Sheehan & Company - Bulletin - Articles: 2001 Tax Relief Act to Provide Education Benefits

Effective tax year 2002, there will be several areas of benefits available to taxpayers with respect to education tax deductions. With the cost of education continuing to rise at twice the rate of inflation, the federal government has responded by enacting The Economic Growth and Tax Relief Reconciliation Act of 2001. Although the new legislation does not take effect until after December 31, 2001 and will "sunset" December 31, 2010, their will be substantial benefits in the upcoming years for eligible candidates.

A significant modification to the deductible expense for qualified higher education will take effect after December 31, 2001. In the first two years, 2002 and 2003, a taxpayer will be entitled to a maximum annual deduction of $3,000 if their adjusted gross income does not exceed $65,000; $130,000 for a married couple filing jointly. In 2004 and 2005, a taxpayer will be entitled to a maximum annual deduction of $2,000, if their adjusted gross income does not exceed $80,000; $160,000 for a married couple filing jointly. Taxpayers with incomes in excess of these limits receive no deductions. Additionally, a taxpayer cannot claim a section 222 credit and a HOPE or Lifetime Learning Credit for the same student in the same year.

In addition, the Act changes the provisions for education IRAís considerably. The annual limit on contributions to education IRAís will increase from $500 to $2,000. In addition, the definition of qualified education expenses expands to include elementary and secondary school expenses. Eligible withdrawals from education IRAís will also include fees, tuition, academic tutoring, supplies, books, uniforms, transportation, room & board, computer technology or equipment for kindergarten through grade 12 at any school. Also, the phase-out range for married taxpayers filing a joint return will be $190,000 to $220,000 of modified adjusted gross income.

In addition, the Act elucidates that a corporation and other similar organizations (including tax-exempt organizations) are permitted to make contributions to education IRAís regardless of the income of the corporation or organization during the year of the contribution.

Another aspect of education that will be affected by the Act is that of prepaid tuition programs. The Act expands the definition of "qualified tuition program" to include a number of prepaid tuition programs established and maintained by one or more eligible educational organization that comply with the requirements of section 529. If the distribution is used to fund a qualified higher education purpose, an exclusion from gross income is acceptable. In addition, the Act extends the exclusion for employer-provided educational assistance to graduate-level education and also makes this exclusion permanent.

Furthermore, modifications have been made to the specifications for the student loan interest deductions. The Act will increase the income phase-out eligibility range from $50,000 to $65,000 for a single taxpayer and $100,000 to $130,000 for a married taxpayer. In addition, it rescinds the limit on the number of months during which interest paid on an eligible education loan is deductible and repeals the restriction that voluntary payments of interest are not deductible. The maximum allowable deduction for this provision is $2,500 and no deduction is allowed to an individual if that individual is claimed as a dependent on another taxpayerís return for that particular tax year.

Other programs that are included in the new qualifications are the National Health Service Corps Scholarship Program and the Armed Forces Scholarship Program. These programs are eligible for tax-free status under section 117, however, the status does not apply to amounts received by students for regular living expenses, including room and board.

The comprehensive effects that this legislation will have upon education will be not only advantageous for current scholars, but for future generations. The federal government has recognized the necessity for financial aid in education endeavors and has responded with a comprehensive plan to alleviate the financial burdens of education costs.

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