Except in cases of tax fraud, the U.S. Internal Revenue Service will generally work with taxpayers to get them back into the system. You can often negotiate a payment plan, and if you are truly strapped, you may be able to cut a deal on how much you must pay. But first you must fess up to the problem.

What happens if you do not file can get ugly, but you may not realize it at first. The IRS may be slow to catch up with nonfilers, as its computers go through the laborious process of matching tax documents with returns.

At first, nothing may happen, but nonfilers cannot escape notice forever.

For Hank, it all started when he lost his job at an ad agency. He began tapping his retirement funds to pay the bills, and did not put anything aside to pay taxes on the early withdrawals. For more than five years, he neither filed a return nor paid his taxes.

“I had some depression issues, and I had a little bit of a problem with alcohol,” says the Los Angeles area resident. “It was just really stupid.”

Now sober for three years, Hank has filed for the years he missed and is working to negotiate down the tax bill, which he figures is, very roughly, $40,000.

“I can see that I have made some egregious errors, and it’s time to grow up and be responsible,” says Hank, who spoke on condition that his last name not be used.

While few people like to talk about it, Hank’s story is not uncommon. “It’s usually drugs, booze or women,” says Don Williamson, executive director of the Kogod Tax Center at American University in Washington, D.C.

Add to that the serious financial problems that have squeezed many Americans over the past five years.

“There are tax issues people haven’t dealt with because they had a home foreclosure or lost their job or withdrew money out of a retirement plan and did not pay taxes on it,” says Chuck Putney, who represents taxpayers before the IRS for Putney-Klein Associates in Walnut Creek, California.

“If someone doesn’t file for a year, they think they can’t file the next year,” he says, “and then they get into a three- or four-year funk.”

FEAR, SHAME AND DENIAL

A nonfiler’s first communication from the IRS is usually a notice stating the amount it believes is due. It may not be accurate, and you should not assume it is.

Rather than pay too much, you should do your returns so you can figure out the correct amount you owe.

“They’ll propose a large tax due, and they won’t have any allowance for deductions,” Putney says. “You can always file a correct return that says you have two kids and a home mortgage.”

If you deal with the problem at that point, you can avoid worse penalties, such as a claim on your assets or the seizure of your property by the IRS.

The more common reactions, however, are fear, shame and denial. “I’ve seen clients bring in envelopes, and they’re afraid to even open them,” Putney says.

Valerie, a teacher who ran into financial trouble after Hurricane Sandy, has not yet filed her New York taxes this year, although she did file her federal return. She says she was afraid.

“It just seems overwhelming, and the emotional aspect blocks me,” she says. “There is shame in not getting your stuff together. It’s just a monster in the closet.”

In the end, Valerie overcame her fears and started to deal with the issues. By mid-May, she had found an accountant to work with, and was hoping to set up a payment plan.

The first step is to open those notices and file the back returns. If you do not have what you owe, you may be able to negotiate an agreement to make monthly payments. To do so, you first need to file your back taxes.

Another option is the Offer in Compromise program, in which you can negotiate away part of your tax deficiency. The rules governing this program are strict, though, and you will generally have to be in extremely bad financial straits to qualify.

Especially if the numbers are large, you will want tax help. Working through back taxes on your own is not for the faint of heart.

(The writer is a Reuters columnist. The opinions expressed are her own.)

(Editing by Frank McGurty and Lisa Von Ahn)

Except in cases of tax fraud, the U.S. Internal Revenue
Service will generally work with taxpayers to get them back into
the system. You can often negotiate a payment plan, and if you
are truly strapped, you may be able to cut a deal on how much
you must pay. But first you must fess up to the problem.

What happens if you do not file can get ugly, but you may
not realize it at first. The IRS may be slow to catch up with
nonfilers, as its computers go through the laborious process of
matching tax documents with returns.

At first, nothing may happen, but nonfilers cannot escape
notice forever.

For Hank, it all started when he lost his job at an ad
agency. He began tapping his retirement funds to pay the bills,
and did not put anything aside to pay taxes on the early
withdrawals. For more than five years, he neither filed a return
nor paid his taxes.

“I had some depression issues, and I had a little bit of a
problem with alcohol,” says the Los Angeles area resident. “It
was just really stupid.”

Now sober for three years, Hank has filed for the years he
missed and is working to negotiate down the tax bill, which he
figures is, very roughly, $40,000.

“I can see that I have made some egregious errors, and it’s
time to grow up and be responsible,” says Hank, who spoke on
condition that his last name not be used.

While few people like to talk about it, Hank’s story is not
uncommon. “It’s usually drugs, booze or women,” says Don
Williamson, executive director of the Kogod Tax Center at
American University in Washington, D.C.

Add to that the serious financial problems that have
squeezed many Americans over the past five years.

“There are tax issues people haven’t dealt with because they
had a home foreclosure or lost their job or withdrew money out
of a retirement plan and did not pay taxes on it,” says Chuck
Putney, who represents taxpayers before the IRS for Putney-Klein
Associates in Walnut Creek, California.

