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Congress has provided many opportunities
for the taxpayers to reduce the cost of education. These are
Education Savings Accounts, the College Tuition Deduction, the HOPE and
Lifetime Learning Credits, the deduction for Student Loan Interest, the
Section 529 Qualified Tuition Program, the exclusion for Scholarships, and
the exclusion for Employer Provided Qualified Education Assistance
Programs. We will cover a brief overview of these programs.
For more detailed information, please contact us for an appointment to
discuss them more completely.
Education Savings Accounts
are a new name for the old Education IRAs that have been
improved. You may now make a nondeductible contribution up to $2,000
per year for a child up to 18 years of age. This contribution may be
made up to April 15th. Married filing a joint return with adjusted
gross income under $190,000 may contribute to this account. The
distributions are not taxable if used for education-related expense for
grades K-12 as well as higher education.
College Tuition Deduction
is new for the years 2002 through 2005. For 2002 and 2003, married
taxpayers with adjusted gross income of $130,000 or less and single
taxpayers with adjusted gross income of $65,000 or less may qualify for an
above-the-line deduction for college tuition up to $3,000 per year.
For 2004 and 2005, the income limits and deduction amount increase.
You may not claim this deduction if you qualify for the HOPE or Lifetime
Learning Credits.
HOPE Credit of up
to $1,500 per student for the first two years of college is available for
joint returns with adjusted gross income of $80,000 or less and single
taxpayers with adjusted gross income of $40,000 or less. Taxpayers
with higher incomes may still receive a partial credit. This credit
comes right off your tax.
Lifetime Learning Credit of 20%
of your higher education expenses up to a maximum credit of $1,000 for
2002 and $2,000 for 2003 is available for higher education expenses not
covered by the HOPE credit. The income limits are the same as the
HOPE credit.
Student Loan Interest
is deductible up to $2,500 even if you do not itemize you deductions.
Married taxpayers filing a joint return with adjusted gross income under
$100,000 and single taxpayers with adjusted gross income under $50,000
will be entitled to the full deduction. Taxpayers with higher
incomes may still receive a partial deduction.
Section 529 Qualified Tuition Programs
are run by the states. They cover private and public colleges,
universities, vocational schools or other post secondary educational
institutions. Contributions to this program are not deductible, but
the distributions used for high education are not taxable.
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Scholarships are
tax free so long as they are for tuition. If the scholarship is for
tuition and other expenses, such as room and board, only the portion that
applies to tuition is free from tax. Books, fees, and supplies are
included in the definition of tuition by the IRS, so any scholarship
proceeds that can be applied to these expenses are also tax-free.
Amounts received from the National Health Service Corp or Armed Forces
Scholarship Program for tuition, fees, books, supplies, and equipment are
not subject to tax. However, payments that are intended to cover
regular living expenses, such as room and board, are taxable.
Employer Provided Qualified Education
Assistance Program payments of up to $5,250 per year
may be received tax free if used for higher education even graduate level
courses leading to a degree.
U.S. Savings Bonds, Series EE or I
that you redeem will have interest that you will have to pay tax on.
However, the interest is not taxable if the total redemption (principal
and interest) is less than your qualified higher education expenses for
you, spouse or dependant. YOU must have purchased the bonds
yourself. You must be as least 24 when you purchased the bonds.
If you are married, you must file a joint return. Married taxpayers
with adjusted gross income of under $86,400 and single taxpayers with
adjusted gross income under $57,600 qualify for this exclusion.
Taxpayers with higher incomes may qualify for a partial exclusion.
Ohio Deduction for Purchase of Ohio
Tuition Credits and Contributions to College Savings Plans
is limited to $2,000 per beneficiary each year. Qualified payments
in excess of $2,000 per year may be deducted on future returns until all
unused portions are deducted. Married taxpayers are limited to
maximum of $2,000 per beneficiary whether they file a joint or separate
return.
Ohio Deduction for Higher Education
Tuition Payments is available for qualified tuition
and fees paid to a post-secondary institution, located in OHIO.
Married taxpayers with adjusted gross income under $100,000 and single
taxpayers with adjusted gross income under $50,000 may claim this
deduction. This deduction is limited to $2,500 for the first 2 years
of post-secondary education.
We hope that this information will
help you and your families. For further information, please call us
for an appointment.
James E. Newland, CPA
939 Center Road
Eastlake, Ohio 44095
440-951-9799
Service@NewlandCPA.com
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