your home for your convenience.

• Lodging provided at your home for your convenience and as a condition of employment.

• Up to $105 a month in 2005 for bus or train tokens (passes) you give your employee, or in some cases for cash reimbursement you make for the amount your employee pays to commute to your home by public transit.

Any income tax you pay for your employee without withholding it from the employee's wages must be included in the employee's wages for federal income tax purposes. It is also counted as Social Security, Medicare and FUTA wages.

TABLE OF CONTENTS 

You are encouraged to give the employee a notice about the EIC if his or her 2005 wages are less than the amount shown in the instructions to 2005 Form W-5. In certain cases you could be required to give notice, but this requirement is met if you give the employee Copy B of 2000 IRS Form W-2 (which includes a notice) by January 31, 2006.

TABLE OF CONTENTS 

• A separate Form W-2, Wage and Tax Statement, must be filed for each household employee to whom you pay Social Security and Medicare wages, or  wages from which you withhold federal income tax. Give Copies B, C, and 2 to your employee by January 31st and send Copy A of Form W-2 with Form W-3, Transmittal of Wage and Tax Statements, to the Social Security Administration by February 28th.
  

• Use Schedule H (Form 1040), Household Employment Taxes, to report the federal employment taxes for your household employee if you pay the employee Social Security and Medicare wages, FUTA wages, or  wages from which you withhold federal income tax.
  

• File Schedule H with your federal income tax return. If you are not required to file a tax return, file Schedule H by itself.

TABLE OF CONTENTS 

There are several types of records that you should keep. Most experts believe it’s wise to keep most types of records for at least seven years, and some you should keep indefinitely.

TABLE OF CONTENTS 

Here’s a list of the kinds of tax records and receipts to keep that relate to your current year income and deductions:

• Income (wages, interest/dividends, etc.)
• Exemptions (cost of support)
• Medical expenses
• Taxes
• Interest
• Charitable contributions
• Child care
• Business expenses
• Professional and union dues
• Uniforms and job supplies
• Education, if it is deductible for income taxes
• Automobile, if you use your automobile for deductible activities, such as business or charity
• Travel, if you travel for business and are able to deduct the costs on your tax return

While you’re storing your current year’s income and expense records, be sure to keep your bank account and loan records too, even though you don’t report them on your tax return. If the IRS believes you’ve underreported your taxable income because your lifestyle appears to be more comfortable than your taxable income would allow, having these loan and bank records may be just the thing to save you.

TABLE OF CONTENTS 

For federal tax purposes, this is generally three years from the date you file your return (or the date it’s due, if that’s later), or two years from the date you actually pay the tax that’s due, if the date you pay the tax is later than the due date.

For some states, you should keep your records for four years.

TABLE OF CONTENTS 

One of the benefits of keeping your tax returns from year to year is that you can look at last year’s return while preparing this year’s. It’s a handy reference, and reminds you of deductions you may have forgotten.

Another reason to keep your old tax returns is that there may be information in an old return that you need later.

One example of information you may need years later is the tax basis of your home. If you sold your home some years ago and replaced it with the one you live in now, you filed a Form 2119 with your old return. On Form 2119, you figured the tax basis of your current home. When you sell your current home, the starting point to find out what your gain (or loss) is comes from the Form 2119 for the old house.

Audits and your old tax returns

Here’s a reason to keep your old returns that may surprise you. If the IRS calls you in for an audit, the examiner will more than likely ask you to bring your tax returns for the last few years. You’d think the IRS would have them handy, but that’s not the way it works. Your old returns are more than likely in a computer, in a storage area, or on microfilm somewhere. Usually what your IRS auditor has is just a report detailing the reason the computer picked your return for the audit. So having your old returns allows you to easily comply with your auditor’s request.

How long should I keep my old tax returns?

You may want to keep your old returns forever, especially if they contain information such as the tax basis of your house. Probably, though, keeping them for the previous three or four years is sufficient.

If you throw out an old return that you find you need, you can get a copy of your most recent returns (usually the last six years) from the IRS. Ask the IRS to send you Form 4506, Request for Copy or Transcript of Tax Form. When you complete the form, send it, with the required small fee, to the IRS Service Center where you filed your return.