“If someone doesn’t file for a year, they think they can’t
file the next year,” he says, “and then they get into a three-
or four-year funk.”

FEAR, SHAME AND DENIAL

A nonfiler’s first communication from the IRS is usually a
notice stating the amount it believes is due. It may not be
accurate, and you should not assume it is.

Rather than pay too much, you should do your returns so you
can figure out the correct amount you owe.

“They’ll propose a large tax due, and they won’t have any
allowance for deductions,” Putney says. “You can always file a
correct return that says you have two kids and a home mortgage.”

If you deal with the problem at that point, you can avoid
worse penalties, such as a claim on your assets or the seizure
of your property by the IRS.

The more common reactions, however, are fear, shame and
denial. “I’ve seen clients bring in envelopes, and they’re
afraid to even open them,” Putney says.

Valerie, a teacher who ran into financial trouble after
Hurricane Sandy, has not yet filed her New York taxes this year,
although she did file her federal return. She says she was
afraid.

“It just seems overwhelming, and the emotional aspect blocks
me,” she says. “There is shame in not getting your stuff
together. It’s just a monster in the closet.”

In the end, Valerie overcame her fears and started to deal
with the issues. By mid-May, she had found an accountant to work
with, and was hoping to set up a payment plan.

The first step is to open those notices and file the back
returns. If you do not have what you owe, you may be able to
negotiate an agreement to make monthly payments. To do so, you
first need to file your back taxes.

Another option is the Offer in Compromise program, in which
you can negotiate away part of your tax deficiency. The rules
governing this program are strict, though, and you will
generally have to be in extremely bad financial straits to
qualify.

Especially if the numbers are large, you will want tax help.
Working through back taxes on your own is not for the faint of
heart.

(Editing by Frank McGurty and Lisa Von Ahn)

The basic problem: Not all 529 accounts are treated equally, so two different students with the same basic profile could get different aid offers, based on who actually owns their 529 plan.

That can come as a shock to middle-class families under the impression that 529 accounts, especially those of grandparents or non-custodial divorced parents, would not count against their aid offers.

Assets in a 529 plan owned by the student or her parents count again need-based aid, while those in a plan owned by anyone else (including grandma) don’t. But once grandparents or other relatives start taking money out of a plan to help pay those bills, the reverse is true. The withdrawals can ding you pretty hard in the following year’s financial aid package.

Grandparents, who may have started 529 plans for their grandkids thinking it will help out when the time came to pay tuition, are particularly dismayed.

“They say, ‘You’ve got to be kidding me. I did all these nice things, and it penalized my grandchild,’” says Douglas Rothermich, vice president of wealth planning strategies at TIAA-CREF, who counts a number of such grandparents among his clients. “It is an awakening.”

DOING THE MATH

The issue is that the federal financial aid formula treats assets and income differently, and also treats the student’s money different from that of other relatives.

The differences show up starkly on the Free Application for Federal Student Aid (FAFSA), which all students seeking aid must fill out. The 529 plans owned by college students or their parents count as assets and reduce need-based aid by a maximum of 5.64 percent of the asset’s value. That means if you have $20,000 in a college-savings plan for your daughter, her aid would be reduced by roughly $1,100. For financially independent students who hold their own 529 plans, the assessment is a far larger 20 percent, but that’s not typical.

However, if the 529 plans are held by grandma and grandpa, they won’t appear on the FAFSA as assets. Instead, as the money is withdrawn to pay for tuition or other educational expenses, that amount must be reported on the next year’s financial aid forms as untaxed income to the student, and it can reduce the amount of aid by 50 percent.

So if that same $20,000 college-savings plan was owned by the grandparents, and the student withdrew $5,000 from it one year, that withdrawal could increase the amount the family is expected to pay for college (and reduce the aid) for next year by about $2,500.

For divorced parents, it’s more complicated. Only the custodial parent’s income and assets are reported on the FAFSA for a dependent student. However, withdrawals from a 529 plan held by the non-custodial parent will be assessed as income against financial aid, just like those held by grandparents.

And that’s just the federal rules. Hundreds of private universities make their financial aid awards based on the College Board’s CSS Profile form, which asks for more detailed financial information than does the FAFSA and treats all 529 plans as assets.

Schools may set their own rules on how to award need-based aid, so the reduction in aid for 529 plans varies, but could be as much as 25 percent of the value of the asset.

“There are lots of questions from families and financial planners,” says Joe Hurley, founder of SavingforCollege.com. “It’s a concern to a lot of families, and the rules are (quirky) enough that it’s hard to get a good grasp on them.”

BEST STRATEGIES

To avoid complications down the road, one route is to set up all the college-savings plans in one name to be owned by the student or the parents. That way, they’d all be covered by the same, generally, less onerous, rules. If grandparents or other relatives have 529 plans, they could transfer that ownership before college if such transfers are allowed by your state. Of course, the assets still would count as student assets, but not as income, so they would have a smaller impact on the aid calculation.

Unfortunately, about a half-dozen states, including New York, restrict such ownership transfers of 529 plans.

