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Educational Expenses

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					Educational Expenses

    Amanda Beavers
     Eddie Bradford
    Nichole Hartfield
         Table of Contents
 Suggested Reading
 Introduction
 Qualified Tuition and Related Expenses Deduction
 Student Loan Interest Deduction
 Hope Scholarship Credit
 Lifetime Learning Credit
 Additional Tax Relief Options
 Summary
 Chart Illustration
 Side by Side Comparison
 Additional Readings
 Appendix
            Suggested Reading




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                      Tax Relief for Higher
                      Educational Expenses
                                        Higher
                                      Educational
                                       Expenses



                                                         Credits against
               Deductions
                                                          Income tax
                for AGI
                                                            liability



Qualified Tuition &
                           Student Loan       Hope Scholarship      Lifetime Learning
 Related Expenses
                        Interest Deduction         Credit                 Credit
    Deduction
          Introduction to Educational
                   Expenses
 The Hope and Lifetime Learning tax credits and the student loan interest
  deduction were created as a part of the Taxpayer Relief Act of 1997, enacted
  on August 5, 1997.

 These benefits were added to ease the burden of families and students paying
  for postsecondary education, especially middle-class families who may not
  qualify for need-based aid but may still be struggling with the costs of higher
  education.

 The Economic Growth and Tax Reconciliation Act of 2001 added the tuition
  and fees deduction and raised the applicable income limits for existing
  benefits, expanding eligibility for the Hope and Lifetime Learning tax credits
  and the student loan interest deduction to include a larger number of
  Americans.


Source: http://www.tgslc.org/resources/history.cfm
Qualified Tuition and Related
    Expenses Deduction
   Qualified Tuition and Related
       Expenses Deduction
What expenses are considered eligible?
  Tuition and fees required for the enrollment
   and attendance of the following parties: the
   taxpayer, the taxpayer’s spouse, or any
   dependent(1) of the taxpayer at an eligible
   educational institution.(2)
   Qualified Tuition and Related
       Expenses Deduction
What is considered an eligible educational
 institution?
  Any college, university, vocational school, or
   other postsecondary educational institution,
   eligible to participate in a federal financial aid
   program administered by the Department of
   Education.(3)
   Qualified Tuition and Related
       Expenses Deduction
Who is considered an eligible student?
  A student who has either a high school
   diploma or a General Educational
   Development (GED) credential, and who is
   enrolled in one or more courses at an eligible
   educational institution.(4)
  Qualified Tuition and Related Expenses
     Deduction: Miscellaneous Fees
What fees can qualify as related
 expenses?
  General Test Questions
     Is this paid to an eligible institution?
     Is this necessary for the student’s enrollment in
      that institution?
  Books, Supplies and Equipment(5)
  Non-academic fees(6)
  Qualified Tuition and Related Expenses
   Deduction: What costs are NOT included?
Personal expenses(7) – room and board,
 insurance and medical expenses,
 transportation, and similar living
 expenses regardless of whether the fee is
 required by the institution
Hobby Courses(8) – sports, games and
 hobbies or any non-credit course unless
 it is a part of the degree program
Qualified Tuition and Related Expenses
    Deduction: Dollar Limitations
    In 2002 & 2003, if AGI is ≤ $65,000 (or ≤ $130,000 if joint
     return), the taxpayer can deduct $3,000 from adjusted gross
     income(9)
    In 2004 & 2005, if AGI is ≤ $65,000 (or ≤ $130,000 if joint
     return), the taxpayer can deduct $4,000 from adjusted gross
     income(10)
    In 2004 & 2005, if AGI is ≤ $80,000 (or ≤ $160,000 if joint
     return), the taxpayer can deduct $2,000 from adjusted gross
     income(11)
    Taxpayers with AGI > $80,000 ( or > $160,000 if joint return),
     are not eligible for this deduction(12)

 This deduction is eligible for four years only (2002-
  2005)! This will be the last year that a deduction of this
  type will be allowed.(13)
   Qualified Tuition and Related
 Expenses Deduction: Adjustments
An educational expense deduction shall be
 reduced by the following:
  a qualified scholarship that is excluded from
   gross income(14)
  an educational expense allowance(15)
  any other payment for an individual’s
   enrollment at an eligible school, which is
   excluded from gross income(16)
   Qualified Tuition and Related
      Expenses: Example(17)
In 2004, Jackie paid $3,000 for tuition and $5,000 for room and
board at University X. The university did not require her to pay any
fees in addition to her tuition in order to enroll in or attend classes.
To help pay these costs, she was awarded a $2,000 scholarship and a
$4,000 student loan.

