The 2001 Tax Cut

Education Incentives

Even before the new law, taxpayers faced a smorgasbord of benefits relating to expenses of higher education. The relief act adds appetizers and dessert. These tax benefits are now so generous I'm thinking I should have a couple more children just so I can send them to college.

Education IRAs
These 90-pound weaklings acquire new muscle as the annual limit on contributions goes from $500 to $2,000 beginning in 2002. More people are allowed to contribute: the phase-out range for married couples filing a joint return will be $190,000 to $220,000. The new law also does away with awkward rules preventing concurrent use of this benefit with other education benefits.
    What's more, the definition of qualified education expenses is greatly expanded. It now includes qualified elementary and secondary school expenses: you can use an education IRA to fund kindergarten through grade 12 if you so choose. What's more, you can use it to purchase "computer technology or equipment," including Internet access. This doesn't have to be exclusively for your child. It simply has to be for use of the child and the child's family during any of the years the child is in school. Wow.

529 Plans
More wow. These already generous plans can now provide tax-free distributions, if the distributions are used for qualified higher education expenses. What's more, private colleges and universities will be able to offer their own tuition credit programs (but not savings programs). The provision for tax-free distributions is effective in 2002, except for private prepaid tuition plans which must wait until 2004. Another change: the penalty for nonqualified use of the money is changed to work the way as the 10% tax for nonqualified use of an Education IRA.

Tuition Deduction
Even more wow. Beginning next year you can deduct up to $3,000 of qualifying higher education expenses if your income is below $65,000 ($130,000 in the case of married couples filing jointly). You can't claim an education credit in the same year you claim this deduction for the same student, so generally you'll use this deduction only in a year when the deduction is more valuable than the credit. Generally you can claim the more valuable HOPE credit only two years, so this deduction will be mainly used for years when the HOPE credit isn't available (or is being preserved for better use later). This deduction will increase in later years.

Student Loan Interest
The 60-month limitation on use of the deduction for student interest is eliminated, and the deduction will be available at higher income levels than before. The new phase-out range, beginning in 2002, is $50,000 to $65,000 ($100,000 to $130,000 for married couples filing jointly). The phase-out range will be adjusted for inflation after 2002.

Employer-Provided Educational Assistance
The exclusion is permanently extended and, beginning in 2002, is available for graduate work as well as undergraduate work.

by Kaye Thomas    
May 27, 2001    

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