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Taxes: Five ways to save
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March 27, 2000: 9:52 a.m. ET
Don't forget to take advantage of education credits and IRAs
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NEW YORK (CNNfn) - Sometimes, the most effective way to trim your tax bill doesn't involve a high-priced accountant at all. It just takes a little due diligence to track down some rather lucrative tax breaks you might be missing out on.
Thanks to the Taxpayer Relief Act of 1997, some of those tax credits are relatively new to the scene. Others, including the tax-advantaged Roth IRA, are oldies but goodies and should never be overlooked.
To make your life easier, the IRS has pulled together a list of five basic tax-advantaged tools you should not ignore. They are listed below.
1.) Cut your federal income tax by the full amount of the HOPE Credit or the Lifetime Learning Credit for qualified costs of higher education.
If you haven't already heard, undergraduate students can take up to $1,500 per year, per student under the HOPE Credit. It only applies for the first two years of post-secondary education, such as college or vocational school; not to graduate and professional level programs.
Under the credit, you are allowed to claim 100 percent of the first $1,000 of qualified tuition and related fees paid during the tax year, plus 50 percent of the next $1,000, for a maximum credit of $1,500 per eligible student, per year. The student must be enrolled at least half-time.
The Lifetime Learning Credit, on the other hand, applies to graduate level and professional degree courses, as well as undergraduate courses including instruction to acquire or improve job skills. If you qualify, your credit equals 20 percent of the post-secondary tuition and fees you pay during the year. It is limited to a maximum credit in 1999 of $1,000 per year.
In 2003, that maximum will increase to $2,000 per year.
Don't forget, it's either one or the other. You can't take both credits at once, and certain qualifications apply. Click here for a chart outlining the qualifications.
As an alternative, there's also an Education IRA. These accounts allow you to contribute up to $500 per child until that child turns 18. The contributions are non-deductible, but the good news is they grow tax-deferred -- just as they would from any other IRA.
Later, withdrawals can be made tax-free to the extent they are not more than the child's qualified education expenses including tuition, books, room and board.
Lastly, keep in mind that you can also make an early withdrawal from your traditional IRA without paying the usual 10 percent penalty if you use the funds to pay for qualified higher education expenses for yourself, your spouse, child or grandchild.
2.) Subtract the full amount of the Child Tax Credit right off your total tax bill, if you qualify.
This is a full, dollar-for-dollar credit that can cut your 1999 federal income tax by up to $500 per qualifying child.
You can qualify for the credit if you have a dependent child or descendent, stepchild, or foster child whom you claim a dependency exemption. The child must be under 17 as of Dec. 31, 1999, and must be a U.S. citizen or resident.
You can figure out your credit using the worksheet in the Form 1040 or 1040A instructions. Then, enter it on Line 43 on your Form 1040, or Line 28 on Form 1040A. For more information, see Publication 17, Your Federal Income Tax, Child Tax Credit, Claiming the Credit.
 Also, take note that your total Child Tax Credit gets reduced by $50 for each $1,000 that your Modified Adjusted Gross Income (AGI) exceeds $110,000 for joint filers; $75,000 if single, head of household, or qualifying widow(er); or $55,000 if married filing separately.
If you have three or more children, special rules apply. See IRS Form 8812 for instructions.
3.) Save for the future with a Roth IRA without paying tax on future gains or earnings by following certain guidelines.
Financial planners say the Roth IRA can be one of the most powerful weapons in your arsenal of tax-advantaged tools. That's because you don't have to pay taxes on the money when you withdraw it. And unlike a traditional IRA, the Roth has no rule requiring minimum distributions after the taxpayer reaches age 70-1/2.
 According to the IRS, the rules for withdrawal generally hold that you must be 59-1/2 and the withdrawal of savings and gains must not be made until after the fifth year, beginning with the year of your first contribution.
Tax-free withdrawals are also allowed for first home purchase -- with a $10,000 lifetime cap -- or upon death or disability, after the five-year requirement is met.
You may still be able to convert funds to a Roth IRA from a traditional IRA to save taxes on future interest. But take note that the maximum you can contribute is $2,000 per year. That's allowed for individuals of any age with taxable compensation and a Modified AGI below $150,000 for married filing jointly, or $95,000 for a single taxpayer.
Participation in an employer's retirement plan does not affect your eligibility for a Roth IRA.
4.) Maximize the taxes required on certain IRA withdrawals for qualified costs of higher education or a first home.
That IRA, in fact, may be even more versatile than you think.
The IRS reminds taxpayers that you can withdraw up to $10,000 from a traditional or Roth IRA to buy a first home. You won't be charged the 10 percent penalty on early withdrawal if you use the money within 120 days to buy, build or rebuild a first home. To qualify, the purchase may be for you or your spouse, or either one's children, grandchildren, parents or grandparents.
You can also withdraw funds from a traditional or Roth IRA for certain education expenses, without incurring the penalty on early  withdrawal if the amount does not exceed the qualified higher education expenses for or your spouse, or either one's children or grandchildren.
5.) Don't forget the "same-year" deductions that make traditional IRAs a popular choice.
Lastly, the IRS urges the public to remember that traditional IRAs, which allow you to deduct your contributions the year you contribute them, are still a good choice for immediate tax savings. Tax is deferred until withdrawal -- usually after retirement when your tax rate is lower. 
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