TABLE OF CONTENTS 

Keep the following types of records:

• Records of capital assets, such as coin and antique collections, jewelry, stocks, and bonds.
• Records regarding the purchase and improvements to your home.
• Records regarding the purchase, maintenance, and improvements to your rental or investment property.

How long should I keep these records? You need to keep these records as long as you own the item so you can prove the cost you use to figure your gain or loss when you sell the item.

TABLE OF CONTENTS 

• Insurance policies, to show whether you were to be reimbursed in case you suffer a casualty or theft loss, have medical expenses, or have certain business losses.
  
• Records of major purchases, in case you suffer a casualty or theft loss, contribute something of value to a charity, or sell it.
  
• Family records, such as marriage licenses, birth certificates, adoption papers, divorce agreements, in case you need to prove change in filing status or dependency exemption claims.
  
• Certain records that give a history of your health and any medical procedures, in case you need to prove that a certain medical expense was necessary.
  
• These categories are the most universal and should cover most of your recordkeeping needs. Everyone’s needs are unique, however, and there may be other records that are important to you. Skimming through our Tax Library Index might highlight other categories that apply to you.

TABLE OF CONTENTS 

Your recordkeeping system can be as casual as storing receipts in a box until the end of the year, then transferring the records, along with a copy of the tax return you file, to an envelope or file folder for longer storage.

To make it easy on yourself, you might want to separate your records and receipts into categories, and file them in labeled envelopes or folders. It’s also helpful to keep each year’s records separate and clearly labeled.

If you have your own business, or if you’re a partner in a partnership or an S corporation shareholder, you might find it valuable to hire a bookkeeper or accountant.

Do you contribute to charity?

If you donate to a charity, you must have receipts to prove your donation.

A canceled check will often be sufficient, unless you make a single donation of $250 or more, in which case, you must have a receipt from the charity that shows the date, the amount you donated, and other specific information about the contribution.

Besides deducting your cash and non-cash charitable donations, you can also deduct your mileage to and from charity work. If you deduct mileage for your charitable efforts, keep detailed records of how you figured your deduction.

Are you employed by someone else?

If you work for someone else and spend your own money on company business, keep good records of your business expense receipts. You will need these records to either get a reimbursement from your employer or to prove business-related deductions that you take on your taxes.

Do you have income from tips?

If you make tips from your job, the hand of the IRS reaches here too, and if you are ever audited, the IRS will be interested in records of how much you made in tips.

Do you own property?

If you own property, be particularly careful to keep receipts or some other proof of all your expenses, especially for repairs and improvements.

Do you hire domestic workers?

It’s important to keep accurate information about who works for you, including nannies and housekeepers, when and where they worked for you, and how much you paid them for the work.

Do you have a business?

If you have a business, you must keep very careful records of all your business expenses, including vehicle mileage, entertainment expenses, and travel expenses.

If you have a business, just because you have cash in your pocket doesn’t mean you’re in the black on the books. Keeping up-to-date records of all transactions and costs will not only help you tax wise, it will tell you if your business is actually profitable.

Do you travel for your business?

If you travel for business, keep good receipts and logs of all your travel expenses, including those for meals and entertainment. You will need this information whether you work for yourself or for someone else.

TABLE OF CONTENTS 

1. To save money for a long-range goal, and/or
2. To produce a guaranteed stream of income for a certain period of time.

Annuities lend themselves particularly well to funding retirement and, in certain cases, education costs.

TABLE OF CONTENTS 

With the flexible-premium annuity, the annuity is funded with a series of payments. The first  payment can be quite small.

The immediate annuity starts payments right after the annuity is funded. It is usually funded with a single premium, and is usually purchased by retirees with funds they have accumulated for retirement.

With a deferred annuity, payouts begin many years after the annuity contract is issued.  Deferred annuities are used as long-term investment vehicles by retirees and non-retirees alike. They are used in tax-deferred retirement plans and as individual tax-sheltered annuity investments. They may be funded with a single or flexible premium.

With a fixed annuity contract, the insurance company puts your funds into conservative fixed income investments such as bonds. Your principal is guaranteed as is a certain minimum rate of interest. The fixed annuity is a good choice for investors with a low risk tolerance and a short-term investing time horizon. The growth that will occur will be relatively low.  

