Many new tax benefits for parents who are sending or planning to send their children to college will be available due to the balanced budget signed into law in August, 1997.

Many new tax benefits for adults who want to return to school and for parents who are sending or planning to send their children to college will be available due to the balanced budget signed into law in August, 1997. These tax cuts effectively make the first two years of college universally available, and they will give many more working Americans the financial means to go back to school if they want to choose a new career or upgrade their skills. When fully phased in, 12.9 million students are expected to benefit -- 5.8 million under the "HOPE Scholarship" tax credit, and 7.1 million under the Lifetime Learning tax credit.

"HOPE SCHOLARSHIP" TAX CREDIT FOR STUDENTS

The "HOPE Scholarship" tax credit helps make the first two years of college or vocational school universally available. Students will receive a 100% tax credit for the first $1,000 of tuition and required fees and a 50% credit on the second $1,000. This credit is available for tuition and required fees less grants, scholarships, and other tax-free educational assistance and will be available for payments made after December 31, 1997 for college enrollment after that date. A high school senior going into his or her freshman year of college in September, 1998, for example, could be eligible for as much as a $1,500 HOPE tax credit.

This credit is phased out for joint filers who have between $80,000 and $100,000 of adjusted gross income, and for single filers who have between $40,000 and $50,000 of adjusted gross income. The credit can be claimed in two years for students who are in their first two years of college or vocational school and who are enrolled on at least a half-time basis in a degree or certificate program for any portion of the year. The taxpayer can claim a credit for his own tuition expense or for the expenses of his or her spouse or dependent children.

A married couple with an adjusted gross income of $60,000 has two children in college at least half-time, one at a community college with a tuition of $2,000 and the other a sophomore at a private college with tuition of $11,000. Using the HOPE Scholarship tax credit, this couple would have their taxes cut by as much as $3,000.

THE LIFETIME LEARNING TAX CREDIT

This tax credit is targeted to adults who want to go back to school, change careers, or take a course or two to upgrade their skills and to college juniors, seniors, graduate and professional degree students. A family will receive a 20% tax credit for the first $5,000 of tuition and required fees paid each year through 2002, and for the first $10,000 thereafter. Just like the "HOPE Scholarship" tax credit, the Lifetime Learning tax credit is available for tuition and required fees less grants, scholarships, and other tax-free educational assistance; families may claim the credit for amounts paid on or after July 1, 1998 for college or vocational school enrollment beginning on or after July 1, 1998. The maximum credit is determined on a per-taxpayer (family) basis, regardless of the number of post-secondary students in the family, and is phased out at the same income levels as the "HOPE Scholarship" tax credit. Families will be able to claim the Lifetime Learning tax credit for some members of their family and the "HOPE Scholarship" tax credit for others who qualify in the same year.

A homemaker, whose family has an adjusted gross income of $70,000, wants to attend a graduate teacher training program at a public university ($3,500 tuition) after being out of college for 20 years. Using the Lifetime Learning credit, her family's income taxes would be cut by as much as $700.

A married couple has an adjusted gross income of $32,000. The husband who is working as an automobile mechanic decides to go back to a local technical college to take some computer classes in the hope of getting a different job. He will pay a tuition of $1,200. Using the Lifetime Learning credit, this family would have their taxes cut by as much as $240.

PARENTS AND GRANDPARENTS CAN CREATE EDUCATION IRAs

Beginning January 1, 1998, taxpayers may withdraw funds from an IRA, without penalty, for their own higher education expenses or those of their spouse, child, or even grandchild. In addition, for each child under age 18, families may deposit $500 per year into an Education IRA in the child's name. Earnings in the Education IRA will accumulate tax-free and no taxes will be due upon withdrawal if the money is used to pay for post-secondary tuition and required fees (less grants, scholarships, and other tax-free educational assistance), books, equipment, and eligible room and board expenses. Once the child reaches age 30, his or her Education IRA must be closed or transferred to a younger member of the family.

