Education planning opportunities available in Tax Relief Act

Whether you are interested in continuing your education, obtaining another degree, or providing the best possible education for your children or grandchildren, the Tax Relief Act of 2001 can help. This law provides over $30 billion in tax relief specifically for education.

The Tax Relief Act of 2001 can help you finance tuition and other related costs with Uncle Sam and the tax law as your partner. The new law offers a variety of new and enhanced tax breaks. Some of these new rules are interrelated, while others operate independently of one another or together with existing tax breaks such as HOPE or Lifetime Learning tax credits.

Planning is required to maximize benefits and avoid missing critical deadlines.

Tax savings can now be realized for college tuition and related expenses, and in some cases for elementary and secondary school education (public or private) as well.

Education savings accounts

Education IRAs that have been available the last couple of years are now being called Education Savings Accounts. For tax years beginning in 2002, you will be able to make contributions to these accounts on behalf of a child, from birth up to age 18, to the extent of $2,000 annually. This is an increase from $500 permitted in 2001. As a result of this increase, education savings accounts will become a much more important vehicle for establishing a fund that could cover a substantial portion of a child's higher education.

The following list shows some of the other significant changes the new law makes to the way these accounts can be maintained and funded:

-- The accounts can accept contributions from corporations, tax-exempt organizations and other entities.

-- Contributions can be made up until April 15 after the close of the tax year for which the contributions are made.

-- The distributions from these accounts are no longer restricted for higher education expenses. They can also be used to fund education-related expenses for grades K-12, regardless whether the student is in a public or private school. Distribution can be used for expenses such as tutoring, extended day programs, and computer equipment.

-- The new law has also significantly expanded the possibilities of those who can contribute to education IRAs by raising the income limits for married taxpayers filing jointly to a $190,000-$200,000 range. This is double the phase-out range for taxpayers filing in the single filing status.

College tuition deduction

Under the new law, parents, as well as students paying for their own education, can take advantage of a long-awaited deduction for college tuition. This provision doesn't apply until 2002 and sunsets in tax years after 2005.

For the 2002-2003 tax years, if you file a joint return and have adjusted gross income of $130,000 or less (or if you are a single taxpayer with adjusted gross income of $65,000 or less) you can take an above-the-line deduction for college tuition of $3,000 for each year.

For 2004-2005 tax years, this deduction increases to $4,000 whether you itemize or not. In addition, for 2004 and 2005 tax years, taxpayers with an adjusted gross income above the normal cutoff level ($130,000 married or $65,000 single) but at or below the $160,000/$80,000 range, will be able to take a deduction of up to $2,000 for the year.

Deduction for payment of student loan interest

The new law significantly expands the availability of the deduction for student loan interest. To begin with, the new law repeals the restriction that this deduction could only be taken with respect to the first 60 months during which student loan interests are required. The new law also greatly increases the adjusted gross income phase-out limits to make this benefit available to more taxpayers.

Other breaks

The new law expands the scope and the tax treatment for qualified tuition plans. Now contributions are not just restricted to state-sponsored qualified tuition plans, but can also be made to privately sponsored plans.

In addition, distributions from state-sponsored plans are excludible for tax years beginning in 2002 and thereafter and distributions from privately sponsored plans can be excluded for tax years beginning in 2004 and thereafter.

Another break that may be helpful is that the law extends the income exclusion of $5,250 annually that an employer can provide under a qualified education assistance program.

As you can see, much change has taken place in the area of education tax planning. Real tuition costs may be reduced substantially if several tax breaks are combined or staggered from one year to the next. Careful advance planning is now advisable in many cases. As always, please feel free to call us with you questions or to arrange for an appointment to examine how these new provisions can best work in your situation.

Melvin J. Van de Ven, CPA, CVA is a partner in the certified public accounting firm of Schott & Van de Ven in Cape Girardeau. He can be reached by email at mvandeven@schottvandeven.com.