The variable annuity, which is considered to carry with it higher risks than the fixed annuity—about the same risk level as a mutual fund investment— gives you the ability to choose how to allocate your money among several different managed funds. There are usually three types of funds: stocks, bonds, and cash-equivalents. Unlike the fixed annuity, there are no guarantees of principal or interest. However, the variable annuity does benefit from tax deferral on the earnings. You can switch your allocations from time to time for a small fee or sometimes for free.

TABLE OF CONTENTS 

Fixed Amount gives you a fixed monthly amount—chosen by you—-that continues until your annuity is used up. The risk of using this option is that you may live longer than your money lasts. If you die before your annuity is exhausted, your beneficiary gets the rest.

Fixed Period pays you a fixed amount over the time period you choose. For example, you might choose to have the annuity paid out over ten years. If you are seeking retirement income before some other benefits start, this may be a good option. If you die before the period is up, your beneficiary gets the remaining amount.

Lifetime Or Straight Life payments continue until you die. There are no payments to survivors. The life annuity gives you the highest monthly benefit of the options listed here. The risk is that you will die early, thus leaving the insurance company with some of your funds.

Life With Period Certain gives you payments as long as you live (as does the life annuity) but with a minimum period during which you or your beneficiary will receive payments, even if you die earlier than expected. The longer the guarantee period, the lower the monthly benefit.

Installment-Refund pays you as long as you live and guarantees that, should you die early, whatever is left of your original investment will be paid to a beneficiary.

Joint And Survivor. In one joint and survivor option, monthly payments are made during the annuitants' joint lives, with the same or a lesser amount paid to whoever is the survivor. In the option typically used for retired employees, monthly payments are made to the retired employee, with the same or a lesser amount to the employee's surviving spouse or other beneficiary. In this case, the spouse's (or other co-annuitant's) death before the employee won't affect what the survivor employee collects. The amount of the monthly payments depends on the annuitants' ages, and whether the survivor's payment is to be 100% of   the joint amount or some lesser percentage.

TABLE OF CONTENTS 

CAUTION: If you purchase through such a "middle-man," you will pay a commission ("load") of from 3% to 8% of your investment. The commission reduces the return you  can get on your investment. Some insurance companies sell "no-load" annuities directly to the investor, so all of your money earns income.

Check Out The Insurer. Make sure that the insurance company offering it is financially sound. Annuity investments are not federally guaranteed, so the soundness of the insurance company is the only assurance you can rely on. Several services rate insurance companies.

Compare Contracts. 

• For immediate annuities: Compare the settlement options. For each $1,000 invested, how  much of a monthly payout will you get? Consider the interest rate and any  penalties and charges.
  
• For deferred annuities: Compare the rate, the length of guarantee period, and a five-year history of rates paid on the contract, not just the interest rates.
  
• For variable annuities: Check out the past performance of the funds involved.

If a particular fund has a great track record, ascertain whether the same management is still in place. Although past performance is no guarantee, consistent management will grant you better odds.

TABLE OF CONTENTS 

Sales Commission

Ask for details on any commissions you will be paying. What percentage is the commission? Is the commission deducted as a front-end load? If so, your investment is directly reduced by the amount of the commission. A no-load annuity contract, or at least a low-load contract, is the best choice.

Surrender Penalties

Find out the surrender charges (that is, the amounts charged for early withdrawals). The typical charge is 7% for first-year withdrawals, 6% for the second year, and so on, with no charges after the seventh year.

TIP: Be sure the surrender charge "clock" starts running with the date your contract begins, not with each new investment.

Other Fees and Costs

Ask about all other fees. With variable annuities, the fees must be disclosed in the prospectus. Fees lower your return, so it is important to know about them. 

Fees might include:

• Mortality fees of 1 to 1.35% of your account (protection for the insurer in case you live a long time),

• Maintenance fees of $20 to $30 per year, and

• Investment advisory fees of 0.3% to 1% of the assets in the annuity’s portfolios.

Other considerations

Some annuity contracts offer "bail-out" provisions that allow you to cash in the annuity if interest rates fall below a stated amount without paying surrender charges.

There may also be a "persistency" bonus which rewards annuitants who keep their annuities for a certain minimum length of time. 

TABLE OF CONTENTS