Educational Benefits Under the New Law

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, September 28, 1997

Copyright 1997 Robert L. Sommers, all rights reserved.

Tax Breaks for Education

For those who qualify, the new tax legislation provides significant tax breaks for higher education, starting in 1988.

Hope Scholarship: After December 31, 1997, a family may claim a maximum tax credit of $1,500 per student for the first two years of post-secondary ("college") education -- $1,000 in the first year, $500 (50% of tuition up to $1,000) in the second year. This credit is allowed for tuition, registration fees and related expenses, but not room and board, at an "eligible educational institution." Families of half-time students are also eligible for these credits.

Lifetime Learning Credit: After June 30, 1998, another tax credit equal to 20% of the first $5,000 of qualified expenses in total (whether incurred in one year or several), may be claimed for "qualified expenses" (including expenses to acquire or improve job skills) at an eligible educational institution. Eligible are college juniors, seniors, graduate students and those improving their job skills. In 2003, the credit increases to 20% of the first $10,000 of expenses. The Lifetime Learning Credit is available only when the Hope Scholarship is not claimed.

For both credits, the qualified educational expenses must be incurred for the taxpayer, spouse or dependents under age 24 and who are claimed as dependents on that parent's tax return. Credits are phased out ratably for adjusted gross incomes ("AGI") between $50,000 and $80,000 for joint filers ($40,000 - $50,000 for single filers). These AGI limitations apply even if more than one child is eligible for the education. Eligible educational institutions will include most accredited colleges that offer credit towards a degree. Vocational and proprietary institutions may qualify if they satisfy the Department of Education's student aid programs.

Unlike the Hope Scholarship, the Lifetime Learning Credit may be used for: (1) undergraduate, graduate or professional degrees; (2) an unlimited number of years; (2) any course that helps acquire or improve job skills; and (4) any course load. However, it is determined on a per-taxpayer, not per-student, basis. For example, a parent is entitled to a maximum credit of $1,000, regardless of how many dependents qualify for the Lifetime Learning Credit. In contrast, the Hope Scholarship's $1,500 maximum credit is available for each eligible student.

Educational IRAs: After 1997, taxpayers may contribute a non-deductible contribution of $500 per year, per child (until the child reaches age 18) to an account whose earnings and eventual distributions for college educational expenses (including room and board for both half-time and full-time students) will be tax-free. The IRA may be rolled over to another child in the same family, including the beneficiary's child. If the child does not attend college, the IRA must be distributed when the beneficiary attains age 30. The exclusion does not apply in any year the Hope Scholarship is claimed for the same student.

Contribution limits are phased out for AGIs between $150,000 to $160,000 for joint filers, $95,000 to $110,00 for single filers. There is a 6% excise tax on excess contributions or one or more IRAs for a single student. Generally, the distributions are not taxed if they are used for educational expenses. Also, there could be a 10% additional tax if a taxpayer receives a distribution not applied for education.

Regular IRA Distributions: After December 31, 1997, distributions from regular IRAs for qualified educational expenses for the taxpayer, spouse, child or grandchild (including a spouse's child or grandchild) will not be subject to the 10% penalty for early withdrawal. The amount that can be withdrawn penalty-free, however, is reduced by any nontaxable scholarships, educational assistance or payments for a student's education (other than a gift or inheritance).

Interest Deduction: After 1997, an interest deduction will be available for interest paid on student loans, during the first 60 months in which interest payments are required. The maximum annual deduction in 1998 is $1,000 and increases $500 each year to $2,500 in 2001. Eligibility for the deduction is phased out for single filers with AGI of $40,000 to $55,000, joint filers of $60,000 to $75,000. The loan must be incurred for the cost of attending an eligible educational institution, including tuition, fees, books, room and board. Institutions conducting internship or residency programs, and hospitals or health care facilities offering post-graduate training are also eligible institutions.

Employer-Provided Assistance: Employees may exclude up to $5,250 per year for college educational assistance (excluding graduate courses) for instruction that commences prior to June 1, 2000.


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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**