I’m a big believer of the fact that any time is the right time to become an investor. In 2006 and 2007, there are many tax deductions that a college student can take. If a student is smart about his or her money, those tax deductions could turn into a great investment in the near future.
The tax deductions that I will be explaining are Educational Savings Bonds, Alternative Fuel Automobile credit, Hope and Lifetime Learning Credits. The Internal Revenue Service has put limits on each of these deductions and credits. The goal of this article is to help the college students and parents of college students to benefit from these three items.
Education Savings Bonds & 2006 Taxes
In 2006, the interest exclusion on education savings bonds is gradually reduced if you are filing married filing jointly or qualifying widower. You will not have to worry about this unless your partner and yourself make more than $94,700 dollars. I am not going to go into the 2006 tax changes because most college students do not make that amount of money per year. If your partner and you do make this amount of money, then please seek further advice.
The key goal is to actually invest in an Education Savings Bond and use them to your tax advantage. Basically, an Education Savings Bond is a U.S. Savings Bond of the EE series.
Benefits Of Education Savings Bonds & 2006 Taxes
The Internal Revenue service is allowing you to cash in qualified U.S. savings bonds for higher educational expenses without including the savings bond as a source of income on your 2006 taxes. The higher educational expenses can be for yourself, your spouse or any dependent that you claim on your tax return.
Savings Bonds can be bought for amounts as small as $10. The largest amount a Savings Bond can be purchased for is $10,000. The average interest on an EE savings bond is 3 – 4% per year.
Negative Aspects Of Education Savings Bonds & Taxes.
The problem with Education Savings Bonds is the fact that your investment does not grow very quickly. The bond would have to been purchased many years ago or a person would have to purchase a savings bond at a high amount.
For example, a $50 EE Savings Bond purchased in January 2006 would actually decrease in value if it were cashed in a year later.
If a $50 EE Savings Bond was purchased and held for the usual 5 years, that bond would be worth $58.00
The key to savings bonds is to purchase them early in the student’s life so that they have a chance to grow with age. For example, if I had kept my $50 savings bond that was given to me in 1982 it would be worth $102.00 today.
Let’s say that in 1982, I had caught on to the value of a savings bond and purchased one every year. I would have spent roughly $500 on my education and received an investment value of $1800.00
If you would like more information on Education Savings Bonds check out the following websites and talk to your tax professional.
Electric Vehicles And 2006 Taxes
If you were a smart cookie in 2006 and purchased an electric powered or alternative fuel-efficient car from New Car Insider, then you could have up to $3,400 to invest. That smart decision could earn you up to $170.00 a year with HSBC Direct. They currently are advertising that a savings account is earning 5.05%. A year long CD Account has the current rate of about 4% which could bring your net investment to a total of $148
Remember that with investments, time means money. The longer a saving account or CD account grows, the larger the investment outcome. If I had read about the 2006 Honda Civic and purchased one, I may have received the $3,400. What if I had taken this tax credit and invested it into a long term CD account that would give me a yearly return of 3 – 4% on the balance. By retirement I could have a total of $12,000.
Hope Tax Credit
The Internal Revenue Service is really sticking it to people of higher incomes. A person or marriage that produce an income of $45,000 is unable to take this tax credit. The tax credit is up to $1,500 for each year the student is a sophomore or junior. If that credit is saved till retirement, that is another investment return up to $12,000
Lifetime Learning Tax Credit
The Internal Revenue Service is also putting a halt of those who produce an income more that $43,000. If you do not make this amount of money, you may be able to take the Lifetime Learning Tax Credit. This is a tax credit up to $2000 for students or dependent students who are obtaining undergraduate, graduate and professional degree courses.
If this tax credit is invested like the others, it also can generate an investment return of $12,000 or more.
As always, speak with investment professionals, tax professional and the Internal Revenue Service if you have any questions.
As you can see, almost anything can be turned into an additional benefit if you do your tax and investment research. There are some great financial advisors and columnist such as David Bach, Ram Charan, Robert Kiyosaki, Suze Orman, and Jim Cramer. Learn from them, I know I have.