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are constantly subject to modification or elimination by Congress and the Courts, the information contained here may be out of date.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 in any year that the taxpayer is claimed as a dependent of another taxpayer (example: parents). This deduction is also limited to the first 60 months of the loan where interest payments are required; refinancing a student loan does not restart this 60-month period. A qualified education loan for this deduction is considered a loan incurred to pay the qualified education expenses of the taxpayer, spouse or dependent attending qualified postsecondary education. This deduction begins to phase-out for taxpayers with an Adjusted Gross Income in excess of $ 40,000 ($ 60,000 for joint filers). Taxpayers who are Married Filing Separate are ineligible to claim this deduction.
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