Hope Scholarship and Lifetime Learning Credits
Coverdell Education Savings Account
"Above-the-line" deduction for qualified higher education
expenses
Deduction for interest on education loans
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Hope Scholarship and Lifetime Learing Credits |
The Taxpayer Relief Act of 1997 (the Act) provides taxpayers two
nonrefundable tax credits for payments made for qualified tuition and
related expenses (tuition and fees, but not books) for post-secondary
education - the HOPE Scholarship Credit and Lifetime Learning Credit.
The HOPE Scholarship Credit allows taxpayers to claim a maximum
credit of $1,650 (100 percent of the first $1,000 of tuition and fees
and 50 percent of the next $1,000 of tuition and fees) for expenses paid
on behalf of the taxpayer, the taxpayer's spouse, or a dependent for the
first two years of post-secondary education at an eligible institution.
The student must be enrolled on at least a half-time basis for
at least one academic period during the year for the expenses to be
qualified.
The Lifetime Learning Credit allows taxpayers to claim a maximum
credit up to $2000 per tax return incurred during the taxable year for qualified tuition and fees
for eligible students for post-secondary education, including any course
of instruction to acquire or improve job skills.
Both credits limit qualified expenses to the expenses of the taxpayer,
the taxpayer's spouse, or a dependent of the taxpayer. Additionally, the
total of qualified expenses must be reduced by any tax-free educational assistance
(grants, scholarships, employer-provided tuition assistance) and by
any refunds of qualified expenses. Qualified expenses paid for with loans are
eligible. Both credits are phased out for taxpayers with modified adjusted gross income between
$42,000 and $52,000 (between $85,000 and $105,000 for joint filers). For each
qualifying student, taxpayers must choose to claim either the HOPE Scholarship Credit,
the Lifetime Learning Credit, or the exclusion for certain distributions from an
education IRA for the taxable year. They cannot claim more than one of these
benefits for a student for any year.
To claim the credits, taxpayers are required to provide the name and taxpayer
identification number of the student on the return. Educational institutions
are required to report information related to higher education tuition and
related expenses assessed during the taxable year.
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Coverdell Education Savings Account |
The Taxpayer Relief Act of 1997 also created an
educational funding vehicle, called a Coverdell Education
Savings Account, for the
purpose of paying the qualified higher education expenses of a
designated beneficiary. Qualified higher education expenses
include tuition, fees, books, supplies and equipment, and room and
board. Contributions are non-deductible, and earnings on the amount held
in the IRA will be non-taxable until distributed. You can contribute to
a Coverdell ESA if your modified adjusted gross income is less than $110,000 for
single filers and $220,000 for joint filers. Annual contributions
are limited to $2000 per beneficiary under the age of 18.
Distributions from a Coverdell ESA are excludable from income to the extent
the amount does not exceed the qualified higher education expenses of the
eligible student during the year. If the distribution from the Coverdell ESA
exceeds the qualified higher education expenses, only a portion of the
distribution is excludable. In addition, distributions not used for higher
education are subject to a 10 percent addition to tax. The Act requires any balance
remaining in a Coverdell ESA at the time a beneficiary becomes 30 years of
age to be distributed and taxed to the beneficiary (and subject to the 10
percent addition to tax). However, the balance may be rolled over tax free
to another Coverdell ESA benefiting another family member. This provision
is effective for taxable years beginning after December 31, 1997.
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"Above-the-line" deduction for qualified higher education expenses |
This deduction was created with the Economic Growth and Tax Relief
Reconciliation Act of 2001 and is effective for taxable years
beginning after December 31, 2001 and
before January 1, 2006. The qualified higher education expenses are defined
in the same manner as for the Hope Scholarship Credit. In 2002 and 2003, a
taxpayer with adjusted gross income of $65,000 or less ($130,000 or less for
joint returns) is entitled to a maximum deduction of $3000 per year. In 2004
and 2005, a taxpayer with an AGI of $65,000 or less ($130,000 for joint returns) is
entitled to a maximum deduction of $4000 and a taxpayer with an AGI of $80,000 or
less ($160,000 for joint returns) is entitled to a maximum deduction of $2000.
Taxpayers may claim the Hope/Lifetime credit or the "above-the-line"
deduction, but not both.
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Deduction for interest on education loans |
| The Taxpayer Relief Act of 1997 provides an above-the-line maximum
deduction for up to $2,500 of interest paid by taxpayers on qualified
education loans. This provision is effective for interest due and paid on
or after January 1, 1998. Taxpayers may take a deduction on
qualified education loans for the benefit of the taxpayer, the taxpayer's
spouse, or any dependent of the taxpayer as of the time the indebtedness was
incurred. Originally, deductions were allowed only for the first 60 months that interest
payments are required. The Economic Growth and Tax Relief Reconciliation Act of 2001
repealed the 60 month repayment limit for interest paid on or after
January 1, 2002. The deduction is phased out for taxpayers with modified AGI
between $50,000 and $65,000 for single filers ($100,000 and $130,000 for joint filers).
Married taxpayers must file jointly to take the deduction, and the
credit may not be claimed on the return of anyone who is claimed as a
dependent on another person's return.
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