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LOISELLE,
GOODWIN & HINDS
CERTIFIED PUBLIC ACCOUNTANTS
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If you are a parent with college-bound children, you are no doubt concerned about how best to fund future college costs, and, if your to minimize the children are already college age, how current expenses for are a number of tax breaks designed tuition and related expenses. There specifically to assist in these areas, some of which are first available in 1998.
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 right 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 aren't deductible, funds in the account aren't 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.
Deduction for education loan interest. Starting this year you can deduct certain interest on student loans, even if it's 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 don't itemize deductions, is allowed only for interest 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).
Scholarships. Scholarships are exempt from income tax if certain conditions are satisfied: For example, 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).
Tuition reduction plans for employees of educational institutions. Tax exempt educational institutions sometimes provide tuition reduction plans for the children of their employees -- tuition reductions for those children who attend that educational institution, or cash tuition payments for children who attend other educational institutions. If certain requirements are satisfied, these tuition reductions are exempt from income tax.
U.S. savings bonds. Series EE U.S. savings bonds offer two tax-savings opportunities when used to finance your child's college expenses: First, you don't have to report the interest on the bonds for federal tax purposes until the bonds are actually cashed in; and second, interest on "qualified" Series EE bonds may be exempt from federal tax if the bond proceeds are used for qualified college expenses.
To qualify for the tax exemption for college use, the bonds must be purchased in your name (not the child's) or jointly with your spouse. The proceeds must be used for tuition, fees, etc. (not room and board). If only part of the proceeds are used for qualified expenses, then only that part of the interest is exempt. But if your adjusted gross income (AGI) is too high, the exemption is phased out. For bonds cashed in during 1998 the exemption starts to "disappear" when your AGI hits $78,350 for joint return filers ($52,250 for singles) and is gone entirely once AGI hits $108,350 ($67,250 for singles). (These figures are adjusted annually for inflation.)
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 1/2. However, the distributions are subject to tax under the usual rules for IRA distributions.
Qualified State tuition programs. A qualified State tuition program allows you to purchase tuition credits for a child or to make contributions to an account set up to meet a child's future higher education expenses. Contributions to these programs are not deductible, but the funds grow tax-deferred and are taxed on distribution at the child's tax rate if used for higher education expenses. There are special gift tax breaks for contributions to these accounts, and unused funds can be transferred tax-free to the account of another family member.
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. If you would like to discuss one or more of the above planning or payment possibilities, or any other alternatives, in more detail, please contact us.
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