Education IRAs
In 1998, for the first time, you can establish education IRAs and make contributions of up to $500 a year for any child under age 18. The ability to make these contributions begins to phase out once your AGI is over $150,000 on a joint return ($95,000 for singles). If the income limitation is a problem, the child can make a contribution to his own account. Although contributions are not deductible, funds in the account are not taxed, and distributions are tax free if spent on higher education expenses. Distributions not used for higher education expenses are subject to tax and penalty, but unused funds can be transferred tax free to an education IRA of another family member.
Tuition Tax Credits
You can now take a tax credit of up to $1,500 a year per student for the first two years of college (a 100% credit for the first $1,000 in tuition and related expenses, and a 50% credit for the second $1,000). Beginning in July, 1998, you can take a credit of up to $1,000 per family for every additional year of college or graduate school (a 20% credit for up to $5,000 in tuition). The credit for the first two years of college is called the HOPE Credit, and the credit for later years is called the Lifetime Learning Credit. Both credits are phased out for couples with adjusted gross income between $80,000 and $100,000, or singles with income between $40,000 and $50,000.
Scholarships
Scholarships are exempt from income tax if certain conditions are satisfied: The scholarship must not be compensation for services and must be used for tuition, fees, books, supplies and similar items (and not for room and board).
Deduction for Education Loan Interest
Starting this year you can deduct certain interest on student loans, even if it is not home equity debt. The maximum deduction is $1,000 for 1998, $1,500 for 1999, $2,000 for 2000, and $2,500 for 2001 and after. The deduction, which is available even to taxpayers who do not itemize deductions, is allowed only for interests paid during the first 60 months in which interest payments on an education loan are required. The deduction phases out for couples whose AGI is between $60,000 and$75,000 ($40,000 and $55,000 for singles).
Penalty Free IRA Withdrawals
Beginning in 1998, IRA funds can be withdrawn to pay college costs without incurring the 10% early withdrawal penalty that usually applies to withdrawals from an IRA before age 59 =. However, the distributions are subject to tax under the usual rules for IRA distributions.
We also have information about: 1) Savings Bonds, and 2) Qualified State Tuition Programs, among other planning ideas including utilizing trusts. Please call us if you are interested.
Not all of the above breaks may be used in the same year, and use of some of them reduces the amounts that qualify for other breaks. So it takes planning to determine which should be used in any given situation.