The terms of the scholarship state that it may be used to pay any of
Jackie's college expenses. Because she applied it toward her tuition,
the scholarship is tax free. Therefore, for purposes of figuring the
tuition and fees deduction, she must first use the $2,000 scholarship
to reduce her tuition (her only qualified education expense). The
student loan is not tax-free educational assistance, so she does not use
it to reduce her qualified expenses. Jackie is treated as having paid
$1,000 in qualified education expenses ($3,000 tuition – $2,000
scholarship) in 2004.
   Student Loan
Interest Deduction
Student Loan Interest Deduction:
    General Information(18)
Can be taken as an adjustment to
 taxpayer’s income if:
  Modified Adjusted Gross Income is less than
   $65,000 (or $130,000 if filing a joint return)
  Loan deemed a qualified student loan
  Loan was used for an eligible student
Student Loan Interest Deduction:
    General Information(18)
 Maximum Benefit: $2,500 reduction in
  income per taxable year
 Loan Qualifications:
   Must have been used for qualified education
    expenses
   Cannot be from a related party or made under
    a qualified employer plan
 Time Limit: Interest is deductible during
  the remaining period of the student loan
Student Loan Interest Deduction:
    General Information(18)
Student Qualifications:
  Loan was used for taxpayer, taxpayer’s spouse
   or qualified dependent
  Student must be enrolled at least half-time in a
   degree program
Student Loan Interest Deduction
Qualified Education Expenses defined as(18):
  Tuition and fees
  Room and Board
      Determined by institution and included in cost of
       attendance
      Housing must be owned and operated by the
       eligible education institution
   Books, Supplies and Equipment
   Other Miscellaneous Expenses
      Transportation
  Student Loan Interest Deduction:
            History(18)
   Year You Made Interest     Interest Deduction Allowed:
         Payments:
 Before                     No deduction allowed.

                             Interest paid during the first 60
 1998 – 2001                 months that interest payments
                              are required on the student
                              loan.

                             All interest paid on student
 2002 and later              loan during year, both required
                              and voluntary payments.
Student Loan Interest Deduction:
          Example(18)
The payments on Roger's student loan were scheduled to
begin in June 2003, 6 months after he graduated from
college. He began making payments as required. In
September 2004, Roger enrolled in graduate school on a
full-time basis. He applied for and was granted deferment
of his loan payments while in graduate school. Wanting
to pay down his student loan as much as possible, he
made loan payments in October and November, 2004.
Even though these were voluntary (not required)
payments, Roger can deduct the interest paid in October
and November.
Hope Scholarship
     Credit
     Hope Scholarship Credit
Who can qualify for this credit?
  A taxpayer who has paid qualified education
   expenses of higher education.
  A taxpayer who has paid qualified education
   expenses for an eligible student.
  If the eligible student is either yourself, your
   spouse or a dependent for who you are
   claiming an exemption for on your current
   year tax return.
      Hope Scholarship Credit
Who CANNOT qualify for this credit?
   A taxpayer whose filing status is married filing
    separately.
   A taxpayer who has been claimed as a dependant
    on another return for the current tax year.
   If the taxpayer’s modified adjusted gross income
    (MAGI) for 2005 is > $53,000 ($107,000 in the
    case of a joint return).(19)
   If the taxpayer claims the lifetime learning credit
    or tuition and fees deduction for the same eligible
    student for the current tax year.(20)
     Hope Scholarship Credit
What additional criteria exist to qualify as
 an eligible student for this credit?
  A taxpayer who did not have expenses that
   were used towards a Hope Credit in any 2
   previous tax years.(21)
  A taxpayer who has not completed the first
   two years of postsecondary education.(22)
      Hope Scholarship Credit:
            Calculation
Per Taxable Year (up to two taxable years):

  100% of the first $1,000 of qualified education
   expenses paid for the eligible student.(23)