A taxpayer's ability to contribute to an Education IRA is phased out when the taxpayer is a joint filer with an adjusted gross income between $150,000 and $160,000, or a single filer with an adjusted gross income between $95,000 and $110,000. There are a few restrictions. A student, for example, who receives the tax-free distributions from an Education IRA may not, in the same year, benefit from the "HOPE Scholarship" or Lifetime Learning tax credits.

GREATER FLEXIBILITY FOR FAMILIES SAVING IN QUALIFIED STATE TUITION PLANS

When a family uses a qualified State-sponsored tuition plan to save for college, no tax is due in connection with the plan until the time of withdrawal as a result of a law passed last year. This year's change in law allows families to use these plans to save not only for tuition but also for certain room and board expenses for students who attend on at least a half-time basis. Tuition and required fees paid with withdrawals from a qualified State tuition plan are eligible for the "HOPE Scholarship" tax credit and Lifetime Learning tax credit. These benefits are available on January 1, 1998.

PAYING BACK STUDENT LOANS AT A LOWER COST

For many college graduates, one of their first financial obligations is to repay their student loans, which average about $13,500 per student. The new student loan interest deduction will reduce the burden of the repayment obligation by allowing students or their families to take a tax deduction for interest paid in the first 60 months of repayment on student loans. The deduction is available even if an individual does not itemize other deductions.

The maximum deduction is $1,000 in 1998, $1,500 in 1999, $2,000 in 2000, and $2,500 in 2001 and beyond. It is phased out for joint filers with adjusted gross income between $60,000 and $75,000, and single filers with adjusted gross income between $40,000 and $55,000. The deduction is available for all educational loans, including loans made to students, parents, guaranteed student loans, and loans from private lenders, made before August of 1997 when the new student loan interest deduction became law but only to the extent that the loan is within the first 60 months of repayment.

A senior graduates from college and finds a job paying $25,000 a year (and has no other income). The student has a total student debt of $12,000 and is in the 15% federal income tax bracket. The monthly payment for this student's loans is $148. The total amounts of payments for the first year is $1,776, over half of which is interest ($960) which can be deducted under the new law. The student's maximum tax benefit can be calculated by multiplying $960 by 15%: for a tax savings of $144.

GOING TO SCHOOL WHILE YOU WORK

The new tax law extends Section 127 of the tax code for three years. Section 127 allows workers to exclude up to $5,250 of employer-provided education benefits from their income. The assistance must be for undergraduate courses beginning prior to June 1, 2000. This provision will enable many Americans to pursue their goals of lifelong learning.

COMMUNITY SERVICE LOAN FORGIVENESS

This provision excludes from income student loan amounts forgiven by non-profit, tax-exempt charitable or educational institutions for borrowers who take community-service jobs that address unmet community needs. For example, a recent graduate who takes a low-paying job in a rural school will not owe any additional income tax if in recognition of this service her college or another charity forgives a loan it made to her to help pay her college costs. This provision applies to loans forgiven after August 5, 1997.

The balanced budget bills signed by President Clinton include many other provisions that will help all of the young people in America grow and learn and help families navigate through these changing times. The new tax law includes a provision to encourage computer donations to schools. The balanced budget agreement protects and advances President Clinton's top domestic priorities, such as expansion of Head Start, and an increase in the maximum Pell grant for college to $3,000. All of these benefits and tax cuts have one goal: to give parents the support they need to give their children a first class education and hope for the future.

For information on additional student aid programs that will help meet the costs of college and lifelong learning for you, your children and grandchildren, call 1-800-4FED-AID. For information on the importance of getting ready for college early, especially middle school students, call 1-800-USA-LEARN.

(This is an informational guide produced by the Department of Education; for detailed tax information and instruction please consult your IRS tax forms and publications to see if you qualify.)

Copyright © 1997 Education World™