If you are continuing your education or if you have a child attending college, you should know about two education tax credits that could change the bottom line on your tax return. If you qualify for the HOPE Credit or the Lifetime Learning Credit, you can subtract the credit from your federal income tax. Also, you may want to consider IRA investment options for education to help you prepare for the costs of higher education. And, this year, you may be able to take a tax deduction of up to $1,500 for interest on student loans.
• The HOPE Credit is for undergraduates enrolled in their first two years of post-secondary education, such as college or vocational school. It does not apply to graduate and professional-level programs. With this credit, you are allowed 100% of the first $1,000 of qualified tuition and related fees paid during the year, plus 50% of the next $1,000 per eligible student, per year. The student must be enrolled at least half time. The credit applies to expenses paid after 12/31/97 for academic periods after that date.
• The Lifetime Learning Credit is for any post-secondary study – graduate level and professional degree courses including instruction to acquire or improve job skills, as well as undergraduate courses. Your credit may equal 20% of the tuition and fees you pay each year for all qualifying students – for a maximum credit in 2000 of $1,000 per year. The Lifetime Learning Credit can be used for an unlimited number of years, starting with expenses paid after 06/30/98 for academic periods beginning after that date.
To qualify for either the HOPE Credit or the Lifetime Learning Credit, you must pay post-secondary tuition and fees for yourself, your spouse, or your dependent. The parent or the student, but not both, may claim these credits. If the student was claimed as a dependent, the student cannot claim the credit. And, remember, you cannot claim both the HOPE and Lifetime Credits for the same student in the same year. Also, the HOPE Credit is not allowed for a student convicted of a felony drug charge.
• The education IRA allows you to contribute up to $500 a year per child until the child turns l8 years of age. This amount is not deductible. The amount that one person may contribute may be affected by certain income limitations. Earnings from the education IRA will grow tax-deferred, just as they would in any other IRA. Later, tax-free withdrawals can be made to pay for the child's qualified education expenses including tuition, books, and room and board. If withdrawals exceed qualified expenses in any year, a proportionate amount of the earnings withdrawn will be taxable, with a 10% additional tax on that portion. Assets can be rolled over from one education IRA to an education IRA of a family member of the beneficiary, as long as this is done before the beneficiary reaches age 30. Any amount remaining in the education IRA at that point must be withdrawn, with the accumulated earnings subject to both income tax and the 10% additional tax.
• If you take an early withdrawal of funds from either a traditional or Roth IRA to pay higher education expenses for yourself, your spouse, child or grandchild, you do not have to pay the usual 10% additional tax. But remember that you cannot “borrow” from an IRA; in fact, amounts taken from an IRA for more than 60 days cannot be put back into an IRA.
• This year, you may be able to deduct up to $1,500 of interest paid on qualified student loans from total income on your 2000 return – even if you don't itemize deductions. The maximum deduction will increase by $500 per year until it reaches $2,500. This deduction phases out for taxpayers with Modified Adjusted Gross Income of $40,000 to $55,000 if single and $60,000 to $75,000 if filing jointly.
For all the details on these education-related tax incentives, call toll-free 1-800-829-3676 to order free IRS Publication 970, Tax Benefits for Higher Education. Also, check the IRS Web site for 2000 tax law changes at www.irs.gov.
(Courtesy of ARA Content, www.aracontent.com, e-mail: email@example.com)
For a related article on tax preparation click here.
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