Sheehan & Company - Bulletin - Articles: Education Incentives

Articles

Education Incentives
FEDERAL INCENTIVES

Student Loan Interest Deduction:
Interest paid on qualified education loans after December 31, 1997 may be deducted from a taxpayerís income. This deduction is taken on page one of the return, therefore it does not matter whether the taxpayer claims the standard deduction or itemizes his deductions. Limitations on the deduction:

Deductions are also limited based upon the taxpayer's income. Income limitations are as follows:

For a single taxpayer the maximum deduction is phased out when the taxpayerís adjusted gross income (not accounting for the interest deduction) is between $40,000 and $55,000.
For married taxpayers, the maximum deduction is phased out when adjusted gross income is between $60,000 and $75,000.
Please note that married taxpayers must file a joint return to qualify for the deduction.

The HOPE Scholarship Credit:
Taxpayers may claim a maximum credit of $1,500 (100% of the first $1,000 of tuition and fees and 50% of the next $1,000 of tuition and fees) for expenses paid on behalf of the taxpayer, the taxpayer's spouse, or a dependent for the first two years of post-secondary education at an eligible institution. The credit applies to expenses paid after December 31, 1997, for education furnished in academic periods beginning after that date. The credit is phased out for single taxpayers whose adjusted gross income is between $40,000 and $50,000 (between $80,000 and $100,000 for joint filers). The HOPE Scholarship credit applies on a per student basis, therefore a taxpayer with more than one qualifying student can take the credit multiple times.

The Lifetime Learning Credit:
Taxpayers may claim a maximum credit equal to 20 percent of up to $5,000 ($10,000 beginning in 2003) of expenses incurred during the taxable year for qualified tuition and fees for eligible students for post-secondary education, including any course of instruction to acquire or improve job skills. The Lifetime Learning Credit applies to expenses paid after June 30, 1998, for education furnished in academic periods after that date. The credit is phased out for single taxpayers whose adjusted gross income is between $40,000 and $50,000 (between $80,000 and $100,000 for joint filers). Unlike the HOPE Scholarship Credit which applies on a per student basis, this credit applies on a per taxpayer basis and can only be claimed once per year.

Education IRA:
An individual may deposit up to $500 a year into the Education IRA of a child under age 18, provided that the total contributions for the child during the year do not exceed $500. The contributor does not have to be related to the child. The ability to contribute to an Education IRA phases at modified adjusted gross income levels between $95,000 and $110,000 ($150,000 and $160,000 for joint filers.) A child may also contribute to his or her own Education IRA.Ý Distributions from an Education IRA will be tax free up to the amount of qualified higher education expenses for the tax year. If the amounts withdrawn exceed qualified education expenses for the year, the amount that represents earnings that have accumulated tax free in the account is taxable and may be subject to the 10% penalty.

For each qualifying student, a taxpayer must chose to claim either the HOPE Scholarship Credit, Lifetime Learning Credit, or the exclusion for distributions from an Education IRA for the taxable year. A taxpayer cannot claim more than one of these benefits for a student for any year.

Penalty Free Higher-Education IRA Withdrawals: Beginning January 1, 1998 a taxpayer may make penalty-free withdrawals from an IRA to pay qualified higher education expenses for himself, his spouse, or the child or grandchild of himself or his spouse at an eligible educational institution. This also applies to Roth IRA withdrawals which may not qualify as tax-free but will be penalty free.

NEW YORK STATE EDUCATION INCENTIVE
The New York State College Choice Tuition Savings Program:Families and individuals may open a special higher education savings account called a Family Tuition Account and benefit from the new State and federal tax incentives. The account owner must designate a single beneficiary for each account, therefore a family may open a separate account for each child.

Contributors to the New York State College Choice Tuition Savings Program relinquish control over the investment of the funds contributed. The Teachers Insurance and Annuity Association of America (TIAA) is responsible for investing all contributions. The TIAA has established nine investment strategies whose stated objective is to achieve investment returns at least equal to the rate of increase in the cost of higher education. The investment strategy used is based upon the age of the beneficiary at the time of contribution (more aggressive for a younger beneficiary and more conservative for an older beneficiary who will need to withdraw the funds sooner). Additionally, there is an annual fee equal to .65% of the assets in the portfolios. No guarantees are made as to the performance of the account or availability of funds to cover necessary education expenses.

Every year up to $5,000 (per taxpayer) in contributions may be deducted from New York State taxable income. Investment earnings on the account are also State tax-exempt and tax deferred for federal purposes. A maximum of $100,000 over a lifetime can be contributed to each account.
An account must be open for 3 years before withdrawals can be made for higher education expenses
The student designated as the beneficiary of the account can use the funds to pay for tuition, room and board, fees, books, supplies and equipment required for enrollment at a public or private two- or four-year institution of higher education. Use of funds is not limited to New York State schools, but the school must be approved by the New York State Regents or a nationally recognized accrediting agency.
Withdrawals for higher education expenses are State tax-exempt. At the time of withdrawal, earnings from the fund are included in the income of the beneficiary for federal tax purposes.
Investments in Family Tuition Accounts will not be used in the calculation of any New York State financial aid programs, however other financial aid programs (private, federal, school) could consider Family Tuition Accounts in calculating assistance.
If the owner of the account withdraws the funds for use other than the higher education of the designated beneficiary, then the funds will be treated as taxable income and the investment earnings will be subject to a 10% federally-required penalty

Other highlights:

The Family Tuition account owner does not have to be related to the beneficiary.
An individual may deduct a maximum of $5,000 in contributions to all accounts in any single tax year, however additional contributions may be made as long as the $100,000 per beneficiary limit has not been exceeded. Earnings on these additional contributions will continue to be tax-free for State purposes and tax deferred for federal purposes.
An account may have only one designated beneficiary, however an account owner may change the designated beneficiary to an individual who is a member of the family of the person originally designated on the account.
If the person designated to receive the funds does not attend college because of death or disability, then the account owner may either transfer the account to another beneficiary or withdraw the funds without being liable for the 10% penalty.
Contributions may not be made to both the New York State College Choice Tuition Savings Program and an Education IRA in the same year.
For more information on the New York State College Choice Tuition Savings Program, or to request an application call: 1-800-NYSAVES or visit www.nysaves.org.

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