  50% of the next $1,000 of qualified education
   expenses paid for the same student.(24)
      Hope Scholarship Credit:
            Example(25)
In 1999, Taxpayer A has two dependents, B and C, both of
whom are eligible students. Taxpayer A pays $1,600 in
qualified tuition and related expenses for dependent B to
attend a community college. Taxpayer A pays $5,000 in
qualified tuition and related expenses for dependent C to
attend University X.
Taxpayer A may claim a Hope Scholarship Credit of $1,300
($1,000 + (.50 * $600)) for dependent B, and the maximum
$1,500 Hope Scholarship Credit for dependent C, for a total
Hope Scholarship Credit of $2,800.
Lifetime Learning
      Credit
     Lifetime Learning Credit:
   Comparison to the Hope Credit
The eligibility requirements of the lifetime
 learning credit are the same as the Hope
 Scholarship Credit.
A taxpayer cannot claim this credit in
 addition to Hope Scholarship Credit in the
 taxable year for the same student.(26)
There is not a year limit on how many
 years that the lifetime credit can be taken.
     Lifetime Learning Credit:
   Comparison to the Hope Credit
The lifetime credit is available for one or
 more eligible courses taken at an eligible
 education institution.
The lifetime credit is available for all
 postsecondary education as well as courses
 taken to acquire or improve job skills.
      Lifetime Learning Credit:
             Calculation
Per Taxable Year:
  20% of qualified education expenses paid by
   the taxpayer during the taxable year up to
   $10,000(27)
  $10,000 in total qualified education expenses
   relates to taxable years beginning January 1,
   2003 and $5,000 in previous years(27)
     Lifetime Learning Credit:
            Example(28)
Bruce and Toni Harper are married and file a
joint tax return. For 2004, their MAGI is
$75,000. Toni is attending a local college (an
eligible educational institution) to earn credits
toward a degree in nursing. She already has a
bachelor's degree in history and wants to become
a nurse. In August 2004, Toni paid $6,000 of
qualified education expenses for her Fall 2004
semester.
Bruce and Toni can claim a $1,200 (20% ×
$6,000) lifetime learning credit on their 2004
joint tax return.
  Hope/Lifetime Credits: Treatment
    of Dependent’s Expenses(29)
IF you...                           IF you...
 claim an exemption on your         do not claim an exemption on
   tax return for a dependent who      your tax return for a dependent
   is an eligible student              who is an eligible student
                                       (even if entitled to the
                                       exemption)

THEN only…                          THEN only…
 you can claim the Hope or          the dependent can claim the
  Lifetime credit based on that       Hope or Lifetime credit. You
  dependent's expenses. The           cannot claim the credit based
  dependent cannot claim the          on this dependent's expenses.
  credit.
 Hope vs. Lifetime: Summary(29)
   Hope Scholarship         Lifetime Learning
           Credit                  Credit
 Up to $1,500 per        Up to $2,000 per return
  eligible student
 Available for only 2    Does not have a year
  years per student        requirement
 Must be pursuing a      Do not need to be
  degree                   pursuing a degree
 Hope vs. Lifetime: Summary(29)
   Hope Scholarship          Lifetime Learning
          Credit                    Credit
 Must be enrolled at
  least half time for at    Available for one or
  least one period           more courses
  during the year
 No felony drug            Felony drug
  conviction on              conviction rule does
  student’s record           not apply
 Additional Tax Relief Options for
      Educational Expenses
Employer Tuition Reimbursement Program
 – allows a company to reimburse an
 employee up to $5,250 per year tax free.
Early Withdrawals from IRAs – the 10%
 penalty tax can be avoided if used to pay
 for qualified higher educational expenses.
§529 Plan
 Summary - How to maximize your
     education tax benefits:
 Since the Hope Scholarship is a tax credit of at least 50% of the
  amount of the expenses, it is better than the tax deductions and
  exclusions from income.
 Since the Lifetime Learning tax credit is 20% of the amount of the
  expenses, whether it is better than tax deductions and exclusions from
  income depends on your tax bracket. If your tax bracket is less than
  20%, the Lifetime Learning tax credit is better than the tax
  deductions and exclusions from income.
 However, the tuition and fees deduction is taken as an above-the-line
  exclusion from income. Since this reduces the AGI, it can potentially
  make you eligible for additional financial aid next year. If that aid is
  in the form of grants instead of loans, it can potentially make the
  tuition and fees deduction more attractive than the Hope Scholarship
  or Lifetime Learning tax credit.
 If you can take either the Hope Scholarship or the Lifetime Learning
  tax credits for a student, prefer the Hope Scholarship.

Source: http://www.finaid.org/savings/taxbenefitcoordination.phtml
                 Chart Illustration
   The following chart illustrates the coordination
   restrictions by assigning each program to a
   column and a row, and placing a letter at each
   intersection to indicate the nature of any
   coordination restrictions. If the letter 'X' is used,
   it indicates that the same expenses may not be
   used as the basis for both programs. If the letter
   'C' is used, it indicates that the programs may not
   be used for the same child during the same year.
   If the intersection is blank, it means that there are
   no coordination restrictions.

