Other Financial Aid Sources
Help from Tax Breaks
Federal tax laws now offer special benefits to help eligible
students and families pay for higher education.
Note: Some of these tax benefits phase
out when a student’s or family’s
income reaches various levels. Numerous other restrictions also apply. In addition,
some of the credits or deductions will change from year to year. Be sure to
check with your tax advisor and your school’s financial aid office for
specific details about these benefits. More detailed information about these
benefits can be found at http://www.finaid.org/otheraid/tax.phtml.
- Hope Scholarship Credit
- Up to $1,500 per year may be claimed for
each eligible student in the family. The claims are against federal taxes
for qualified tuition and fees – not room and board and other expenses.
Students must be enrolled at least half time in their first or second year
of post-secondary (after high school) education.
- Lifetime Learning Credit
- Up to $1,000 per family each year through
2002 (and $2,000 thereafter) may be claimed against federal income
taxes for qualified tuition and fees – not room and board and other
expenses. Students must be enrolled in at least one course of undergraduate
or graduate study.
- Deduction for Higher Education Expenses
- Students may deduct payments
for qualified tuition and related expenses. Qualified expenses follow the
same general rules as the Hope and Lifetime Learning Tax Credits. Students
cannot claim both this Deduction and a Hope or Lifetime Learning Tax Credit.
In 2002 and 2003, the maximum deduction will be $3,000 per year depending on
income level. In 2004 and 2005, the maximum deduction will be $4,000 per year
depending on income level.
- Student Loan Interest Deduction
- All interest up to $2,500 on eligible
loans is deductible. The loans must have been used to pay qualified costs
of attendance, including room and board.
- Coverdell Education Savings Accounts
(formerly known as Education IRAs)
- Money
in these accounts may increase tax-free. Withdrawals may also be tax-free
if the student’s higher education expenses for a year equal or exceed
the withdrawal. Eligible expenses include tuition and fees, books, materials,
room and board for students enrolled at least half time. Total contributions
per tax year may be up to $2,000.
- IRA Withdrawals for Education Expenses
- Federal income tax is owed
on withdrawals from other IRAs, including a Roth IRA. But there may
be no early withdrawal penalty when the money is equal to or less than a
student’s
qualified education expenses for a year (including room and board for
students enrolled at least half time).
- Qualified (State) Prepaid Tuition Programs (Also called 529 plans)
- Start saving for your child’s education now with this qualified state tuition
program. Under Section 529 of the Internal Revenue Code, 529 College Savings
Plans provide families a better, more tax-advantaged way to save for college.
Neither principal nor earnings in these programs will be taxed. And the student
or parent may claim a Hope Scholarship or Lifetime Learning Credit for expenses
covered by a program. However, the distribution from the Programs may not
be used for the same expenses for which the Credit is claimed. Prepaid Tuition
Programs may include those established by educational institutions such as
colleges, as well as the state programs. However, the tax-free benefits are
delayed until 2004 for non-state 529 plans. Note that these Plans often are
administered by financial services companies. Details of their particular
Plans may differ, sometimes significantly.
- Education Savings Bonds
- A savings bond qualifies if:
- It is a Series
EE U.S. Savings bond issued after 1989 or a Series I Bond
- It is issued either
in the taxpayer’s name (as sole owner) or also
in the spouse’s name (as co-owners)
- The owner is at least 24 years old
before the bond’s issue date
- The interest on these bonds may be excluded from gross income if the taxpayer
has qualified higher education expenses during the redemption year. Qualified
education expenses are the same as those allowed for the Hope Scholarship Credit.
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