Tax Relief Includes Complex Credits for College Costs

Long-promised tuition tax relief has finally arrived for middle-class families digging deep into their pockets to cover the escalating costs of a higher education.

Under new tax law, the middle-income families of college freshmen and sophomores can qualify for a $1,500 “HOPE Scholarship” tax break for tuition and fees spent on spring semester classes.

In the fall, the “Lifetime Learning” tax credit kicks in, permitting families of modest incomes to claim $1,000 for adults returning to school.

And this year, for the first time, parents and even grandparents are allowed to withdraw funds, without penalty, from an IRA to cover college expenses including tuition, books and room and board.

These and five other new or sweetened tax breaks, contained in the Taxpayer Relief Act of 1997, are nothing if not complicated.

To help college students and their families figure out who can benefit from the tax breaks, the Internal Revenue Service has provided detailed information on its World Wide Web site: https://www.irs.ustreas.gov/

hot/not97-60.html

But here are the basics:

The HOPE Scholarship: This new scholarship covers tuition and fees incurred only during the first two years of college or vocational school. Students will receive a 100% tax credit for the first $1,000 spent on tuition or fees and a 50% credit on the second $1,000, up to a maximum of $1,500 a year.

The credit was designed for married couples with adjusted gross incomes of less than $80,000, and is slowly phased out as income reaches $100,000. For unmarried individuals, the full credit is available for income up to $40,000 and then is phased out for income above $50,000.

Although the HOPE Scholarship now covers the spring semester, those who paid this spring’s tuition before Jan. 1 will not qualify--at least as the law is now written.

But the American Council on Education and other collegiate leaders are urging Congress to make a technical correction to the law so that the families who paid early can still benefit from the tax break.

Lifetime Learning Tax Credit: When this tax credit takes effect July 1, a family can qualify for a 20% tax credit for the first $5,000 in tuition and fees paid by students each year through 2002. After that, a family can claim a 20% tax credit for the first $10,000 in tuition and fees.

This benefit is intended to help workers return to school to upgrade their job skills or to train for a new career. But it can also be claimed for college juniors and seniors and those in graduate or professional schools. It is phased out at the same income levels as the HOPE Scholarship.

The Lifetime Learning credit is limited to $1,000 per family, no matter how many students are taking post-secondary classes. But a family can claim both this credit and the $1,500 HOPE Scholarship in a tax year if it has beginning and returning college students.

Education IRAs: Beginning Jan. 1, taxpayers can withdraw money--without penalty--from an Individual Retirement Account to cover their own college expenses or the expenses of a spouse, child or grandchild. The taxpayer must pay income tax on the withdrawal, but the money is not subject to the normal 10% penalty for early withdrawals from an IRA.

In addition, families can now deposit $500 a year into an Education IRA in the name of a college-bound child under the age of 18. There is no tax deduction for the deposit, but the earnings will accumulate tax-free and can be withdrawn without paying taxes provided the money is used for college tuition, fees, books, equipment or basic room and board.

Once a student reaches 30, the student’s Education IRA must be closed or transferred to a younger member of the family.

These Education IRAs are designed for married couples with adjusted gross incomes of less than $150,000 a year and are phased out for incomes that exceed $160,000. A single taxpayer can make up to $95,000 and still stash away future college expenses in these IRAs, but the benefit is phased out if the single taxpayer’s income tops $110,000.

And there’s an additional restriction. A student who receives tax-free distributions from an Education IRA cannot benefit from the HOPE Scholarship or Lifetime Learning tax credits during the same year.

Interest on Student Loans: The new tax law also allows students or their families to take a tax deduction of up to $1,000 this year for interest paid on student loans. That deduction edges up to $1,500 next year, and will continue a steady climb to $2,500 by 2001.

This deduction is limited to the interest paid in the first five years of repayment.

It is phased out for married couples with incomes of $60,000 to $75,000 and for single taxpayers with incomes of $40,000 to $55,000.