Also, you can wait to spend down the grandparents’ 529 plans until the last year of college. Since the financial aid forms are based on the previous year’s income and assets, this type of backloading would avoid any impact from the withdrawals.

“The theory becomes, let’s use that account to fund the last year’s expenses when there won’t be a next year,” Rothermich says.

An added benefit: If both the parents and the grandparents own 529 plans for the benefit of the same student, by spending down the parents’ plans first you might be able to reduce the assets you report on subsequent years’ FAFSAs.

Depending on a family’s situation with financial aid, it could make sense to delay the spend-down of the 529 plans – perhaps using withdrawals to pay down student loans later – though it could, ironically, mean forgoing the tax benefits of the distribution.

“That’s a difficult decision,” Hurley says. “Most people would never think of that, but depending on the financial aid package, the financial aid penalty may be worse than the tax penalty.”

(The writer is a Reuters columnist. The opinions expressed are her own.)

(Follow us @ReutersMoney or here Editing by Beth Pinsker and Jeffrey Benkoe)

Cry, scream, punch the wall if you have to. But then deal
with the problem head on.

Here’s what to do:

1. File for an extension

If you won’t be ready to send in your return by April 15,
file for a six-month extension, using Form 4868. It’s automatic.
And so long as you pay at least 90 percent of the taxes you owe
(guessing is fine!), you won’t owe a late-payment penalty. This
also gives you time, if you’re still doing your taxes at the
last minute, to correct any errors you may find on, say, a 1099
form from your broker.

But if you can’t pay at all, it’s best to go to step 2 and
work out a deal.

“Some people will file the return, and not attach any
payment, and wait for the IRS to come to them,” says David
Kautter, managing director of the Kogod Tax Center at American
University in Washington. “You can do that, but the interest and
penalties will start to run.”

2. Weigh your payment options

You may be able to borrow on your home equity, or put the
bill on your credit card, or you can set up an installment plan
with the IRS.

It all depends on what you’ll pay with the options available
to you. With interest rates low, the average rate for a $30,000
home equity line of credit is 5 percent, according to
Bankrate.com. If you have access to one, that may be your best
option.

The average credit card rate nationally is just under 15
percent, according to CreditCards.com, and the average for those
with bad credit is a whopping 23.6 percent. There’s also an
added “convenience fee” for paying your taxes by credit card
(since the IRS is prohibited from paying the credit-card fees
that retailers do). The fee varies by card but could add an
extra 2 percent to your bill. Those numbers should make you
think twice about putting your taxes on your Visa or Mastercard.

3. Set up an installment plan.

By comparison, a tax installment payment plan will run you
around 6 percent a year.

To set up an installment plan, file Form 9465 or simply file
an online request here

You’ll pay an application fee of $43 to $105, depending on
your income level and whether you’ll pay electronically. And
then you’ll pay off that tax debt in monthly installments.

But setting up an installment plan, you’ll cut the penalty
on unpaid tax in half, to 0.25 percent per month, though the
interest due remains the same.

If you owe less than $50,000, it’s pretty much automatic -
and you can set up an installment plan from the privacy of your
home online. Says Kautter, “There’s no need to call or write or
visit the IRS.”

4. Pay your penalties

If you ignore the problem, you’ll end up owing more, and
eventually you’ll have to pay up. The IRS assesses separate
penalties for not filing and for not paying on time, as well as
charging interest on the taxes owed, currently at a rate around
3 percent a year.

The failure-to-file penalty generally runs 5 percent for
every month your return is late, up to 25 percent (with a
minimum penalty of $135). If you owe $10,000 and don’t pay till
September, tack on an extra $2,500 to your bill.

The failure-to-pay penalty is just a fraction of that, at
0.5 percent per month of the unpaid tax, and that rate can be
cut in half by setting up an installment plan. For that same
$10,000 non-filer, the penalty on the money that is owed would
be $250 for those same five months.

(Follow us @ReutersMoney or here
Editing by Beth Pinsker)

If you’re among the procrastinators, here are eight
last-minute things to consider:

1. IRA contributions

If you’ve put off your taxes till the last minute, chances
are you’ve postponed making contributions to any Individual
Retirement Accounts, too. That deadline is the same as your tax
return. The 2012 limits are $5,000 ($6,000 if you’re 50 or
older), and can go to either a traditional IRA, a Roth IRA, or
be split between the two. If you’re among the minority thinking
ahead, the limits go up in 2013 – to $5,500 for everyone, and
$6,500 for those allowed to make “catch-up” contributions.

If you’re sitting at your dining room table on April 14 and
still haven’t taken care of this, you can claim the deduction on
your return before you make it, as long as you invest the money
on April 15 – on your way to the post office.

2. HSA contributions

If you were covered by a high-deductible insurance plan in
2012, as Americans increasingly are, you also have until April
15 to make a tax-deductible contribution to a Health Savings
Account. The maximums are $3,100 for singles and $6,250 for
families (with catch-up contributions of as much as $2,000 for
those over 55). Like an IRA, the money in an HSA grows tax-free
- and you can withdraw it tax-free, too, as long as you use it
for uninsured medical expenses.