Source: http://www.finaid.org/savings/taxbenefitcoordination.phtml
                                                           Tuition     Student     Tax-Free

                                                           Deduction   Loan        Educ.

                                                                       Interest    Assist.

                     529   ESA   Hope   Lifetime   Bonds               Deduction

           529             X     X      X                  X

ESA              X               X      X          X       X

Hope             X         X            C          X       C                       X

Lifetime         X         X     C                 X       C                       X

Bonds                      X     X      X                  X                       X

Tuition

Deduction        X         X     C      C          X                               X

Student

Loan

Interest

Deduction


Tax-Free


Educ.


Assist.                          X      X          X       X
                Side by Side Comparison(30)
Program                                            Qualified                          Income                             Other

Name               Amount                          Expenses                           Phaseouts                          Constraints

529 Plans          Amount of distribution is not   Higher education expenses.         None.                              None.
                          taxed.                           Includes room and board
                                                           for students enrolled at
                                                           least half-time (e.g.,
                                                           actual charges from
                                                           school, or school's
                                                           official budget for
                                                           students living off-
                                                           campus but not at
                                                           home).




Coverdell ESA      Amount of distribution is not   Higher education expenses          On contributions only.             Contributions end at age 18 and
                          taxed.                           including tuition and              Contributions limited to           must withdraw assets by
                                                           fees, books, supplies,             $2,000 per beneficiary.            age 30, unless special
                                                           equipment, and room                Contributions phased out           needs.
                                                           and board. Room and                between $95,000 and
                                                           board are limited to the           $110,000 (single filers)
                                                           school's actual charges            and $190,000 and
                                                           for students living on             $220,000 (married filing
                                                           campus and $2,500 for              jointly).
                                                           students living off
                                                           campus and not at
                                                           home. Certain
                                                           elementary and
                                                           secondary school
                                                           expenses may be
                                                           included.
Hope Scholarship     $1,500 tax credit per student      Higher education expenses,            Single filers: $41,000 to $51,000;   First two years of postsecondary
                             (100% of first $1,000,             limited to tuition and fees             Married filing jointly:             education. Must be
                             50% of next $1,000).               required for enrollment                 $82,000 to $102,000.                enrolled at least half-time
                             Capped at amount of tax            or attendance. Does not                                                     in a degree program. No
                             (not refundable).                  include room and board.                                                     felony drug convictions.
                                                                                                                                            Must be able to claim an
                                                                                                                                            exemption for the
                                                                                                                                            student on your income
                                                                                                                                            tax return.

Lifetime Learning    $1,000 tax credit per tax return   Higher education expenses,            Single filers: $41,000 to $51,000;   Available for all years of
                             (20% of the first $5,000           limited to tuition and fees             Married filing jointly:             postsecondary
                             paid for all eligible              for courses.                            $82,000 to $102,000.                education. Does not
                             students). Capped at                                                                                           need to be pursuing a
                             amount of tax (not                                                                                             degree. Must be able to
                             refundable).                                                                                                   claim an exemption for
                                                                                                                                            the student on your
                                                                                                                                            income tax return.

Savings Bonds        Interest on redeemed bonds         Higher education expenses             Single filers: $55,750 to $70,750;   None.
                              excluded from income.             limited to tuition and                  Married filing jointly:
                                                                fees. Does not include                  $83,650 to $113,650
                                                                room and board or non-                  (2001 figures)
                                                                degree courses.

Tuition Deduction    $3,000 in 2002 and 2003, $4,000    Tuition                               Single filers: $65,000 to $80,000;   Must be able to claim an
                              in 2004 and 2005.                                                         Married filing jointly:            exemption for the
                                                                                                        $130,000 to $160,000               student on your income
                                                                                                                                           tax return. Adjustment to
                                                                                                                                           income, so do not need
                                                                                                                                           to itemize deductions.

Interest Deduction   $2,500 tax deduction               Amount of student loan interest       Single filers: $40,000 to $55,000;   Adjustment to income, so do not
                                                               paid for higher education                Married filing jointly:           need to itemize
                                                               expenses. Higher                         $60,000 to $75,000.               deductions. Student
                                                               education expenses                                                         must have been enrolled
                                                               include tuition, fees,                                                     at least half-time in a
                                                               books, supplies,                                                           degree program.
                                                               equipment, room and
                                                               board, transportation,
                                                               etc.

