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EDUCATION
TAX BREAKS
Hope Credit
The Hope tax credit can only be
claimed for tuition and fees relating to the first two years of postsecondary
education. It is worth a maximum of
$1,500 in tax savings per student, per year.
The student must be enrolled in an accredited school at least halftime
during the year.
Lifetime learning credit
The lifetime credit can be claimed
for tuition and fees relating to any year of post-secondary education and for
job-related courses as well. Expenses
must have been paid after June 30, 1998. The credit is worth a maximum $1,000 of
tax savings per family (rather than per student), per year.
Both the Hope and lifetime
learning credits cannot be claimed for the same student in a given year.
Given a choice between the two credits, it will generally make sense to
use the Hope credit for the first two years of college, since it is currently
larger and available for any number of students, at least until 2003.
In 2003, the lifetime learning credit increases to a maximum of $2,000
per year.
Education IRAs
Nondeductible annual contributions
of up to $500 can be made to an education IRA for any child under 18.
Funds can accumulate and be paid out tax-free for college expenses,
including books, room, and board.
Funds in an education IRA must
ether be paid out before the age 30 or rolled into an education account for
another child, or the IRA will be subject to tax and penalties.
A
QUICK LOOK AT THE NEW TAX BREAKS
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Hope
tax credit
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Lifetime
learning credit
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Education
IRA
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Early
IRA withdrawal
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Interest
Deduction
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Amount
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Up
to $1,500 credit per student for first two years of post-secondary
education
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Up
to $1,000 credit per family for unlimited number of years Maximum credit
increases to $2,000 in 2003
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Up
to $500 annual nondeductible contribution for each child under 18.
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Up
to the amount of qualified education expenses.
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Up
to $1,000 "above the line" deduction for 1998, increasing to
$2,500 by 2001
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Income
limits
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Credit
phases out at
$40,000-450,000
for singles;
$80,000-$100,000
for couples
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Phases
out at $95,000-$110,000 for singles; $150,000-$160,000 for couples
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None.
Amounts may be subject to income tax, but the 10% early penalty tax
does not apply
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Deduction
phases out at $40,000-$55,000 for singles; $60,000-$75,000 for couples.
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Can
be used for
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First
two years of post-secondary tuition and fees
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Unlimited
years of post-secondary tuition and fees, plus qualifying job related
courses.
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Post-secondary
tuition, fees, books, supplies, plus room and board
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Post-secondary
tuition, fees, books, supplies, plus room and board.
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First
five years of repayment
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Here are some helpful suggestions:
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If
your income is too high to let you establish education IRAs for your
children, make a $500 gift to each child and have the child establish the
IRA with himself/herself and the beneficiary.
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Because
the annual contribution limit is so low, the longer an education IRA can
grow, the more useful it will be as a source of funds for college.
Start as early in your child’s life as you can.
You may also find it beneficial to roll an older child’s IRA into
the IRA of a younger child to get a longer compounding period.
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Shop
around for an educational IRA with reasonable fees.
If fees are too high, they may eat up the account’s annual
earnings.
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In
your planning, remember that the education credits apply to expenses paid
not only for your dependent child, but also to qualifying education expenses
paid for you and your spouse.
See US Saving Bonds EE-Series
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