Proper Tax Deductions

There's a big exception to Roth Ira education, and it can be used to avoid tax altogether: the money may be rolled over, or transferred, to another Education IRA that's set up to benefit another member of his or her family. The key question is whether an Education IRA will work for you. And to answer that, you have to look at a lot of different angles. For example:

* If you use money from an Education IRA to help pay for a child's college education in a given year, you can't also claim the Hope Scholarship Credit for that year. The Hope credit, which took effect in January 1998, is valuable because it generally lets you claim a federal income tax credit of up to $ 1,500 per student per year for tuition and related expenses during the first two years of college. A credit is important, because it cuts your overall federal income tax bill dollar for dollar.

* If you use the Education IRA to pay for a child's college expenses, you can't also take advantage of the Lifetime Learning Credit in the same year. The Lifetime Learning Credit, for college expenses paid after June 30, 1998, generally gives you a federal income tax credit of up to $ 1,000 a year, (You can't take advantage of both the Hope credit and the Lifetime Learning credit; it's one or the other.)

* In any given year, you can't contribute to an Education IRA on a child's behalf if you contribute to a state-sponsored prepaid college tuition program for the same child.

Because the disadvantages may outweigh the benefits in many cases, the Education IRA may work best only as a supplement to a broader savings plan. In other words, you should first check out better, more flexible alternatives, and fund an Education IRA only after exhausting those alternatives.

August hasn't been easy. The market's been brutal. Taxes were due for those who opted for the extension. And the good weather is coming to an end. So enjoy this three-day weekend, and we'll be back at taxes next week. But first, send me some questions! And don't forget to include your full name.

Can A Foreigner Inherit $$$ in the U.S.? My wife and I have a "pass-through" trust. It was drawn up in 1972 and has been updated. However I recently was told that my wife, being a Canadian citizen (green carded here), cannot inherit, even through my will, without a special kind of trust. No one I have talked to in two different law firms has given me a good answer. Something about a Qualified Marital Trust, but trying to find information is like pulling teeth while paying $200 an hour. Can you set us in the right direction? Thank you in advance.

First, any one can inherit anything in the U.S. "It's just a matter of who pays the estate tax," says the manager of investment advisory services at KPMG.

If your spouse were a U.S. citizen, she would be eligible for the unlimited martial deduction. That means she would not have to pay any estate taxes on her inheritances. But because your wife is not a U.S. citizen, Section 2056(d)(1)(a) says that she does not qualify for the marital deduction at all. That means after the general $625,000 estate tax exclusion, she will owe tax on everything else, says Martin Nissenbaum, national director of personal income-tax planning at Ernst & Young.

Education IRA