With college tuition rates rising, many parents find it difficult to save enough to pay for their childrens college education. However, the new
$1.35 trillion Economic Growth and Tax Relief Reconstruction Act of 2001, passed by Congress in May, could open up new avenues for parents to fund their childrens education.
In 1997, Congress enacted higher education tax credits for tuition paid by qualified students. That bill included programs such as the Hope Scholarship Credit, the Lifetime Learning Credit, expanded ability to claim deductions for interest paid on student loans, and an Educational Individual Retirement Account. The new 2001 provisions make some of these provisions available to more parents than before. (Because everyones tax situation is different, parents should contact their tax advisers to discuss their own situations.)
The summary of the new higher education provisions provided on the American Council on Education web site gives a good overview of the changes and modifications:
Student Loan Interest Deduction: The act raises the income eligibility to claim a student loan interest deduction to $50,000 to $65,000 (up from $40,000 to $55,000) for single taxpayers and to $100,000 to $130,000 (up from $60,000 to $75,000) for married taxpayers who file jointly. After 2002, the income eligibility will be adjusted annually for inflation. In addition, the act repeals the current 60-month time limit during which student loan interest is deductible and makes voluntary payments of interest deductible. The changes are effective for interest paid on qualified education loans after Dec. 31, 2001.
Qualified Tuition Plans: The act waives the tax on withdrawals from the prepaid tuition plans and savings programs sponsored by many states. It also allows private colleges and universities to set up prepaid tuition plans, beginning in 2004. The act allows one rollover per year among these different plans, so long as the account is maintained for the same beneficiary.
Education IRAs: The act increases the annual limit on contributions to education IRAs from $500 to $2,000. Private elementary and secondary school expenses, as well as higher education expenses, can now be paid tax-free from an education IRA. The income eligibility to claim this benefit increases from the current $95,000 to $110,000 for single taxpayers, and from $190,000 to $220,000 for married taxpayers filing jointly. A taxpayer may claim Hope or Lifetime Learning credits for a taxable year and exclude from gross income amounts distributed from an education IRA on behalf of the same student as long as the distribution is not used for the same educational expenses for which a credit was claimed. The provisions are effective for taxable years after Dec. 31, 2001.
Above the Line Deduction for Qualified Higher Education Expenses: The act permits taxpayers to take a deduction for qualified higher education expenses paid by the taxpayer during a taxable year. Qualified higher education expenses are defined in the same manner as for purposes of the Hope scholarship credit. In 2002 and 2003, taxpayers with an adjusted gross income that does not exceed $65,000 ($130,000 for married taxpayers filing jointly) are entitled to a maximum deduction of $3,000 per year. In 2004 and 2005, individuals at these income levels are entitled to a $4,000 deduction. Also in 2004 and 2005, taxpayers with incomes between $65,000 and $80,000 (single) and $130,000 and $160,000 (joint returns) are entitled to a deduction of up to $2,000. This provision expires in 2005.
For more information on the Economic Growth and Tax Relief Reconstruction Act of 2001 go to www.dttus.com/pub/taxcut/default.htm.
For more information on the 1997 higher education tax credits, contact your tax adviser or go to www.ed.gov/inits/hope. You can get a copy of the Internal Revenue Services Publication 970 on tax benefits for postsecondary students by calling 1-800-829-3676.
For more information on other forms of student financial aid, go to www.ed.gov/studentaid, where you can download a student guide.
The Federal Student Aid Information Centers toll-free number is 1-800-433-3243.
by Bren Landon