The tax-time bonus: It’s a potentially large deduction that
you can take even if you don’t itemize.

3. Education tax breaks

If you have kids in school, don’t forget to take your tax
breaks, even if sorting them gets complicated. There are a few
different credits and deductions, but the best one, if you
qualify – undergraduate education only – is the American
opportunity credit. It’s worth $2,500.

If you need records at the last minute for student loan
interest or 529 Plan contributions, you should be able to find
those through your online accounts. (See link.reuters.com/vun27t
for more detail)

4. Charitable deductions

When you’re pulling your records together, don’t forget any
under-the-radar charitable write-offs. If you gave money to a
qualified non-profit through automatic payroll deductions, it is
deductible. So, too, is that pizza you bought for a homeless
shelter and the miles you drove (at 14 cents a mile) to help a
qualified charity do repair work in a Hurricane Sandy-ravaged
location.

If you’re looking for information at the last minute, go
through your credit card statements (log on to your bank online
if you didn’t save them in hard copy) to search for forgotten
charitable donations, and search your calendar to jog your
memory.

5. Medical expenses

Not everyone will qualify to write off their medical
expenses, but if your health costs were high relative to your
income – either because your earnings were squeezed or because
you had medical issues – it’s a valuable deduction. You have to
itemize to take this deduction, and you qualify only if your
medical costs go above 7.5 percent of your adjusted gross
income.

On the plus side: For tax purposes, medical expenses include
a vast array of spending, from eyeglasses and hearing aids to
travel to medical appointments (at 23 cents a mile), and even
some long-term care insurance premiums.

To tally up all the year’s costs, review any records you
kept, and then search through your credit card statements, your
health insurance website to capture any co-pays that you might
have paid for in cash and online prescription drug ordering
history.

6. Capital gains, capital losses

The one bright spot to taking losses in this volatile market
is that you’ll see some value at tax time. You can use those
investment losses (including any “tax loss carryforward” rolled
over from previous years) to offset your gains, and then take a
$3,000 deduction against income.

Pay attention to the details: If you’ve been reinvesting
dividends, you may need to account for the “wash sale” rule, in
which capital losses are prohibited to the extent that you
bought a similar stock or fund back too quickly.

The increased disclosure on “cost basis” (the purchase value
of your investments for tax purposes) reported on the 1099 forms
you received (and may have ignored) makes it easier to fill out
your tax returns last minute.

If you find mistakes, though, you may need to file an
extension in order to have time to sort out the issue with your
broker before filing your return.

7. Extensions

If you just can’t get it together to get your tax return in
on time, file for an extension to avoid the hefty penalties for
late filing. It’s automatic, and it lasts for six months, until
October 15th. But caveat emptor: Getting an extension does not
extend the time you have to pay your taxes, so if you think
you’ll owe, it’s best to send a guesstimated payment to minimize
any late-payment penalties.

8. Check your return and check it again

Taxpayers make all kinds of errors on their returns, from
basic math (though tax software has generally cut down on those)
to forgetting to claim your kids as dependents (or, perhaps
worse, claiming them at the same time your former spouse does)
to messing up Social Security numbers. Go over your return
carefully. And if you do owe, make sure you’ve got the cash in
your checking account to cover the payment. The last thing you
want is for your check to the U.S. Treasury to bounce.

(Follow us @ReutersMoney or here
Editing by Beth Pinsker and Andrew Hay)

That means grabbing every available deduction, even the ones
you may not have thought about. Here’s a helpful starter list
for your 2012 returns.

TAXES ON YOUR NEW CAR

If you blinked at year-end, you might have missed the
revival of the state sales tax write-off, which lets taxpayers
choose between deducting state income taxes or state sales
taxes.

That makes it a no-brainer for itemizers who live in Florida
or other states without an income tax. While it won’t generally
make sense for those who live in high-tax states like New York
or California, it may be worthwhile for retirees who shelled out
for something big, like a boat or a car.

SUPPLIES YOU SENT TO SANDY VICTIMS

You probably already keep track of the money you donate to
your favorite causes. You can also write off food you bought for
a homeless shelter, pens you donated to an after-school program
and the like. And if you drove your car for charity in 2012, you
get to deduct that, too, at a current rate of 14 cents per mile.

If you scoured your closets for clothes to send to Hurricane
Sandy victims, don’t undervalue them. You can use software like
ItsDeductible from Intuit Inc., publisher of TurboTax,
or H&R Block Inc.’s DeductionPro to come up with the
right value. And yes, you’ll need receipts.

THOSE CRUSHING STUDENT LOANS

You’re allowed to write off up to $2,500 a year in student
loan interest, and you can claim it even if you don’t itemize
your deductions, though there are income limitations. If you
paid extra in an effort to pay down the loan faster, you can
deduct the interest portions of those voluntary payments, too.

