Planning

Important Information

Education Tax Laws

The Taxpayer Relief Act of 1997 instituted new tax programs, including those described below. The following definitions are provided in layman’s terms and should not be considered tax advice. You should consult with a tax accountant or the actual tax code to determine if you are eligible to take advantage of the tax regulations explained below. The IRS can also answer your questions at 1-800-829-1040.

Hope Scholarship Credit

Available to many families with modified Adjusted Gross Income less than $100,000. This is a tax credit based on annual tuition expenses paid, for up to $2,000 per year (beginning in 2003), per student in college. It may only be claimed for the first two years of college. This credit is only available for tuition paid after January 1, 1998. Married couples must file jointly to claim this tax credit.

Lifetime Learning Credit

Available to many families with modified Adjusted Gross Income less than $100,000. This is a tax credit based on tuition paid after June 30, 1998 per tax payer (regardless of how many students are in college). It cannot be claimed simultaneously with the Hope Credit. The maximum credit is 20% of annual tuition expenses with a maximum credit of $2,000 per year (beginning in 2003). Married couples must file jointly to claim this tax credit.

Families will most likely claim the Hope Credit during the student’s first two years of college, and the Lifetime Learning Credit in the student’s last two years in school. Families with more than one student in college at a time will have to weigh the pros and cons of each tax credit available to them.

Cordell Education IRA

Allows a $2,000 annual contribution for families with modified adjusted gross incomes under $190,000. Earnings in an education IRA accumulate tax-free, and no taxes would be due upon withdrawal, if the withdrawal is used for college expenses. This benefits families with young children, who are looking for a tax-free saving option for college. Education IRA’s must be included as assets when completing the Free Application for Federal Student Aid (FAFSA).

Other Information

In addition to the programs listed above, many families will want to investigate tuition and fees deductions, 529 savings plans, education Savings Bonds, and other Federal Income Tax incentives for financing your college education. Finally, it is the taxpayers responsibility to obtain and use current IRS rules and regulations since information presented here may not be up-to-date due to changes in the tax codes.