CHILD TAX CREDIT

A credit is $600 for 2003 is available. This credit directly reduces the taxpayer’s tax liability up to the total amount. The credit is available for the taxpayer’s son, daughter, grandchild, or eligible foster child.

The child credit is phased out if Modified Adjusted Gross Income exceeds a set amount. For joint filers, this amount is $110,000. For singles and heads of households it is $75,000. For married filing separately it is $55,000. For credit is reduced by $50 for each $1000 (or part of) above the exclusion limit. For example, if Modified AGI for a single person is $80,010, then the credit in 1999 would be $500 less $300 (50 x 6) or a total of $200.

The credit is generally nonrefundable (cannot exceed the tax liability) but families with three or more children are allowed a refundable credit to the extent of certain employee-paid payroll taxes, less the earned income credit claimed.

EDUCATION TAX BREAKS

Hope Scholarship Credit

  • Individuals can elect to take a nonrefundable tax credit of up to $1,500 per student per year for tuition and related expenses incurred during the first two years of post-secondary education. The credit equals 100% of the first $1,000 paid and 50% of the next $1,000 paid for tuition and academic fees required for enrollment or attendance. Fees for books and room and board are not included. The student can be the taxpayer as well as a spouse and dependents.

    This credit begins to be phased out for modified AGI between $80,000 and $100,000 for joint filers and $40,000 to $50,000 for single filers. The credit cannot be claimed if an education IRA distributions is used to pay educational expenses for the same taxable year.

    To qualify, the expenses must be paid after 1997 for education furnished in academic periods beginning after 1997. The student must have earned a high school diploma or equivalent degree, carry at least one-half the normal course load for one term during the tax year, and not have been convicted of a federal or state drug felony.

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    Lifetime Learning Credit

  • A taxpayer can elect a nonrefundable credit of 20% of up to $5,000 of qualified tuition and related expenses, including fees for both undergraduate and graduate courses attended at least on a half-time basis as part of a degree or certification program. This credit is also available for courses to acquire or improve job skills.

    The Lifetime Learning Credit is available for expenses paid for education beginning after that date. Expenses for the taxpayer, spouse and dependents qualify for this credit. The Hope and Lifetime Learning credit cannot be taken for the same student in the same year. Both can be taken in the same year if they are for separate students. The credit cannot be claimed if an education IRA distributions is used to pay educational expenses for the same taxable year.

    The credit is phased out for joint filers with modified AGI between $80,000 and $100,000 ($40,000 to $50,000 for single filers). For example, if a single taxpayer has qualified expenses of $4,000 and modified AGI of 45,000, then the credit is 20% of 4,000 or $800 minus one half (for 45,000 modified AGI) or $400 for a total credit of $400.

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    RECOMMENDATIONS

    If the taxpayer qualifies for both credits in a given year, the one that produces the largest benefit should be chosen. For college students, the Hope credit products the maximum tax credit for the first two years of schooling ($1,500 per year versus $1,000)

    Unreimbursed job related educational expenses should qualify for the credit to the extent that they are not allowed as miscellaneous itemized deductions due to the 2% of AGI floor.

    Student Loan Interest Deduction

  • A phased-in deduction of up to $2,500 is available for interest due and paid on qualified education loans after 1997. This deduction is before AGI ("above the line") and applies to any loan during the first 60 months interest payments are due. The deduction limits are currently $2,500.

    The deduction cannot be claimed by taxpayer’s that are claimed as a dependent on another return nor can it be claimed if AGI is $75,000 and above for joint filers and $55,000 and above for single filers. The phase out begins for joint and single filers at $60,000 and $40,000 respectively.

    • IRA Withdrawals for Higher Education

  • Penalty-free distributions from an IRA can be made before the age of 59 ½ if the funds are used to pay qualified higher education expenses. The withdrawal will be subject only to regular income tax.

    Qualified higher education expenses include tuition at an eligible post-secondary educational institution as well as room and board, fees, books, supplies and equipment required for enrollment or attendance. Graduate level course expenses are also covered.

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    IMPACT OF IRA WITHDRAWALS FOR HIGHER EDUCATION

    Penalty-free educational distributions cannot be made from qualified retirement plans. If the plan permits, the participant may want to consider transferring funds to an IRA for penalty-free educational distributions

    Education IRAs

  • Taxpayers are permitted to contribute up to $500 each year per child under 18 to an education IRA. Such contributions are nondeductible, but withdrawals used to pay qualified higher education expenses, including room and board, will generally be tax free. The education IRA contribution must be made before the designated beneficiary reaches age 18, and must be made in cash only.

    Earnings from the education IRA not used to pay such expenses are includible in the income of the distributee and are generally subject to an additional 10 percent penalty. The annual contribution limit is phased out for joint filers with modified AGI between $150,000 and $160,000 and single filers with modified AGI between $95,000 and $110,000.

    • Coverdell IRA

    Whether your child is six months or ten years old, it's never too early to start thinking about their college education. With   the enormous cost of higher education, it's important to plan ahead and start saving early. A Coverdell IRA is a great way to start saving for your child's education.

    A Coverdell (educational) IRA can be opened for a named beneficiary under the age of 18. Annual contributions of $2,000 can be made into a child's IRA.

    The "Economic Growth and Tax Relief and Reconciliation Act of 2001" raised the contribution limit for the Coverdell (Education) IRA to $2,000 per year. And starting in 2003 we will be able to make carry-back contributions. (That's when you make a contribution for the previous year by April 15th of the current year).

    The law adds elementary and secondary school educational expenses to the definition of qualified education expenses. Such expenses include tuition fees, academic tutoring, special needs services, books, supplies, equipment, room and board expenses, uniforms, transportation, educational computer technology or equipment and internet access.

    School means any school that provides elementary or secondary education (kindergarten through grade 12) as determined under state law, including public, private or religious schools.

    The law allows contributions for individuals with special needs beyond age 18. And the age 30 limitation does not apply for distributions for special needs beneficiaries.

     

    OBSERVATION

  • Unlike an ordinary IRA, where contributions can be made up until the time the return is due, contributions to an Educational IRA must be made during the tax year. This makes the calculation of the amount that can be contributed more difficult if modified AGI approaches the phase-out limits.
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    WHAT EDUCATION COSTS ARE COVERED

    Provision Tuition Limited
    Fees    		 Fees Books and
    Supplies    		 Room and
    Board
    Hope scholarship credit X* X*      
    Lifetime learning credit X X      
    Education IRA X   X X X*
    Traditional IRA withdrawal
    without penalty    		 X   X X X*
    Education loan interest X   X X X*
    Qualified state tuition
    programs    		 X   X X X*

    *Student must attend at least half-time

    OTHER EDUCATIONAL PROVISIONS

    There are a number of additional provision relating to education that are part of the 1997 Taxpayer Relief Act.

    For detailed information on these and all aspects of the new tax law, contact your tax advisor or Ford Levy at Maxwell Shmerler & Co., CPAs.

    ESTIMATED TAXES

    Under the prior law, a penalty for underpayment of estimated taxes was imposed if the total tax liability, reduced by any tax withheld, was $500 or more. Under the new law, this amount is increased to $1,000

    The new law also changes the requirements for estimated tax payments. Under the old law, if an individual’s AGI exceeded $150,000 for the prior year, estimated tax payments were based on either 90% of the current year’s tax or 110% of the preceding year’s tax. Under the new law, the prior year’s percentage is changed, as follows.

  • For 1998 100%
  • For 1999-2001 105%
  • For 2002 112%
  • For 2003 and beyond 110%
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