USA Funds reminds taxpayers of higher-education tax benefits
Families May Qualify for Tax Relief to Reduce College Costs
INDIANAPOLIS — USA Funds®, the nation's leading education-loan guarantor, advises families who paid college expenses during 2001 that they may qualify for credits or deductions on their federal income-tax returns. According to USA Funds, families also should be aware of expanded higher-education tax benefits effective for the 2002 tax year.
"We remind families who paid college expenses or student-loan interest during the past year to take advantage of these tax benefits as they prepare their federal income-tax returns," said Carl C. Dalstrom, USA Funds president and CEO. "Because Congress significantly expanded higher-education tax breaks for 2002, families may qualify for even greater tax savings when they file their returns next year."
Among the benefits available for the 2001 tax year are the following items:
Student-Loan Interest Deduction. The maximum deduction increases by $500 to $2,500 for 2001. Taxpayers may deduct only the interest that they paid during the first 60 months that interest was required on their education loans. The deduction phases out for taxpayers with modified adjusted gross incomes of $40,000 to $55,000, and for married taxpayers with modified adjusted gross incomes of $60,000 to $75,000. Taxpayers must file Form 1040 or Form 1040A to claim the deduction, although taxpayers do not have to itemize their deductions to use the student-loan interest deduction. To claim the deduction, taxpayers should complete the "Student Loan Interest Deduction Worksheet" in their tax-form instructions and report the amount of the deduction on line 24 of Form 1040 or line 17 of Form 1040A.
Hope Credit. Students, their parents or their guardians may be able to claim a credit of up to $1,500 for each student for out-of-pocket tuition and fees. The credit is available for each of the first two years of classes toward a postsecondary degree or certificate. Students must be enrolled at least half time to qualify for the credit.
Lifetime Learning Credit. This credit is available for any education beyond high school, including vocational, graduate and professional education. The amount that a taxpayer may claim under this tax credit equals 20 percent of the first $5,000 of qualified expenses, for a maximum of $1,000.
Tax-relief legislation enacted by the U.S. Congress and signed into law by President Bush last year significantly expands higher-education benefits for 2002, including the following items:
Student-Loan Interest Deduction. Beginning in 2002, the 60-month limitation on education-loan interest that qualifies for the deduction is eliminated. In addition, income limits to qualify for at least a partial deduction are raised to $65,000 for single taxpayers and to $130,000 for married taxpayers filing jointly.
Coverdell Education Savings Accounts. Beginning with the 2002 tax year, the maximum amount that taxpayers may contribute annually to these accounts, formerly known as education IRAs, increases to $2,000, from the previous maximum of $500.
Employer-Provided Education Benefits. Effective for 2002, provisions allowing taxpayers to exclude from their taxable income up to $5,250 each year in employer-provided education assistance are made permanent and extended to graduate-education costs, as well as undergraduate expenses.
Qualified Tuition Programs. Beginning with the 2002 tax year, taxpayers may exclude from their taxable income earnings distributed from state-sponsored college savings plans, commonly known as 529 plans, as long as the proceeds are used for qualified education expenses.
Deduction for Higher-Education Expenses. Taxpayers may be able to deduct from their taxable income up to $3,000 in tuition and fees paid during 2002. Taxpayers may not claim both this deduction and higher-education tax credits for the same student in the same year, however.
For more information about higher-education tax benefits, taxpayers should refer to Internal Revenue Service Publication 970, "Tax Benefits for Higher Education," which is available from the Internal Revenue Service, or consult their tax adviser.