BREAST PUMPS AND ACUPUNCTURE

The IRS has a much more lenient description of medical costs
than your health insurer probably does. Lots of expenses,
including breast pumps and their accessories, eyeglasses,
hearing aids, acupuncture treatments and weight-loss programs
are often deductible. So is the travel to your doctor’s
appointments (whether in your own car, at 23 cents per mile, or
by taxi). Want a laundry list? Get a copy of the IRS’s
Publication 502.

Of course, there is a catch: You can only deduct the amount
of medical expenses that top 7.5 percent of your adjusted gross
income.

MOM’S CARE

Families with children get to count their kids as dependents
(the exemption is worth $3,800) and take the child tax credit
($1,000 per dependent child under the age of 17). If you have
kids, you probably are well aware of that. You may not realize
that you may be able to count your aging parents (or other
relatives) as dependents as well. The rules are tighter here: In
general, your parent must make less than $3,800 (excluding
Social Security), and you (along with siblings) must pay more
than half of her bills.

THE HIGH-END LINKEDIN SUBSCRIPTION

Job switchers, take heart: You can deduct the costs of
preparing your resume, traveling to interviews, outplacement
fees and other job-hunting necessities. And if you take a job at
least 50 miles away, you can write off the cost of that move.
While job-hunting costs get lumped into the miscellaneous
deduction (which you can only take once it’s above 2 percent of
your adjusted gross income), there’s no such limit on moving
expenses. In fact, if you qualify, you can get the tax write-off
even if you don’t itemize.

INVESTMENT ADVICE

Fees for financial advisers are deductible. So is the cost
of traveling to meet with your financial guru in person, and
subscriptions for financial publications. But sorry: Costs to go
to investment seminars and hear get-rich-quick schemes are not
generally deductible.

HIGH SPEED INTERNET AND VACUUMING

Self-employed workers get a grab bag of deductions: the home
office (don’t forget the pro-rated electric bill, homeowner’s
insurance and cleaning costs for that part of the house), health
insurance and whatever subscriptions, books and conferences you
need to keep the business going. And if you bought a new laptop,
set up a new phone system or purchased some other big-ticket
piece of equipment for your business, you can write off the cost
immediately rather than depreciating it over time, a difference
that may sound ridiculously geeky but can be extremely valuable.

HOUSING BUBBLE FALLOUT

If you struggled through negotiations with your lender last
year that resulted in part or all of your mortgage debt being
forgiven, you don’t have to report that amount as income, as
long as it was for your primary home. And you can deduct private
mortgage insurance, the coverage that lenders typically require
for those who make downpayments of less than 20 percent, though
income limits apply to this one, too.

FUTURE FUN

OK, so you probably didn’t forget your individual retirement
account or other retirement plan contributions. But this is a
big item and one of the only ones you can still change for the
2012 tax year.

Don’t forget that you have until April 15 to sock away
$5,000, ($6,000 if you’re 50 or older) into an IRA. Depending on
your income and work situation, this might be a deductible IRA
or a Roth IRA. Whether you get a tax break now or later, in a
couple of decades you’ll probably be happy you remembered this
one.

Follow us @ReutersMoney or at

You may need a high-priced education just to figure out how
to write it off. The federal government offers a variety of tax
breaks to lessen your burden. But they are complicated, limited
and overlapping, and it is not always easy to figure out how to
maximize them.

And if you’ve already saved money in a tax-favored 529
college savings plan, that adds another layer of complexity to
your tax calculations.

Here’s a brief guide for the perplexed.

THREE BIG BREAKS

There are three main educational tax breaks to consider at
tax time. First, the American Opportunity Tax Credit, which
offers a $2,500 tax credit per student. It is the best of the
bunch.

Second, the Lifetime Learning Credit, a less-valuable
credit, allows you to reduce your taxes by up to $2,000 per
return.

Finally, the tuition and fees deduction lets you deduct up
to $4,000 from your taxable income. Remember that a deduction,
which reduces the income subject to taxes, is worth less than a
credit, which lowers your tax bill dollar for dollar.

Of course, there is a catch: You have to choose which credit
or deduction to take, and there’s no double-dipping.

If you have one child in college, you must pick one. A
family with two kids in college may be able to mix and match but
can take only one credit per student. In the case of the
Lifetime Learning credit, the maximum credit is $2,000 per
return, regardless of how many students your family may have in
school.

Making matters more complicated, all three tax breaks have
different income limits and eligibility requirements on the
kinds of educational costs they will cover. (For all the
nitty-gritty details, see the Internal Revenue Service’s
publication 970, Tax Benefits for Education.)

FORMULATING A PLAN OF ATTACK

Since you cannot take more than one of these tax breaks per
student, you need to prioritize. If you qualify for all of them,
take them in this order: First, the American Opportunity credit;
then the Lifetime Learning credit; and finally the tuition and
fees deduction.

In the 28 percent tax bracket, for example, both the $2,000
and $2,500 credits will trump the $4,000 deduction, which would
lower your federal tax bill by just $1,120.

The American Opportunity credit has advantages for both
upper-income taxpayers and lower-income ones. It has the highest
income cap of the three, partially phasing out at $160,000 in
income for married couples filing jointly and disappearing
completely above $180,000.

