Believe It Higher Education Education IRAs. Beginning January 1, 1998, taxpayers will be able to establish education IRAs. These IRAs must be created exclusively to pay the qualified higher education expenses of a named beneficiary, such as a child or grandchild. Generally, the earnings on the funds in the IRA won't be taxed until a distribution from the IRA is made, and distributions from the IRA won't be included in gross income. But, the annual contribution can't be more than $500 per beneficiary, and can't be made after the beneficiary reaches 18. And, you can't contribute to an education IRA in the same year in which you contribute to a qualified state tuition program on behalf of the same beneficiary. Eligibility for education IRAs phases out for single taxpayers with modified AGI between $95,000-$110,000, and between $150,000-$160,000 for joint returns. Hope Scholarship Credit. Individual taxpayers are allowed to claim a nonrefundable credit against federal income taxes, up to $1,500 per student, per year, for qualified tuition and fees paid during the year on behalf of a student; a student can be the taxpayer, the taxpayer's spouse, or a dependent, and must be enrolled in a post secondary degree or certificate program at an eligible institution, on at least a half-time basis. The credit is computed per student, for each eligible student in the taxpayer's family for the first two years of undergraduate education. This credit phases out for taxpayers filing singly with modified AGI between $40,000-$50,000, and $80,000-$100,000 for joint returns. The Hope credit is available for expenses paid after December 31, 1997, for academic periods starting after that date. Lifetime Learning Credit. Individual taxpayers are allowed to claim this credit against federal income taxes equal to 20% of qualified tuition and fees paid during the tax year on behalf of the taxpayer, the taxpayer's spouse, or a dependent. The maximum credit is $1,000 per year, per taxpayer; after 2005 it will increase to $2,000 per taxpayer, per year. The student must be enrolled at an eligible education institution. The student is eligible for the credit so long as he or she is taking undergraduate or graduate level classes at a qualifying institution, to acquire or improve job skills. This credit is computed on a per taxpayer return basis, so it doesn't vary based on the number of students in a taxpayer's family, and it may be claimed for an unlimited number of tax years. This credit phases out for single taxpayers with modified AGI between $40,000-$50,000, and $80,000-$100,000 for joint returns. The Lifetime Learning credit is available for expenses paid after June 30, 1998, for academic periods beginning after that date. Note: Of the three methods above, you can only elect one for each student in any given year. Student Loan Interest Deduction. Interest on qualified education loans may be claimed as an above-the-line deduction, up to a maximum amount of $2,500 a year, for any loan interest payment due for the first five years of the loan payment and paid after December 31, 1997. The maximum amount will be phased in over four years, beginning with $1,000 in 1998. The deduction phases out for single taxpayers with modified AGI of $40,000-$55,000 and for those filing joint returns, with modified AGI of $60,000-$75,000. Penalty-Free IRA Withdrawals. Beginning January 1, 1998, penalty-free withdrawals can be made from IRAs for qualified higher education expenses, including those for graduate level courses. The withdrawal has to be for academic periods starting on or after January 1, 1998. The expenses can be of the taxpayer, the taxpayer's spouse, a child, or a grandchild of the individual or of the individual's spouse. Although there are no income phase-out ranges, the income limits for contributions to IRAs still apply. Prepared by: The information in this brochure is for general purposes and is not intended as specific advice for any individual business. In addition, late-breaking tax developments may alter certain tax-planning strategies. Before acting on any advice, consult a CPA. |