The Taxpayer Relief Act of 1997
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(Note: The information provided here
concerning provisions of the Taxpayer Relief Act of 1997
is for informational purposes only and is not intended to
represent any legal or tax advice. This information is
general in nature and students and parents should consult
with their accountant or other tax professional to
determine how it may specifically apply to them.) In planning for college expenses, students and parents should consider tax credits and deductions that may be available to them as a result of the Taxpayer Relief Act of 1997. The Act provides several ways which may make higher education more affordable. The Act created two new tax credits against federal income taxes for payments made for qualified tuition and related expenses for post-secondary education. These credits are direct credits against the taxpayer's tax liability and not just a deduction. Hope Scholarship Credit - Up to $1,500 credit per student per year. The HOPE Scholarship Credit allows taxpayers to claim a maximum credit of $1,500 (100 percent of the first $1,000 of tuition and fees and 50 percent of the next $1,000 of tuition and fees) for expenses paid on behalf of an eligible student. The credit is limited to the first two years of postsecondary education at an eligible institution. The student must be enrolled on at least a half-time basis for at least one academic period during the year and must be enrolled in a program leading to a degree, certificate or other recognized educational credential. Lifetime Learning Credit - Up to $2,000 credit per family per year. The Lifetime Learning Credit allows taxpayers to claim a maximum credit equal to 20 percent of up to $10,000 of expenses incurred during the taxable year for qualified tuition and fees for eligible students for post-secondary education, including any course of instruction to acquire or improve job skills. Note: Eligible students for both the Hope Scholarship and Lifetime Learning Credits include the taxpayer, the taxpayer's spouse or a dependent of the taxpayer. Both credits are phased out for single taxpayers with a modified adjusted gross income between $41,000 and $51,000 and for married taxpayers filing jointly with a modified adjusted gross income between $83,000 and $103,000. Additionally, taxpayers must choose from one or the other of the credits. They cannot claim more than one of the credits for any single student for any year. Student Loan Interest Deduction - Up to $2,000 for tax year 2000. The Student Loan Interest Deduction allows students and parents to take a deduction for interest paid on qualified educational loans. The maximum deduction each taxpayer may take is $2,500. The deduction is not an itemized deduction but one that directly reduces adjusted gross income. The deduction is available for only the first 60 months that interest payments are required and is phased out for single taxpayers with modified adjusted gross incomes between $50,000 and $65,000 and for married taxpayers filing jointly with a modified adjusted gross income between $100,000 and $130,000. IRA Withdrawals - Make withdrawals without the 10% penalty. A taxpayer may make withdrawals from an Individual Retirement Account (IRA) to pay the qualified higher education expenses for the taxpayer, the taxpayer's spouse, or the child or grandchild of the taxpayer or taxpayer's spouse at an eligible educational institution. The taxpayer will owe federal income tax on the amount withdrawn, but will not be subject to the 10 percent early withdrawal tax that applies when amounts are withdrawn from an IRA before the account holder reaches age 59 1/2. |
