Tax Breaks for Higher Education Expenses

The Taxpayer Relief Act of 1997 (TRA) contains a number of measures designed to help families and individuals who are paying or saving for higher education expenses or are repaying student loans. The TRA added section 25A of the Internal Revenue Code (IRC), which provides for the Hope Scholarship Credit and Lifetime Learning Credit; added section 221, which provides a deduction for student loan interest; amended section 127 providing an exclusion from income for employer-provided education assistance; and amended section 529, which covers the requirements for tax-exempt status for qualified state tuition programs.

Deduction for Student Loan Interest

Under section 221 of the IRC, an individual taxpayer can deduct the interest paid on any qualified education loan, up to $2,500. This amount is reduced for taxpayers with certain adjusted gross income levels. For 2007, the amount of the student loan interest deduction is phased out if the taxpayer’s modified adjusted gross income is between $55,000 and $70,000 (single filer) or $110,000 and $140,000 (joint filer). If the taxpayer’s modified adjusted gross income exceeded $70,000 (single filer) or $140,000 (joint filer), he or she cannot take the deduction.

Employer-provided Educational Assistance Excluded from Income

Under section 127 of the IRC, amounts paid or expenses incurred by an employer for educational assistance to an employee is not included in the employee’s gross income. The assistance must be given to the employee pursuant to an "educational assistance program." The maximum amount given by an employer that an employee can exclude from income is $5,250. Educational assistance includes expenses the employer incurs on behalf of the employee for the employee’s education including tuition, fees, books and supplies. It does not include any supplies that will be kept by the employee after his or her education is complete or any meals, lodging or transportation. The exclusion from income does not extend to expenses connected with graduate level courses that a person pursuing an advanced academic or professional degree would normally take.

Section 529 – Qualified Tuition Programs

Under section 529(a) of the IRC, qualified tuition programs are exempt from taxation. Qualified tuition programs (sometimes called "529 Plans" or "Qualified State Tuition Programs") allow individuals to either prepay or contribute to an account that is to be used for paying a student’s qualified higher education expenses at an eligible educational institution. Colleges, universities, vocational schools and other postsecondary educational institutions are generally considered eligible educational institutions. A taxpayer’s contributions to a qualified tuition program are not deductible on the federal income tax return.

Coverdell Education Savings Accounts

A Coverdell Education Savings Account (ESA) is a trust or savings account set up solely for the purpose of paying qualified education expenses for the designated beneficiary of the account. While contributions to a Coverdell ESA are not tax deductible, the money that is contributed will grow tax free until it is distributed. If the distributions are less than a beneficiary’s qualified education expenses at an eligible institution, the beneficiary will not owe any tax on those distributions. Total contributions to a Coverdell ESA cannot exceed $2000 in any year.

Preparing for a Meeting with Your Tax Attorney

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Preparing for a Meeting with your Tax Attorney

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