Tax Breaks for Higher Education

\| DT Online Home \| Site Search \| Personal Finance Advisor \|
	Higher Ed Tax Benefits Personal Finance Advisor by Deloitte & Touche OnLine August 23, 1999

The federal government offers a number of ways to save on college costs.

Federal tax law provides several benefits to individuals who are saving or paying for higher education costs. The Joint Committee on Taxation recently issued a report describing current tax and savings incentives for education, background data on college enrollment and costs, and certain related economic issues (JCX-12-99, 3/2/99). Following is a summary of various tax benefits:

Tax Deductions: An itemized deduction generally is available for education/training expenses incurred to (1) maintain or improve a skill required in a trade or business currently engaged in by the taxpayer, or (2) meet the express requirements of the taxpayer’s employer, or mandates of applicable law or regulations, imposed as a condition of continued employment. Education expenses that are related to minimum educational requirements, or training that enables the individual to begin working in a new trade or business, are not deductible.

In the case of an employee, education costs may be claimed as an itemized deduction only if (1) the costs are not reimbursed by the employer, (2) the expenses meet the above criteria for deductibility, and (3) the education expenses, along with other miscellaneous deductions, exceed two percent of the taxpayer’s adjusted gross income (AGI).

Employer Assistance: An employee may annually exclude up to $5,250 in education assistance paid by his/her employer from AGI (for federal income tax purposes) and wages (for employment tax purposes). This exclusion is available only if the expenses (1) would have been deductible if paid by the employee, and (2) do not relate to graduate-level courses. The assistance must be provided pursuant to a written plan that does not discriminate in favor of highly compensated employees and is not available to certain individuals who own more than five percent of the employer. Qualified assistance includes payments by employers for tuition, fees, books, supplies, equipment, and certain other education costs.

Scholarships: An exclusion from AGI is available for qualified scholarship funds that are (1) received by an individual who is a candidate for a degree at a primary, secondary, or post-secondary educational institution, and (2) used for tuition and educational fees (for example, books, supplies, equipment). The exclusion does not apply to amounts paid to a student for teaching, research, or other services.

HOPE Credit: Individual taxpayers may claim a nonrefundable credit (HOPE credit) against federal income taxes of up to $1,500 per student per year for qualified tuition and related expenses paid for the first two years of the student’s post-secondary education in a degree or certificate program. Charges and fees associated with meals, lodging, insurance, transportation, and similar personal/living/family expenses are not eligible for the credit. The student must pursue a course of study on at least a half-time basis.

Lifetime Learning Credit: Another nonrefundable credit against federal income taxes, the Lifetime Learning credit, is available to individual taxpayers. This credit equals 20 percent of qualified tuition and related expenses incurred during the year on behalf of the taxpayer, the taxpayer’s spouse, or any dependents. In contrast to the HOPE credit, a taxpayer may claim the Lifetime Learning credit for an unlimited number of years, and the maximum amount of the credit will not vary based on the number of students in the family (that is, the HOPE credit is computed on a per-student basis, while the Lifetime Learning credit is computed on a family-wide basis).

Student Loans: Certain individuals who have paid interest on qualified education loans may claim an above-the-line deduction for the interest, subject to limitations -- the maximum annual deduction is $2,000 in 2000, and $2,500 in 2001 and thereafter. As a general rule, gross income includes the amount of discharged indebtedness of the taxpayer. However, gross income does not include amounts from the forgiveness (in whole or in part) of certain student loans, provided the forgiveness is contingent on the student’s working for a minimum time in certain professions.

Education IRAs: Taxpayers may establish trusts or custodial accounts created exclusively for the purpose of paying qualified higher education expenses of a named beneficiary (Education IRAs). Annual contributions to education IRAs may not exceed $500 per designated beneficiary and may not be made after the designated beneficiary reaches age 18.

State Tuition Programs: Federal law grants tax-exempt status to Qualified State Tuition Programs. These programs are established and maintained by a state (or agency or instrumentality thereof) and permit individuals to (1) purchase tuition credits or certificates on behalf of a designated beneficiary that will pay for his/her qualified higher education expenses, or (2) make contributions to an account established for the purpose of meeting qualified higher education expenses of a designated beneficiary.

These are some thoughts to consider about education tax benefits. Your Deloitte & Touche financial advisor also can provide information and should be consulted before any action is taken.