COLLEGE TUITION DEDUCTION, EDUCATIONAL IRA ACCOUNTS, AND BETTER STUDENT LOAN DEDUCTIONS

COLLEGE TUITION DEDUCTION, EDUCATIONAL IRA ACCOUNTS, AND BETTER STUDENT LOAN DEDUCTIONS

STARTING IN 2002:

COLLEGE TUITION DEDUCTION

• The new law introduces an above-the-line deduction for qualified higher education expenses. For 2004 through 2007, the deduction is $4,000 for singles with incomes below $65,000 and married filing jointly with incomes below $130,000. Single taxpayers with incomes up to $80,000 and for joint filers with incomes up to $160,000 are permitted a maximum deduction of $2,000 in 2004 through and 2007. After 2007, this deduction is scheduled to sunset (die).

• This deduction cannot be claimed in the same year as a HOPE or Lifetime Learning credit for the same student.

EDUCATIONAL IRA ACCOUNTS

• Distributions from education individual retirement accounts are free from federal taxation if they are used to pay for qualified education expenses. The new legislation greatly expands the prominence that education IRAs will play in future family savings strategies:

• New contribution limit. Currently, annual contributions to education IRAs are capped at $500. The new law raises the limit to $2,000 starting in 2002. The new law also allows contributions to special needs beneficiaries after they turn 18.

• Starting in 2002, contributions also will be allowable not only from individuals but also from corporations, tax-exempt organizations and other entities. Contributions counted toward any tax year will be permissible until April 15 of the following year, rather than being cut off on December 31.

• Higher AGI ceiling. The current contribution phase-out range for joint filers of $150,000—$160,000 jumps to double that of single filers ($190,000 — $220,000).

• Grades K-12 covered. The most controversial and amazing provisions in the new law are: Proceeds in education IRAs are now available to pay for elementary and secondary school tuition — public and private — as well as the costs of higher education. Covered expenses include tutoring, computer equipment, room and board, uniforms and extended day program costs.

ENHANCED STUDENT LOAN DEDUCTION

• The new law permits more student loan interest — considerably more — to be deducted.

• Current rules permit taxpayers to deduct up to $2,500 in student loan interest above-the-line. The deduction also had been severely limited by the rule that a taxpayer’s adjusted gross income must fall under a certain threshold and the interest must be attributable to payments made during the first 60 months in which interest payments are required. The new law scraps these restrictions. It raises the income phase-out thresholds (to $55,000-$65,000, from $40,000-$50,000, for singles, and to $100,000-$130,000, from $60,000-$75,000, for joint filers). In addition to repealing the 60-month limit, the new law repeals the restriction that voluntary payments of interest are not deductible.

If you have concerns, want to understand better, or want to take advantage of some of these tax benefits please call or email me for a tax planning appointment. The above amounts do not include information on income limitations on the above benefits.

Home (Index) Page