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Tax Incentives for Education


Between federal and state taxes, most of you end up missing at least 33% of your gross income. In August of 1997, the Taxpayer Relief Act of 1997 was signed into law. The benefits of this new law include education tax credits, a new education IRA, penalty-free withdrawals from traditional IRAs for education expenses and a deduction for student loan interest. The following information will help you determine which benefits apply to you and your family.

Hope Scholarship

The Hope Scholarship is somewhat of a misnomer. It is not a scholarship at all. Rather, it is a tax credit available to certain taxpayers.

During the first two years of post-secondary education, students or parents may be able to take advantage of the Hope Scholarship tax credit. The credit can be as much as $1,500 per student per year for tuition and related expenses paid after December 31, 1997.

The tax credit will equal 100% of the first $1,000 of tuition and fees required for enrollment and attendance (not room or board) and 50% of the next $1,000 paid during the applicable tax year to an institution that participates in the U.S. Department of Education student aid programs.

To qualify, the student must have earned a high school diploma or equivalent degree, be enrolled at least half-time for one academic period during the tax year, and must not have been convicted of a federal or state drug felony.

The Scholarship is available to individuals with a modified adjusted gross income (AGI) under $40,000. For individuals, the credit is phased out for AGI's between $40,000 and $50,000. The credit is also available to joint filers with AGI's under $80,000 with the credit phased out for AGI's between $80,000 and $100,000.

Eligible family members include the taxpayer, the taxpayer's spouse and the taxpayer's dependent(s).

Expenses paid after December 31, 1997 for education/academic periods beginning in 1998 may be eligible. You cannot combine the Hope Scholarship Credit with the Lifetime Learning Credit or the Education IRA in the same year for the same child.

Lifetime Learning Tax Credit

If you are an adult who wants to go back to school, change careers, or take a course or two to upgrade your skills OR a college junior, seniors, or graduate and professional degree students you may be eligible for this tax break.

A family will receive a 20% tax credit for the first $5,000 of tuition and required fees paid each year through 2002, and for the first $10,000 thereafter. Just like the "HOPE Scholarship" tax credit, the Lifetime Learning tax credit is available for tuition and required fees less grants, scholarships, and other tax-free educational assistance; families may claim the credit for amounts paid on or after July 1, 1998 for college or vocational school enrollment beginning on or after July 1, 1998.

The maximum credit is determined on a per-taxpayer (family) basis, regardless of the number of post-secondary students in the family, and is phased out at the same income levels as the HOPE Scholarship tax credit. Families will be able to claim the Lifetime Learning tax credit for some members of their family and the HOPE Scholarship tax credit for others who qualify in the same year.

Student Loan Interest Deduction

Qualified individuals are able to deduct a portion of their education loan interest up to $1,000 in 1998, $1,500 in 1999, $2,000 in 2000, and $2,500 in 2001, and after.

Interest paid during the first 60 months (5 years) of scheduled repayment may be deductible. Deductions for student loan interest may be made for interest due and paid after 1997.

The tax credit is available for individuals with modified AGI under $40,000 and is phased out between $40,000 and $55,000. Joint filers with modified AGI under $60,000 (phased out between $60,000 and $75,000) are eligible for the deduction as well.