Education Tax Benefits

Education IRAs.  The legislation also increases the annual contribution limit for education IRAs from $500 to $2,000.  Previously, the law prohibited contributions after the beneficiary turns 18.  The new legislation exempts special needs beneficiaries from the age restriction.

    Starting in 2002, contributions will be allowed from corporations and tax exempt organizations, and other organizations in addition to individuals.   Contributions counted toward any tax year will be allowed until April 15 of the following year.  (The old cutoff date was December 31 of the tax year).

    In addition, the AGI ceiling for those who can contribute to an education savings account has been increased.  The current contribution phase-out range for joint filers of $150,000-$160,000 has been doubled to that of single filers, to $190,000-$220,000.

    Moreover, the legislation makes a big change on how the education IRAs can be used.  It allows taxpayers to use them to pay for elementary and secondary school tuition (public and private) as well as the costs of higher education   Expenses that are covered include:

•     Tuition
•     Books and supplies
•     Computer equipment, software, and Internet access
•     Uniforms
•     Room and board, including extended day programs
•     Tutoring                            

        Lastly, the legislation makes it easier to use all the different types of education tax breaks, by allowing:

1. Hope and Lifetime Learning tax credits to be claimed in the same year as education IRA distributions, as long as the distribution is not used to pay for the same costs used to claim the education credit;
2. Penalty-free contributions to IRAs and qualified state tuition programs in the same year.       

        All of the above changes are effective for taxable years beginning in 2002.

Deduction for higher education expenses.  A new itemized deduction was created for qualified higher education tuition and related expenses.   For taxable years beginning in 2002 and 2003, the deduction amount will be up to $3,000 for taxpayers whose AGI does not exceed $65,000 ($130,000 for joint returns).   For taxpayers with AGI that does not exceed $65,000 ($130,000 for joint returns).   For taxpayers with AGI above those amounts, the deduction is zero.

        For years 2004 and 2005, the deduction amount increases to a maximum of $4,000 for taxpayers with AGI that does not exceed $65,000 ($130,000 for joint returns).  In addition, in 2004 the AGI limit is expanded, so that taxpayers whose AGI is over $65,000 ($130,000 for joint returns) but not over $80,000 ($160,000 for joint returns) will be eligible for a $2,000 deduction.

        No deduction is allowed for married individuals filing separate returns.

      Tax Planning Is a Year-Round Activity

           A New Bonus: Additional Depreciation & Income Tax Rate Reductions

           Marriage Penalty Relief

             Five Often Overlooked Reasons Why You Need a Will

            Homework Assignment: Saving for Your Future

This article is excerpted from the CPA Bulletin that is prepared monthly by the staff of the AICPA for the clients of its members.  This article does not have any official authority and the information therein should not be acted upon  without professional advice.  Copyright ã 2002,2003, American Institute of Certified Public Accountants, Inc., Harborside Financial Center, 201 Plaza Three, Jersey City, NJ  07311-3881

 

ã 2003  David J. Driscoll & Company