Everyone’s keeping track of how their taxes will be affected by the American Taxpayer Relief Act of 2012 (ATRA) enacted to avert the fiscal cliff. Most of the focus, however, has been on payroll tax rates and individual income tax rates. Rightly so, because these are the changes that affect taxpayers monthly. So you know that 6.2% will be withheld from your paycheck, and that those earning more than US$400 thousand will be taxed 39.6%. But have you looked at the other provisions closely and figured out how they’ll affect you?
Let’s take a look at some of these provisions that can work to your advantage.
Child Tax Credit. The change to US$1000 per qualified child, which was scheduled to revert to US$500, has been made permanent. To qualify, for this tax credit the child must be:
- Claimed as a dependent;
- Under age 17 at the end of the year;
- A son, daughter, adopted child, grandchild, stepchild or eligible foster child, a sibling, stepsibling, or their descendant;
- A U.S. citizen or resident alien.
Dependent Care Credit. The increase in the maximum credit rate for the child and dependent care tax credit (CDCTC) is permanently extended from 30% to 35%. Working parents that pay for the care of a dependent under the age of 13 may be eligible for all qualifying expenses. The maximum credit a family can take is between 20 to 35% of qualifying expenses, with a deduction cap of $3,000 for one child and $6,000 for two children.
Tuition Deductions. The tuition deduction technically expired after 2011, but ATRA revives it retroactive to the 2012 tax year and extends it through 2013. In the 2012 tax year, it’s possible to deduct up to $4,000 for higher education tuition and qualifying fees. This deduction is phased out starting at $80,000 for single filers and $160,000 for joint filers.
Student Loan Interest. Taxpayers that qualify can deduct up to $2,500 in student loan interest provided you meet the following criteria: 1. You must be the person liable for the debt and the loan is for education purposes only and not an open credit line; 2. Your income can’t exceed $150,000 on a joint return or $75,000 in 2012 on a single return; married couples filing separately cannot deduct; and 3. You’re not claimed for this deduction as a dependent.
Education Tax Credits. Two additional education tax credits can help lower your tax bill. American Opportunity Tax Credit (AOTC), which was formerly Hope Credit, is available during the first four years of postsecondary education and worth up to $2,500 for each qualifying student. Set to expire after 2012, this was extended for five years by ATRA. The Lifetime Learning Credit can be claimed if not seeking, or eligible for, AOTC. It’s possible to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit to the number of years the Lifetime Learning Credit can be claimed for each student.
Sources:
http://www.kkbcpa.com/faq-taxbenefitsofhigheredu.php
http://www.taxpolicycenter.org/UploadedPDF/412730-Tax-Provisions-in-ATRA.pdf
Will ATRA help lower your tax bill or make you pay more, instead? Leave a comment and let us know.
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