Many of the credits discussed in this chapter do not lend themselves to being “planned.” Instead, our life circumstances may qualify us for the credits and it is up to us or our tax planners to take advantage of eligible credits. For example, credits for the earned income, the elderly, and retirement contributions are only available to lower income taxpayers meeting additional qualifications. There are a couple of areas covered in this chapter where we can use tax planning, including tax on married individuals living in community property states, transferring assets to children, and education expenses.

Married couples can avoid problems by filing jointly. Tax on income in community property states only becomes a potential problem when married couples file separately. Joint tax returns, in most cases, will result in the lowest overall tax for both the husband and wife. Consult a competent tax professional who can show how much can be saved and both parties can then share the savings.

Lower tax rates on children’s income still available. The “Kiddie tax,” or the parental tax on children’s unearned income, has reduced the opportunity for parents to shift the tax to children who are in a lower tax bracket. The opportunity is, however, still there. The first $900 dollars of unearned income (more if there were investment expenses) are tax free because of the standard deduction for children. The next $900 of unearned income will be taxed at the child’s tax rate, which would be 10% (if there was no earned income to push the rate higher). Over $1,800 and the parents’ tax rate kicks in.

While $900 does not sound like much, it represents the return on assets. There would be an opportunity to provide each child with over $35,000 in Dow Industrial stocks (the average yield as of August 2008 was 2.57%) without having to pay tax on the dividends.

Many opportunities for education tax planning. A taxpayer has several opportunities to deduct education expenses. The general rule usually is to take advantage of credits since $1 in credits reduces taxes by $1. The Hope and lifetime learning credits, however, do not yield $1 in credits for every $1 spent on education. Instead, a percentage must be applied to the expenses to determine the credit.

The primary driver of where to deduct the expenses is the purpose for which the education was obtained. If the learning is to improve job performance or to keep a job, the deductions are business expenses and deductible on Schedule C for the self-employed or as an unreimbursed business expense by an employee. The expenses can also be an adjustment to income or used to compute the credits if other qualifying criteria has been satisfied (e.g., first two years of higher education for Hope credit leading to a degree).

Deducting education expenses as business expenses do not have overall caps. The tuition and fees adjustment and the Hope and lifetime learning credits all have maximum amounts that can be claimed.

Another factor in where to deduct the expenses is the type of expense. The credits and the adjustment for tuition and fees have narrower qualifying expenses than the business expense educational spending. A professional seminar at a luxury hotel would not qualify for a lifetime learning credit but it does qualify for someone improving job skills.

Tax free home purchase loan. Buy a house before July 1, 2009, and get a loan of up to $7,500 and pay no interest for fifteen years.