A $1,500 tax refund--or more--may be in your pocket if you or your child go to college. That's because Congress passed legislation full of tax relief incentives to encourage Americans to continue their educations.
You may be able to take advantage of one or more (but not all) of the college cost savers. Because the new incentives revolve around tax relief, your personal tax situation is likely to dictate which options you choose. As with any tax situation, review your alternatives with a tax adviser to ensure you're making the most of your options.
Tax credits
If you pay federal income tax, the biggest new savings come from two tax credits--the Hope Scholarship and the Lifetime Learning Tax Credit.
The Hope Scholarship Credit allows a $1,500 tax credit for each student enrolled in a degree program on at least a half-time basis, for the first two years of college.
The Lifetime Learning Credit is a family tax credit of up to $1,000 per year (increasing to $2,000 in 2003) for full- and part-time students for an unlimited amount of years.
The hitch? Both of these tax credits kick in only after excluding scholarships and grants, and they don't apply in any year the student receives a tax-free distribution from an Education IRA (individual retirement account). And, there are income limit qualifications: single taxpayers with modified adjusted gross incomes up to $40,000 (or up to $80,000 for joint filers). Tax credits phase out between $40,000 and $50,000 for single filers (or $80,000 to $100,000 for joint filers). The winners here are parents putting their children through college.
Tax deduction
Now, you can deduct education loan interest. The interest deduction is $2,000 in 2000 and then rises to $2,500 in 2001 and beyond. You qualify provided your adjusted gross income is less than $40,000 for a single filer ($60,000 for joint filers. The deduction phases out between $40,000 and $55,000 for single filers (or $60,000 to $75,000 for joint filers). The hitch? The deduction applies only during the first 60 months of repayment. But the deduction for a filer in the 15% tax bracket is the equivalent of reducing the loan's interest rate a full percentage point. The winners here are new college graduates and parents earning less than $60,000.
Lower capital gains rate
If you're saving for college, the long-term capital gains rates also are good news. Generally, profits on investments held at least 18 months will be taxed at lower rates. For those in the 15% tax bracket, your long-term capital gains rate is only 10% (20% for those in the higher brackets). There are no hitches--and winners here are parents investing savings in stocks and equity mutual funds.
