Higher Education Tax Benefits Highlighted
Students and families who paid college expenses during 2003 may qualify for higher-education deductions or credits when they file their federal income tax returns. Tax law changes in recent years have added and expanded higher education tax benefits. As they prepare their 2003 federal income tax returns, students and parents should be advised to see if they qualify for savings under these tax law provisions:
Student loan interest deduction
Benefit: You may be able to reduce your taxable income by up to $2,500 for interest paid during the tax year on your student loans.
Income limits: If you are a single taxpayer with a modified adjusted gross income of between $50,000 and $65,000, you can take a partial deduction. If your income is below $50,000 (below $100,000 if you are married and filing jointly) you qualify for the full deduction. Married taxpayers with modified adjusted gross income of between $100,000 and $130,000 may qualify for partial deduction if they file jointly.
Other information: Deductible interest includes loan-origination fees, capitalized interest and voluntary interest payments on loans taken out solely to pay qualified educational expenses for a student enrolled at least half time. Interest paid on loans from a relative or made under a qualified employer plan does not qualify for the deduction. You can claim this deduction even if you don't itemize deductions.
Hope Tax Credit
Benefit: You may reduce your federal income tax by as much as $1,5000 per student for out-of-pocket tuition and fees for each of the first two years of study toward a degree or certification from a college or vocational school. Students must be enrolled at least half time to qualify.
Income limits: If you are single and have a modified adjusted gross income of $51,000 or more, or married, filing jointly, with a modified adjusted gross income of $103,000 or more, you do not qualify for this credit. If you're single and your modified adjusted gross income is between $41,000 and $51,000, or married, filing jointly, with a modified adjusted gross income of between $83,000 and $103,000, you may qualify for a partial credit.
Other information: You cannot claim both the Hope Tax Credit and Lifetime Learning Credit for the same student for the same year.
Lifetime Learning Credit
Benefit: You may be able to reduce your federal income tax by as much as $2,000 for qualifed tuition and related expenses paid for students enrolled in an eligible postsecondary institution. The maximum credit equals 20 percent of the first $10,000 of qualified expenses.
Income limits: Income limits are the same as the Hope Tax Credit.
Other information: The Lifetime Learning Credit is available for any year of education beyond high school, including vocational, college, graduate and professional education. The student does not need to be pursuing a degree or certificate to qualify, and the credit is available for students taking one or more courses. You cannot claim both the Hope Tax Credit and the Lifetime Learning Credit for the same student for the same year.
Deduction for higher education expenses
Benefit: You may be able to reduce your taxable income by up to $3,000 for qualified higher education expenses that you paid during the tax year. This deduction may benefit you if your income is too high to qualify for either the Hope or Lifetime Learning credits.
Income limits: You may qualify for this deduction if you are a single taxpayer with a modified adjusted gross income of $65,000 or less, or married with a modified adjusted gross income of $130,000 or less, and you file a joint return with your spouse.
Other information: In general, higher education expenses that qualify for the deduction are tuition and fees paid for you or your spouse or dependent. You may include student activity fees and fees for course books, supplies and equipment if you were required to pay those fees to the institution in order to attend. Room and board is not an eligible expense. You may not claim this deduction and higher education tax credits such as Hope or Lifetime Learning Credits for the same student in the same year. You can claim this deduction even if you don't itemize deductions.
Employer provided education benefits
Benefit: You may be able to exclude from your taxable income up to $5,250 in higher education assistance provided by your employer each year.
Other information: Undergraduate and graduate education assistance qualify for this tax benefit. Eligible employer provided education benefits include payment for tuition, fees, books, supplies and equipment.
529 college savings plan
Benefit: You may be able to exclude from your taxable income earings from state sponsored qualified tuition programs, commonly known as 529 savings plans, that you used to pay for qualified education expenses. These plans permit you to prepay or invest to pay higher education expenses.
Other information: To qualify for this benefit, you must have used the proceeds of a 529 plan distribution for tuition, fees, books, supplies and equipment at a qualified higher education institution. In the case of room and board costs, check with the educational institution to determine the amount considered "reasonable" for that school for the deduction. You also may contribute to qualifed tuition plans sponsored by educational institutions, but any earnings distributed from these plans prior to 2004 will be taxable.
Coverdell Education Savings Accounts
Benefit: You may contribute up to $2,000 annually to a Coverdell Education Savings Account, formerly known as education IRAs, on behalf of a designated beneficiary who is younger than age 18 or is a special needs beneficiary, to pay qualified education expenses. Although these contributions are not tax deductible, they will grow tax-free until withdrawn.
Income limits: If you're single, and your modified adjusted gross income is less than $95,000 or married, filing jointly, with a modified adjusted gross income of less than $190,000 you can contribute the maximum amount. If you're single and your modified adjusted gross income is between $95,000 and $110,000 or married, filing jointly, with a modified adjusted gross income of between $190,000 and $220,000 you may make a reduced contribution.
Other information: Proceeds of Coverdell accounts may be used to pay certain elementary and secondary education expenses, as well as expenses for postsecondary studies. Contributions to Coverdell accounts and 529 plans are permitted for the same beneficiary in the same year. You may take a tax-free distribution from a Coverdell account in the same year that you claim a Hope or Lifetime Learning Credit, as long as you don't use your Coverdell account distribution for the same expenses for which you claimed the credit. Starting with the 2003 tax year, the federal government will not charge excise tax on excess Coverdell account contributions, as long as the excess and earnings from that amount are withdrawn by May 31 of the following calendar year.
Credit or deduction?
If you qualify, a tax credit generally is more beneficial than a deduction. A credit directly reduces the tax that you owe. A deduction reduces the amount of your income that is taxable. To determine the value of a deduction, multiply the amount of the deduction by your tax rate.
Please note that this information is intended as a general summary of these tax benefits. Financial aid administrators should refer students and their families to a qualified tax advisor or the Internal Revenue Service (IRS) to determine eligibility for any of these benefits. They may reach the IRS on the Web at www.irs.gov, or by phone at (800) 829-1040. For additional information, order IRS Publication 970, "Tax Benefits for Education."
Further information is available in the free USA Funds brochure "Higher Education Tax Benefits - Expanded Taxpayer Savings." The brochure is available to view and to order by visiting www.usafunds.org/forms/order_pubs.asp on the USA Funds Web site.