At the low end, the credit is especially valuable because it
is partially “refundable,” as it’s known in tax lingo, meaning
you can claim a piece of it even if you don’t owe any tax.
That’s unusual; most credits can only be used to lower the tax
you owe.

The caveat is that the American Opportunity credit is for
undergraduate education only, and you can claim it only four
years per student.

The Lifetime Learning credit, on the other hand, can be used
for all post-secondary education, including courses you take to
improve your job performance. A student in graduate school, for
example, would qualify for the Lifetime Learning credit but not
the American Opportunity credit; so, too, would someone taking a
few college courses but not pursuing a degree. Since you can
take it for an unlimited number of years, you also could claim
it for a student who’s already maxed out the American
Opportunity credit.

For tax purposes, those paying for higher education will
receive a Form 1098-T from the college or university. Check it
over closely; some recipients have found errors on their forms
that can bring unwanted attention from the IRS.

WHO TAKES THE CREDIT?

Because of the income limitations, many upper-income parents
may not qualify for the education credits, though their children
might. That can be a great strategy.

“I just finished somebody’s return, and it saved them $800
to take the education credit on the child’s return,” says Bill
Fleming, managing director in PwC’s personal financial services
division. “The kid had made money in the summertime, so was
going to pay some income taxes.”

The general rule is that if the parents claim their kids as
dependents, only they can claim a college credit. For the
student to claim the credit, he or she cannot be claimed as a
dependent on the parents’ tax return. That can be worthwhile if,
as in Fleming’s clients’ case, the parents make so much that
they would lose tax breaks for their kids anyway under
alternative minimum tax rules.

It’s a case-by-case determination, Fleming says, and you
need to run the numbers. Then you need to remember from year to
year which children are on the parents’ tax returns.

“We are constantly doing these back-and-forth calculations,”
he says.

WEAVING IN THE 529 PLAN

If you’ve saved in a 529 college savings plan or a Coverdell
education savings account, congratulations – the funds you
withdraw for tuition and fees won’t be taxed. But that will add
another layer of complexity to your tax return.

You can’t get double tax breaks for the same educational
expense, so if any part of it was already covered by tax-free
scholarships, Pell grants or these tax credits, using money from
a 529 plan to cover the same expenses may trigger a tax on that
withdrawal.

Let’s say you have one child in college and incur qualified
educational expenses of $21,000. If you got $12,000 in tax-free
assistance (from scholarships, fellowships or Pell grants),
you’d have $9,000 in remaining educational expenses. You could
then claim the American opportunity credit. It works on a
formula in which you get to claim 100 percent of the first
$2,000 in expenses, but only 25 percent of the next $2,000, for
a total of $2,500 in credits for $4,000 in expenses.

How much could you withdraw tax-free from your 529 plan?
Subtract the eligible expenses from that $9,000 to get the
answer: $5,000. If you go above that amount, you’d owe tax on
the earnings, but not the principal, of that withdrawal.

So plan your withdrawals accordingly, and then give yourself
a back pat: If you can work your way through all that financing,
you deserve some sort of honorary degree, at least.

Follow us @ReutersMoney or at

The amount an individual can exclude from estate taxes (including gifts given during his or her lifetime) is an extremely generous $5.25 million per person for 2013.

That leaves very few people who will be subject to the tax. After all, a couple could exclude $10.5 million from estate or gift taxes, and with smart estate-planning – putting assets into an irrevocable trust, for example – pass on many times that amount tax-free to the next generation. The result: Just 3,800 estates are expected to be big enough to owe any federal estate tax in 2013, according to estimates from the Tax Policy Center.

That is a relief to many would-be estate tax payers. Without the year-end tax agreement, the exclusion was slated to revert to $1 million per person — an amount that worried homeowners in high-priced real estate markets like New York and Los Angeles — with a 55 percent tax rate on most estates.

The new top tax rate for estates is 40 percent.

“Everyone is taking a big, deep breath,” says Dan Schrauth, a wealth adviser in J.P. Morgan’s San Francisco private banking office.

Last year’s uncertainty led wealthy clients to race though plans and gifts that ordinarily might have been been handled slowly and thoughtfully. Some, in their mad dash to act before the end of the year, gave away money and seeded trusts with quick cash. But there’s scant evidence they gave away more than they really wanted to.

“I’m not seeing any clients who have remorse about doing gifting,” Schrauth says.

Those who put cash into a trust may now choose to invest it in growth stocks or other assets expected to appreciate over time. Depending on the type of trust, they may also be able to swap the cash out for existing assets currently held outside the trust.

Those who ran out of time before making gifts last year won a reprieve, and anyone still thinking about getting money out of their estates can make gifts and feed trusts this year.

The annual gifting rules allow you to give up to $14,000 per person in 2014(up from $13,000 in 2012) tax-free. These gifts don’t count toward the lifetime $5.25 million exclusion, and can add up quickly: A couple with two adult married children, for example, could give $28,000 to each this year, plus $28,000 to each spouse, for a total of $56,000. With education costs high and rising, these funds could seed a 529 college-savings plan for your children or grandchildren.

