COLLEGE 101: EDUCATION TAX INCENTIVES

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

Paying for college just got a little easier with the passage of the Taxpayer Relief Act of 1997. For tax years after 1997, the act will provide relief from the high cost of a college education through two new educaiton tax credit programs (the HOPE credit and the Lifetime Learning credit) and a new education investment account (the Education IRA). You can choose among these alternatives when making decisions about funding college educaiton expenses, but you cannot use all three choices simultaneously for one eligible student.

HOPE Credit

The HOPE credit is a non-refundable tax credit that can only be used for the first two years of postsecondary education in a qualified degree or certificate program. It's equal to 100 percent of the first $1,000 of tuition expense, plus 50 percent of the second $1,000 of tuition expense, for a maximum credit of $1,500 per eligible student. To be eligible, students must carry at least one-half the normal full-time work load for their course of study and have never been convicted of a drug felony. The HOPE credit is available for academic periods beginning after 1997.

Lifetime Learning Credit

The Lifetime Learning credit is a non-refundable tax credit available in any year you pay postsecondary expenses for a student taking either undergraduate or graduate-level courses to acquire or improve job skills. This credit is limited to 20 percent of the first $5,000 of qualified tuition and fees, for a maximum credit of $1,000 on expenses paid after June 30, 1998, and before Jan. 1, 2003. The maximum credit will increase to $2,000, or 20 percent of the first $10,000 of qualified tuition and fees, for expenses paid after Dec. 31, 2002.

Education IRA

The Education IRA can help you save for qualified higher education expenses by allowing earnings to accumulate tax free. You must make cash contributions, which are nondeductible and limited to $500 annually. You may set up only one account for a beneficiary, and contributions must cease after the beneficiary reaches age 18. Generally, distributions to pay for higher education expenses will be both tax-free and penalty-free. The Education IRA provisions are effective for taxable years beginning after 1997.

There are many variables to consider when using any of these programs. Talk to your investment professional to find out which best suits your needs.

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