Taxpayer Relief Act of 1997
On August 5, 1997, President Clinton signed both the Balanced Budget Act of 1997 and the Tax Payer Relief Act of 1997. The Taxpayer Relief Act of 1997 provides for the Hope Scholarship and Lifetime Learning Credits, as well as other tax benefits for students and families. Their intent is to make postsecondary education more affordable. The following is not to be constructed as tax advice or counsel, but is intended to help you initiate conversations with your tax advisor. Please discuss the possible implications of this law in regard to your particular situation with your tax advisor before making any decision.
Hope Scholarship Tax Credit
Description: The Hope Scholarship non-refundable tax credit helps make the first two years of postsecondary education more universally affordable. Taxpayers may be eligible to receive a 100% tax credit for the first $1,000, and 50% of the second $1,000 of tuition and required fees for each student who is enrolled at least half-time in one of their first two years of postsecondary education and who is enrolled in a program leading to a degree, certificate, or other recognized educational credit at a Title IV eligible institution. This tax credit is available for tuition and required fees less grants, scholarships, and other tax-free educational assistance. Multiple Hope Scholarship credits may be claimed for multiple students who meet the requirements. This means that if the taxpayer has paid for two qualifying students during a single year, the taxpayer may be eligible to take Hope Scholarship credits for both students.
Lifetime Learning Credit
Description: This non-refundable tax credit is targeted at college juniors and seniors, graduate students, and adults who want to pursue an educational credential, change careers, or take a course or two to upgrade their skills. A family may be eligible to claim a tax credit for 20% of the first $5,000 of tuition and required fees paid each year (this limit will increase to 20% of $10,000 after January 1, 2003). Just like the Hope Scholarship non-refundable tax credit, the Lifetime Learning non-refundable tax credit is based on qualified tuition and required fees less grants, scholarships, and other tax-free educational assistance.
Interest Deduction on Educational Loans
Description: The new student loan interest deduction will reduce the burden of repayment obligation by allowing a borrower (who is a taxpayer) to take a tax deduction for interest paid in the first 60 months of repayment on student loans. The deduction is available even if an individual does not itemize deductions.
The maximum deduction is limited to $2,000 for 2000, $2,500 for 2001, and thereafter. For a taxpayer in the 15% tax bracket, the tax savings will be up to $300 for 2000 and $375 for 2001.
Penalty-Free Withdrawals from Individual Retirement Plans for Higher Education Expenses
Description: Taxpayers are permitted to withdraw funds from an IRA, without penalty, for their own higher education expenses or those of their spouse, child, or even grandchild. This allows for penalty-free withdrawals to pay college expenses, just like penaltyfree withdrawals from retirement. (Usually there would be a 10% penalty if the taxpayer made a withdrawal prior to age 59 1/2.)
There are other provisions to the Balanced Budget Act of 1997 and the Taxpayer Relief Act of 1997 which may be pertinent to you. Please discuss them with your tax advisor. To find out more about educational tax benefits, you can obtain IRS Publication 970, "Tax Benefits for Higher Education," by contacting your local IRS office or the Web at www.irs.ustreas.gov.