Ironically, a poor economy can help, because it may depress the value of securities, real estate and businesses, allowing people to get more out of their estates. Wealthy families generally seed trusts with growth stocks or businesses likely to expand; that’s because once the asset is transferred, it is out of the estate and its appreciation won’t be subject to any future estate tax.

While heirs could eventually owe capital gains taxes when they sell those assets, the long-term capital gains rate, at 20 percent, is half the estate tax rate.

Those who used up their lifetime $5-plus million exclusion before year-end can still give more this year. That’s because the exclusion is inflation-adjusted, and it rose by $130,000 for 2013.

Even if you doubt you’ll ever have such a high level of assets, it still pays to plan ahead. Pay attention to the rules in your state: Some states have estate and inheritance taxes that kick in at lower levels than do the federal ones and could take a bite out of funds you’d hoped to pass on.

The more important reason to plan is to make sure that what you want to happen after you’re gone does. Who gets control of the business? Who gets the family home? Will a special-needs grandchild have the necessary funds available? Even if you don’t need to do tax-motivated estate planning, you’ll want to get your will in order, and make sure it still represents your wishes.

“Everybody should think about their estate regardless of the level of assets,” says Barry Fischman, a partner at accounting firm Marcum. “The biggest hurdle is psychological. People say, ‘I’m not ready to do anything. I want to maintain control until the day I pass.’ You have to have these conversations that really have nothing to do with the law, but have to do with the emotional attachment and control.”

How much you’ll want to give now depends not just on your financial situation, but on your ability to tolerate risk and uncertainty. As Schrauth says: “Clients should never make gifts that won’t let them sleep at night. The over-arching theme is, what do you feel you can afford to irrevocably give away?”

(Follow us @ReutersMoney or here Editing by Linda Stern and Andrew Hay)

The tax, which covers Social Security, is deducted from your
paycheck automatically. It is based on your income, up to a
maximum of $113,700 for 2013. Income above that amount is exempt
from Social Security taxes. A tax cut to stimulate the economy
shaved 2 percentage points off the payroll tax, but now it has
been restored to 6.2 percent.

As a result, you will owe as much as $2,274 in taxes this
year that you did not have to pay in 2012.

“You have to put it into perspective: It’s (a maximum of)
around $40 a week,” said Robert Pesce, a partner at accounting
firm Marcum LLP in New York City. “That is real money, but I
don’t know that it warrants panic.”

From a tax perspective, the answer is, you can’t do much.
“You can’t opt out of it, and your employer can’t reduce it,”
said Tim Speiss, a partner at accounting firm EisnerAmper and
head of the personal wealth advisers group.

But from a budgeting perspective, if you need the cash,
there are things you can do. Here is how to think about your
options:

CONSIDER CHANGING WITHHOLDINGS

Changing your withholdings will not change the payroll tax
you owe, but it may help smooth out your tax burden for the
year. The Internal Revenue Service’s online withholding
calculator (once it’s up and running for 2013 it will be
available at ) can help you come up with the right number. To change your
withholdings, you would file a new Form W-4 with your employer.

If you make $100,000, for example, you will owe $6,200 for
Social Security taxes and $1,450 for Medicare taxes, regardless
of what you do with your withholdings. At that income level,
each additional allowance you take means, very roughly, more
than $1,000 more annually in your paycheck – $20 a week – due to
lower federal, state and local income taxes withheld.

Be careful if you go this route. Your final tax bill in 2013
depends on your unique financial situation (whether you itemize
or take the standard deduction, for example) as well as whether
you are affected by the year-end tax changes (such as the new
3.8 percent Medicare surcharge).

If you always get a big refund at tax time – as many
taxpayers do – changing your withholdings may be a good way to
keep money in your pocket now rather than loaning it to the IRS.
For instance, if you got more than $1,000 back last year, and
adding one allowance would mean roughly $1,000 back in your
paycheck, you could access that money now instead of later.
Depending on other changes in your financial and tax picture,
however, it is unlikely to shake out quite that neatly.

If you already owe tax in April or received only a small
refund last year, however, Pesce warns that he would not advise
changing withholdings to add to your paycheck. After all, come
tax time, you would have to come up with the extra cash.

“You’re just postponing the problem for later,” Pesce said.
“In my experience, dealing with the problems in the moment is
better than later on. They get worse later on.”

DON’T CUT YOUR 401(k)

You may be tempted to cut your contribution to your
retirement accounts to goose up your paycheck to cover that 40
bucks a week, but it is not generally a smart move. Most
Americans are already under-saving for retirement, and trimming
what you put in now will have a much bigger impact down the road
due to the power of compounding. That is especially true if you
receive a matching contribution from your employer and wind up
leaving it on the table – essentially walking away from free
money.

If you make $100,000, for example, and were putting aside 6
percent in your 401(k) – and your employer was matching at 50
percent up to that level – that’s $9,000 going toward
retirement. Cut that savings to 5 percent, and the amount going
to retirement falls to $7,500 – or $1,000 less that you would
have put in and $500 less from your employer.