Tax-Free             $5,250 in employer-paid benefits   Undergraduate and graduate            None.                                Excess also tax free if working
                              not taxed.                        courses, including tuition,                                                condition fringe benefit
                                                                fees, books, supplies                                                      (i.e., if paid by employee
                                                                and equipment. Does not                                                    deductible as employee
                                                                have to be for work-                                                       business expense).
                                                                related courses. Does
                                                                not include courses
Employer                                                        involving sports, games
                                                                or hobbies unless
Educational                                                     required as part of a
                                                                degree program or
Assistance                                                      related to business of
                                                                employer.
            Additional Readings
Here are a few links to additional sources
 related to this topic:

 http://www.finaid.org/savings/taxbenefitcoordination.phtml

 http://www.turbotax.com/articles/DeductionforHigherEducation
  Expenses.html
                        Appendix
(1) IRC   § 25A(g)(3)(B) – “qualified tuition and related
     expenses paid by a dependent is treated as being paid by the
     taxpayer”
(2) IRC   § 25A(f)
(3) Reg. §1.25A-2(b)
(4) IRC § 25A(b)(3)
(5) Reg. §1.25A-2(d)(2)(ii) “must be used in a particular
      course of study and are paid to the eligible educational
      institution”
(6) Reg. §1.25A-2(d)(2)(iii) “must be paid to the eligible
      educational institution for the enrollment or attendance
      of the student”
                    Appendix cont.
(7)Reg. §1.25A-2(d)(3)     “Qualified tuition and related expenses do not
    include the costs of room and board, insurance, medical expenses
    (including student health fees), transportation, and similar personal,
    living, or family expenses, regardless of whether the fee must be paid
    to the eligible educational institution for the enrollment or attendance
    of the student at the institution.”
(8)Reg. §1.25A-2(d)(5) “Qualified tuition and related expenses do not
    include expenses that relate to any course of instruction or other
    education that involves sports, games, or hobbies, or any noncredit
    course, unless the course or other education is part of the student's
    degree program, or in the case of the Lifetime Learning Credit, the
    student takes the course to acquire or improve job skills.”
(9)IRC § 222(b)(2)(A)(i)
(10)IRC § 222(b)(2)(B)(i)
(11)IRC § 222(b)(2)(B)(ii)
             Appendix cont.
(12)IRC  § 222(b)(2)(B)(iii)
(13)IRS Publication 970 Chapter 6 “The tuition and
   fees deduction is available for 4 years, 2002
   through 2005.”
(14)IRC § 25A(g)(2)(A)
(15)IRC § 25A(g)(2)(B)
(16) IRC § 25A(g)(2)(C)
(17)Example taken from IRS Publication 970

   Chapter 6
                      Appendix cont.
(18) Information   and example taken from IRS Publication 970 Chapter 4
(19)
     http://www.savingforcollege.com/tutorial101/federal_tax_incentives_
     to_education.php
(20)IRS Publication 970 Chapter 2
(21)IRC § 25A(b)(2)(A) “CREDIT ALLOWED ONLY FOR 2
     TAXABLE YEARS. An election to have this section apply with
     respect to any eligible student for purposes of the Hope Scholarship
     Credit under subsection (a)(1) may not be made for any taxable year
     if such an election (by the taxpayer or any other individual) is in
     effect with respect to such student for any 2 prior taxable years.”
(22)I.R.C. § 25A(b)(2)(C) “CREDIT ALLOWED ONLY FOR FIRST 2
     YEARS OF POSTSECONDARY EDUCATION. --The Hope
     Scholarship Credit under subsection (a)(1) shall not be allowed for a
     taxable year with respect to the qualified tuition and related expenses
     of an eligible student if the student has completed (before the
     beginning of such taxable year) the first 2 years of postsecondary
     education at an eligible educational institution.”
                 Appendix cont.
(23)IRC  § 25A(b)(1)(A)
(24)IRC § 25A(b)(1)(B)
(25)Example taken from Reg. §1.25A-2
(26)IRC § 25A(c)(2)(A) “COORDINATION WITH HOPE

    SCHOLARSHIP. --The qualified tuition and related
    expenses with respect to an individual who is an eligible
    student for whom a Hope Scholarship Credit under
    subsection (a)(1) is allowed for the taxable year shall not
    be taken into account under this subsection.”
(27) IRC § 25A(c)(1)
(28)Example taken from IRS Publication 970 Chapter 3
                Appendix cont.
(29) Tables   from IRS Publication 970
       Chapters 3-4
(30) Chart   taken from
  http://www.finaid.org/savings/taxbenefitcoordination.phtml

				
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