Continuing Education Loan
Q: Is it true that one can take tax deduction on tution fees?
If so, what is the amount?
A:Income tax deduction? No, not really.
Educational expenses are only deductible if they maintain present
skills for present employment. Education that qualifies you for
another job is not deductible.
As with any general tax information, this is meant to inform you that the
tax law has been changed and you should consult with a tax professional to see
exactly how it will affect your tax return and the best way to use the law
changes in your favor. Remember that tax laws are constantly subject to
modification or elimination by Congress and the Courts, the information
contained here may be out of date.
CURRENT TAX CHANGES FOR EDUCATION
One of President Clinton's major issues in his attempt to cement his legacy
is education. The Taxpayer Relief Act of 1997 in its many changes to the tax
code has numerous and significant changes in how education expenses are
handled. Many of these changes will have an immediate and possibly significant
impact of the taxes of students or their parents. As this will effect how
students will pay for their schooling it is critically important that they know
of the changes in the tax act that effect them directly.
HOPE Scholarship Credit
The first of the many changes for education in the Taxpayer Relief Act of
1997, is in Sec. 201 (a) which created the new HOPE and Lifetime learning
credits. The HOPE Scholarship Credit, starting January 1, 1998, is aimed
directly at freshmen and sophomores. It is only for use during the first two
years of post-secondary education by the taxpayer, spouse, or dependent.
Therefore, upper level students will have to read on to later changes that
effect them. The HOPE Scholarship credit will create a nonrefundable tax
credit of the first thousand dollars of qualified education expenses (tuition,
fees, and books, not room and board) and 50% of the second thousand dollars of
qualified education expenses. This may be of greater importance to the parents
than the student since it is the payer who gets the credit and many students do
not have enough income to make using the credit worthwhile, while their parents
often will.
To qualify, the student must be enrolled at least one half time for at
least one full enrollment period during the year in an qualified higher
education institution. This credit is allowed for use during only two tax
years, so it is best used during years of the highest early enrollment
expenses. Some of the other limitations of this credit are that a taxpayer may
not take it for more than two students in one year (or twice the limit for one
student), and it may not be used for any student who has been convicted of a
Federal or State felony offense consisting of the possession or distribution of
a controlled substance. Additionally, any education expenses that were paid
for by scholarship funds are excluded from claim under this credit.
The Lifetime Learning Credit
For the upper level, graduate, and continuing education students there is
the Lifetime Learning Credit. This credit is available for any taxpayer for any
taxable year in an amount equal to 20 percent of qualified education expenses
that do not exceed $ 5,000 ($ 10,000 beginning 1/1/2003). Any education
expenses claimed under the HOPE Scholarship credit above or paid for by
scholarships cannot be claimed for this credit. This credit may be used for
qualified expenses (tuition, fees, and books) that are used to continue
education or improve job skills.
For both of these credits, if the Taxpayer claims the credit for expenses
related to their dependent, the dependent may not claim the credit. There is a
reduction in the amount of the credit that may be claimed for taxpayers with an
Adjusted Gross Income in excess of $40,000 ($80,000 if filing jointly).
Additionally, nonacademic fees, such as athletic student activity and insurance
fees may not be used to calculate these credits. Filers who are filing Married
Filing Separately or who are nonresident aliens are not eligible to claim these
two credits. This program begins July 1, 1998.
Qualified State Tuition Programs
State qualified tuition programs tax treatment has been modified under the
Taxpayer Relief Act of 1997, Sec 211. The federal government does not limit
contributions to state run tuition programs, but distributions from these plans
that are used to pay for qualified education expenses are treated as income to
the taxpayer to the extent that earnings have exceeded the original
contributions. However, the HOPE Scholarship or Lifetime Learning credits may
be used to offset the increased tax on this income. The major advantage of
this sort of tuition plan is to defer the taxation on the income within the
plan until there are education expenses creating a credit to reduce the tax on
the earnings. This program starts January 1, 1998.
Education IRAs
There has also been the creation of a nondeductible Education IRA in the
Taxpayer Relief Act of 1997 Sec 213. Contributions to this Education IRA are
limited to $500 per year, per student, and may not be made to an account of a
student who has reached the age of 18. There is also a phase-out of this option
for taxpayers with an Adjusted Gross Income starting at $95,000 ($150,000 if
filing jointly). Distributions from Education IRAs that are used to pay for
only qualified education expenses (tuition, fees, and books) are excludable
from income. If distributions exceed the qualified education expenses the
distribution become income to the extent that earnings exceeded contributions
to the Education IR
A: The taxpayer may voluntarily waive the exclusion of the income for the distributions, recognize the income, and claim their expenses paid for using the HOPE or Lifetime education credits. The contributor to the Education IRA needs to be aware that such contributions count against their $10,000 annual gift limitation or their unified credit. This program begins January 1, 1998. Deduction for Student Loan Interest As of January 1, 1998, Taxpayer Relief Act of 1997, Sec 202 allows a certain amount of student loan interest may be deductible to taxpayers. This interest deduction may not be claimed