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Debt Management Tips - Educational Tax Benefits

Saving money should be a primary goal of students and parents. One way to save money on your taxes is utilizing the educational tax benefits. The Taxpayer Relief Act of 1997 and the subsequent Economic Growth and Tax Relief Reconciliation Act of 2001 have created a number of incentives to help you save for higher education expenses.

Listed below are some of the educational tax benefits:

Hope and Lifetime Learning Tax Credits

The Hope and Lifetime Learning Tax credits were created by the Taxpayer Relief Act of 1997. These programs reduce the amount of your federal taxes based on qualifying "out-of-pocket" educational expenses paid for yourself, your spouse or your dependent child. Qualifying "out-of-pocket" expenses include tuition and fees less any grants and scholarships received. It does not include room, board, books, and transportation. Only one taxpayer (either the student or the parent) may claim this tax credit. Also, only one of these tax credits may be claimed per tax year.

Hope Tax Credit

  • You can claim a tax credit of up to $1,500 for each qualifying family member who is attending an eligible school.
  • You can claim 100% of the first $1,000 of your out-of-pocket educational expenses for each student, plus 50% of the next $1,000.
  • The student must be in the first or second year of a degree or certificate-granting program and must be attending at least half time.

Lifetime Learning Credit

Beginning in tax year 2003, you can claim a maximum credit of up to $2,000 (20% of the first 10,000). This credit is calculated per family, not per student.

The maximum credit is the same, no matter how many family members are in school. You can claim this credit at any time during a student's education at an eligible school. The student needs only to be enrolled in one course.

Coverdell Education Savings Account

Formerly the Education IRA, the Coverdell Education Savings Account, introduced by the Taxpayer Relief Act of 1997 as the Education IRA, allows you to save money for future educational expenses. A Coverdell Account can be established for anyone less than 18 years of age. Contributions are not tax deductible, but the funds grow tax-free. Distributions used for qualified educational expenses are not subject to tax and are excluded from income as long as they are not greater than educational expenses in a given year.

As a result of the Economic Growth and Tax Relief Reconciliation Act, there have been several changes in 2002 to the Coverdell Education Savings Account.

  • The annual contribution limit increases to $2,000 per designated beneficiary.
  • Definition of qualifying educational expenses expands to include elementary and secondary school costs as well as some Food and Housing, uniform, computer, and extended day program expenses.
  • Annual income limits on those who can fund a Coverdell Account increase (e.g., from $150,000 - $160,000 to $190,000 - $220,000 for joint filers).

529 Plans

Section 529 Plans are state-sponsored investment programs that permit taxpayers to make contributions on behalf of a beneficiary. The account earnings are untaxed until withdrawn for the beneficiary's qualified college education expenses at which time they are taxable to the beneficiary.

The Economic Growth and Tax Relief Reconciliation Act of 2001 expanded the scope of these plans. Educational institutions can now sponsor these tuition programs. State-sponsored programs can now allow distributions to be tax free when used for qualified post-secondary education expenses (educational institution distributions will be tax free beginning in 2004).


For more details about tax education benefits and incentives, visit the following websites:

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