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Money Management (Distributed by the New Jersey Society of Certified Public Accountants)

Education Tax Breaks You Can't Afford to Miss

Parents facing college tuition expenses and college graduates struggling to pay off student loans can look forward to some help. According to the New Jersey Society of Certified Public Accountants (NJSCPA), you may qualify for tax credits and deductions on your 2001 return. What's more, as a result of the Economic Growth and Tax Relief Reconciliation Act of 2001, you may qualify for even bigger tax breaks in 2002.

Education Tax Credits Continue To Offer Help
As you complete your 2001 tax return, you'll want to determine if you are eligible for one of two education credits. The Hope Scholarship Credit allows taxpayers to claim a credit of up to $1,500 (100% of the first $1,000 of tuition and fees, and 50% of the next $1,000) per qualified student for the first two years of post-secondary education in an eligible educational institution. The Lifetime Learning Credit, which can be used for an unlimited number of years, provides a total credit of up to $1,000 (20 percent of the first $5,000 of qualified tuition and related expenses) in higher education expenses per family each year. Both credits are phased out for higher income taxpayers. In 2002, the credits phase out for single taxpayers with AGIs of $40,000-$60,000 and for joint filers with AGIs of $80,000- $100,000.

Student Loan Interest Deduction Extended
Under previous law, qualifying taxpayers could claim a deduction for up to $2,500 of interest paid on student loans during the first 60 months interest payments are required. While the deduction for student loan interest remains limited to $2,500 on your 2001 tax return, the 60-month limit is repealed beginning in 2002 for individuals paying back student loans.

Also in 2002, the new law increases the AGI phase-out ranges for eligibility for the student loan interest deduction to between $50,000-$65,000 for single filers and between $100,000-$130,000 on joint returns. Like the tuition deduction, the student loan interest deduction is an adjustment to income, available regardless of whether you itemize.

Tuition Assistance Announced
There is also good news for employees who take college courses and receive tuition assistance from their employers. For the 2001 tax year, employees could receive up to $5,250 tax-free to cover undergraduate courses. Effective in 2002, the cost associated with courses leading to advanced degrees also will qualify, within limits, for tax-free treatment.

Higher Education Deduction Introduced
The Tax Act of 2001 introduces a new tax deduction for qualified tuition and related expenses. With its higher income eligibility limits, this deduction is likely to benefit those taxpayers with incomes too high to get much, if any, benefit from the Hope or Lifetime Learning credits.

Beginning in 2002 and continuing in 2003, you can deduct up to $3,000 of qualifying higher education expenses if your AGI is $65,000 or less for a single filer, and $130,000 or less for joint filers. In 2004 and 2005, the deduction increases to $4,000. There is also a provision that makes taxpayers with even a higher AGI ($80,000 for singles and $160,000 for joint filers) eligible for a $2,000 deduction, but only in 2004 and 2005. The tuition tax break is an above-the-line deduction so you won't need to itemize in order to benefit.

Making The Most of Education Benefits
To determine the best strategy for making the most of education tax breaks, you'll want to consider several issues. First, because the same student cannot take the tuition deduction in the same year as either of the credits, taxpayers who are eligible for both may need to compute their taxes both ways to find out which provides more tax savings. Generally speaking, tax credits, which provide a dollar-for-dollar reduction in taxes you owe, are typically more valuable than deductions that reduce the income on which your tax bill is figured.

Second, beginning in 2002, the Hope and Lifetime Learning Credits can be claimed in the same year that you take a distribution from an Education IRA or make a tax-free withdrawal from a state-sponsored Section 529 Plan. This eliminates the need to choose between the two (provided the distribution isn't used for the same expenses for which a credit will be claimed).

Given the cost of higher education, it's important that you make the most of available tax breaks. A CPA can provide more detailed advice on your options.

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Money Management is a weekly column on personal finance distributed by the NJSCPA.

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