Volume 4
|
Go
To School - Get A Tax Break
A number of new laws have been created to help students and their parents pay for college.
 |
Deduction for Interest Paid On Student Loans |
|
Hope Credit |
|
Life Time Leaning Credit |
Deduction for Interest Paid On Student Loans
This
deduction allows for an “above the line” deduction on interest paid
for qualifying student loans. Therefore,
taxpayers need not itemize deductions to benefit.
Who
can take the Deduction for Interest Paid on Education Loans?
Individuals
who have taken out loans to pay the cost of attending an eligible higher
educational institution for themselves, their spouse, or their dependents
generally may deduct the interest, subject to certain limitations and
restrictions.
What
can the Loan be Used For?
A
qualified education loan is one incurred solely to pay costs (e.g.,
tuition, fees, room, board, books, transportation) of attendance at an
eligible educational institution for a student (taxpayer, spouse, or
dependent) enrolled at least half-time in a program leading to a degree,
certificate or other educational credential.
This includes costs to obtain a graduate degree.
How
Much is the Deduction?
For
1999 tax returns, the maximum amount a taxpayer can deduct is $1,500.
This amount increases to $2,000 in 2000 and $2,500 in year 2001 and
thereafter. The limitation is
the same regardless of how many students are in the taxpayer’s family.
Only the taxpayer legally obligated to make interest payments under
the terms of the loan can claim the interest deduction.
What
Are Other Limitations?
The
maximum allowable deduction phases out when a taxpayer’s modified AGI
exceeds certain amounts. For
1999, the following phase-out ranges apply:
|
Married Filing Joint Return |
$60,000
- $75,000 |
||
|
Single | $40,000 - $55,000 | ||
|
Head of Household | $40,000
- $55,000 |
||
|
Married filing Separate | No Deduction Allowed |
The deduction is available only for interest paid during the first 60 months when interest is required on the loan. Months in which a loan and interest is in deferral, also defers the 60 month count.
Hope
Credit / Lifetime Learning Credit
To
provide some tax relief for taxpayers who are paying costs for higher
education for themselves or members of their families, Congress created
two tax credits: the Hope Credit and the Lifetime Learning Credit.
Both
credits have several common elements:
|
Each
credit is based on the amount of qualified tuition and related
expenses paid for an eligible student at an eligible educational
institution. |
|
An
eligible student may be the taxpayer, the taxpayer’s spouse, or a
dependent for whom the taxpayer claims a dependency exemption. |
|
If
a student is a claimed dependent of another taxpayer (parent or other
taxpayer), only that taxpayer (not the student) can claim an education
credit for that tax year for the student’s qualified expenses.
Any qualified expenses paid by a student who is a claimed
dependent of a taxpayer are treated as paid by that taxpayer (not the
student) for the tax year in which the expenses are paid. |
|
Both
credits are subject to AGI phase-out limitations. Both credits phase out as modified AGI moves from
$80,000-$100,000 for married joint filers and $40,000-$50,000 for
other taxpayers. |
If a parent’s income exceeds the phase-out amounts of these credits, it may be beneficial for the parents to have the student claim the credit (assuming the child has sufficient tax liability to use it) by not claiming the child as a dependent.
|
Hope
Credit This
is a per student credit.
A maximum Hope Credit of up to $1,500 times the number of
students in a family who meet the requirements may be claimed for
qualifying expenses. The
Hope Credit is allowed for only the first two years of
post-secondary education. The
Hope Credit is not allowed for a tax year if, before the beginning
of the tax year, the student has completed the first two years of
post-secondary education. The amount of the Hope Credit equals 100% of the first $1,000, plus 50% of the next $1,000 of qualified tuition and related expenses paid during the tax year. Thus, the maximum credit of $1,500 is allowed for each eligible student for whom the taxpayer pays at least $2,000 for qualified expenses.
|
 |
Lifetime
Learning Credit This
is a per taxpayer (per return) credit.
It does not vary with the number of students in a family. The
taxpayer may claim a maximum Lifetime Learning Credit of $1,000 per
return (not per student) through the year 2002.
After tax year 2002, the maximum credit increases to $2,000. Unlike
the Hope Credit, the LLC can be claimed for the costs of any course
at an eligible institution even if the student is enrolled on a
less-than-half-time basis to acquire or improve job skills rather
than obtain a degree. The credit is calculated by taking 20% of up to $5,000 of the aggregate qualified expenses per tax return for expenses paid during the tax year for education furnished to an eligible student during any academic period beginning in the tax year or beginning in the first three months of the next year. Thus, the maximum credit allowed per return is $1,000. For expenses paid after 2002, up to $10,000 of qualified expenses per tax return will be eligible for the 20% credit, increasing the maximum credit to $2,000.
|