Tax Tip of the Week
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Consider these tax breaks to cut your education costs
For the week of
October 15, 2001
As your child heads to school this fall, consider these tax-advantaged ways to pay for college expenses.
- Take tax-free withdrawals from education savings accounts. If your child has an education savings account (previously called an education IRA), he or she can
use these funds to pay for qualified college expenses. Beginning January 1, 2002, the money can be used for elementary
and secondary school (K-12) expenses as well.
- Use funds in a Section 529 plan to pay college expenses. Qualified distributions from a 529 plan are taxed at the student's rate, which may be lower than
your own. This includes withdrawals to pay for tuition, fees, books, supplies, equipment, and certain room and
board expenses. Beginning next year, qualified withdrawals from state-run Section 529 plans will be tax-free.
- Cash in education savings bonds. The
bond interest on Series EE and Series I bonds issued after 1989 is tax-free if you meet certain requirements and
use the funds to pay for college tuition and fees.
- Tap individual retirement account (IRA) funds.
Withdrawals from traditional IRAs used to pay for college tuition and fees escape the 10% early withdrawal penalty.
(You'll still have to pay income tax on the distributions.) If you have a Roth IRA, you'll have to wait until you've
had the account for five years to use the funds penalty-free for college expenses.
- Recover your expenses through tax credits. Two education-related tax credits may cut your taxes. The Hope scholarship credit (up to $1,500 per student per year) can be claimed for tuition and fees relating to the first two years of college. The lifetime learning credit (worth a maximum of $1,000 per family per year) can be claimed for any year of college as well as job-related courses.
These are a few of the education tax breaks to which you may be entitled. And the 2001Tax Relief Act expands education incentives beginning
next year. For more information and assistance in planning the best utilization of the education tax breaks, contact
our office.
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