Wednesday, February 5, 2003

Breaks promote education

There are several ways to save for schooling

By Amy Higgins
The Cincinnati Enquirer

The federal government wants you to get an education, and to that end, has loaded its tax forms with helpful credits, deductions and other breaks.

It's just too bad it seems you need an accounting degree to figure it all out.

There are three main ways that the IRS tries to make financing an education easier: credits, deductions and tax-favored savings programs.

Saturday: Getting your records organized
Sunday: What's new for 2002
Monday: Often missed work-related deductions
Tuesday: Does it make sense to deduct a homeoffice?
Today: Education related credits and deductions
Thursday: Reducing taxes without itemizing
Friday: Which filing status is best?
Saturday: IRS Free File and online tax chat on Cincinnati.Com

Tax chat: Visit Cincinnati.Com from 11 a.m.-noon Feb. 8, Feb. 22 and March 8 for our third annual series of Tax Chats. Questions will be answered live by Tom Cooney and Crystal Faulkner, partners in the accounting firm of Cooney, Faulkner and Stevens.
Questions: E-mail questions throughout the week to Answers to commonly asked questions will be printed in Saturday editions of the Enquirer through April 12.
The most valuable education tax break this year might be the Hope or Lifetime Learning credits. Credits are so powerful because they actually lower your tax bill dollar for dollar.

Deductions lower your taxes by decreasing your taxable income so that a $1 deduction might only mean 27 cents or 30 cents in tax savings, depending on your tax rate. Still, being able to deduct up to $3,000 in education expenses this year can go a long way toward cutting that tax bill.

The most powerful of all education tax breaks are probably found in the state-sponsored 529 plans and Coverdell Education Savings Accounts. While they can't do much to help your tax bill this year, they promise significant savings in the long run because withdrawals can be tax-free.


You may be eligible for the Hope and Lifetime Learning credits if you, your spouse or a dependent is going to an accredited college, university or vocational school.

You can take only one of the two credits for each student in school - but only if you don't claim another tax break on the same expenses, and only if your income is less than $51,000 filing as a single or head of household, or less than $102,000 filing jointly.

You cannot claim these credits if you are married and file separate returns.

The Hope credit can reach $1,500 for students enrolled in a program that leads to a degree or certificate. The Lifetime Learning credit is limited to $1,000 but can be applied to nondegree courses.


New to the tax code this year, thanks to the $1.35 trillion tax cut package passed in 2001, is a deduction that might allow you to exclude $3,000 from your taxable income.

This is considered an "above-the-line" deduction because you can take it whether you itemize or take the standard deduction.

The income limits for the deduction are $65,000 for single or head of household filers, or $130,000 for married joint filers. Married people filing separately are not eligible for the deduction.

Because you can't take both this deduction and either of the education credits, take the one that benefits you more. Typically, the credits will be a bigger tax savings - but higher-income taxpayers might find their benefits limited with the credits and could do better with this deduction.

Savings programs

State-sponsored 529 plans might be the best thing to happen to higher education since the keg party. Some states, such as Ohio, allow contributions to the plan to be deducted from state income taxes.

More importantly, however, the growth and gains in these plans over several years can be profound. And as long as it's used for qualified education expenses, such as tuition and fees, it's tax-free.

The programs are fairly flexible, allowing for out-of-state and private schools, and keep parents or guardians in control of the funds.

Coverdell Education Savings Accounts are what used to be called Education IRAs. They are more restricted in what goes in - with contributions limited to $2,000 per child - but they have more flexibility in how the funds can be invested and later used.

Most significantly, ESAs can be used to cover private elementary and secondary school costs. You can also claim the Hope or lifetime learning credits in the same year to take a distribution from an ESA, as long each covers different expenses.

As with retirement accounts, you can make contributions count for 2002 if you open an account and put the money in before April 15.


P&G fights Mideast rumors caused by product's name
Business in China not just for giants
Retail perk-up for Jan. likely
Car dealers skip 'killer' questions
Breaks promote education
Industry notes: Banking
American urges employees to accept $1.8B in wage cuts
Labor board files complaint vs. Bigg's
Factory orders bounce back
Business digest
Tristate summary
Morning memo
What's the buzz?