Yet you will not see anywhere close to that $1,500 in your
paycheck since part of it was from the match and part of it
disappears as you lose the tax benefit of saving for retirement.

“Bite the bullet and fund the 401(k) plan,” Speiss said.
“You’ve got to figure out a way to make it work.”

RECALCULATE ESTIMATED TAX PAYMENTS

If you are self-employed and owe estimated taxes, the
payroll tax cut’s expiration means that you will owe more in tax
this year than last, too. To figure out how much, you will need
to re-do your estimated tax calculations before making your
first quarter payment in April.

The simplest (and most financially conservative) thing:
calculate the extra 2 percent you will owe this year, divide it
by four, and add that number – an extra $569, if your income is
above the Social Security cutoff – to your quarterly estimated
payments.

Whether you would rather pay that now or later is up to you.
Because of the way the so-called safe harbor rules work, as
long as you pay 90 percent of the total tax you owe this year,
or 100 percent of what you paid last, you generally will not owe
penalties.

TAP DISCRETIONARY INCOME

Ask yourself if you really need the money lost to the
payroll tax for living expenses. If the answer is yes, look at
your discretionary spending. Can you cut your expenses by eating
out less, or by not buying so many cups of coffee during the
work day? More important, is your credit card debt weighed down
by high fees that you would be better off trying to lower?

So he paid what he believed he owed — $2,800 in back taxes, plus the estimated interest and penalties – and entered the U.S. Internal Revenue Service’s overseas disclosure program.

But when the IRS assessed its penalty in November, Winfield was stunned to learn that it would be $28,000 — 10 times the amount of tax he owed from 2003 to 2010.

“My first reaction was: ‘There’s no way in hell I’m going to pay that,’” the 39-year-old Wake Forest, North Carolina, resident says. “It’s kind of crazy when you look at the numbers and compare the penalty to the $2,800 (in back taxes) due.”

The IRS has been aggressively seeking out taxpayers with offshore assets, asking them to come in on their own to avoid further prosecution and requiring foreign financial institutions to send information about American accounts.

But the voluntary disclosure programs have lumped together overseas Americans and immigrants with relatively small accounts and those trying to evade taxes by putting their money offshore.

Winfield moved to the United States from England in 1992 to go to college, with the hope of becoming a professional tennis player. He ended up staying and becoming a certified public accountant.

His bank accounts were funded from inheritance money from his sister – who had died young – and his grandmother, as well from childhood birthday and Christmas gifts.

All the funds had already been taxed in England, he says. But U.S. tax rules require all American taxpayers who have at least $10,000 in a foreign financial account to file a form known as the FBAR each year. He had never declared those accounts here.

To enter the IRS’s overseas voluntary disclosure program, Winfield and his wife, Marisa, scrambled to file amended returns for 2003 through 2010, working with his mother in England to come up with the details of the accounts he had there. Winfield paid what he thought he owed, became a citizen, and waited for the IRS to assess its penalties.

The penalties assessed in the 2011 program, which Winfield was in, can go as high as 25 percent of the account’s highest value. The IRS raised that figure to 27.5 percent for the 2012 program.

While last year the IRS announced a streamlined procedure for certain overseas Americans who were considered low compliance risks, there is no such program for immigrants. Yet with some 39 million immigrants in the United States, compared with 5 million to 6 million Americans living abroad, Winfield’s story may signal a bigger problem at home.

“There’s only half-a-million FBARs reported every year,” Winfield says. “It’s like I’m getting hit for the other 30 (plus) million.”

FEAR AND MISUNDERSTANDING

“There’s a tremendous amount of fear and misunderstanding,” says Steven Mopsick, a Sacramento, California, lawyer who focuses on tax controversies and has handled some 100 voluntary disclosure cases. “This isn’t something they teach you in citizenship classes.”

In fact, Mopsick figures that about half his clients going through the overseas disclosure programs are immigrants from places that include India, Taiwan, Greece and northern Europe.

“I have many Indian couples and families who have come here and successfully established themselves, and all of a sudden they realize their names are on their parents’ accounts,” he says. “It’s a common practice in lieu of estate planning to put names of children on the accounts so they don’t have to go through probate.”

Since he always prepared his own tax returns, Winfield says it was not obvious where he should turn for help. He has been looking around for the right accountant or tax attorney to represent him, but says it has been a struggle.

“I’ve tried to talk to people in North Carolina, and nobody has any dealings with it,” he says. “You have to talk to people in New York or D.C.”

He says he has requested an extension and wonders if he did the right thing by entering the formal overseas disclosure program.

“I just stay awake at night trying to think of ways it could have been handled differently,” Winfield says.

Because the penalty is based on balances when the exchange rate favored the British pound, paying that amount would mean giving up virtually everything he now has in the accounts.

“So, yes, I could pay it,” he says. “But would I have a problem paying it? Yes, because I know where the money came from.”

Unfortunately, feelings about a death in the family are not generally part of a tax calculation.

(The writer is a Reuters columnist. The opinions expressed are her own.)

(Editing by Beth Pinsker and Lisa Von Ahn)