New Education Tax Savings Optionshttp://www.fool.com/taxes/2002/taxes020719.htm By Roy Lewis
Just a few years back, there were virtually no provisions in the tax code that would allow for deductions and/or credits for education expenses unless those expenses were job- or business-related. That's all over now. The Tax Relief Act of 1997 cracked the door open for various education deductions and credits. The changes brought about by the new Economic Growth and Tax Relief Reconciliation Act of 2001 kicked the door in and knocked it off of its hinges.
You now have more options (and combinations of options) than ever to pay for primary, secondary, and higher-education expenses for yourself and your family members. It's now possible that the same education expense might qualify for any number of deductions or credits. It'll be more important than ever to determine what is best for you. Let's take a look at some of the major changes on the education credit and deduction front.
Still hate the Ed IRA? Well, try this on for size: Effective in 2002, Ed IRA distributions can be made for qualified primary and secondary (kindergarten through 12th grade) education expenses. That includes distributions made to public, private, and/or religious schools. Heck, in the new law, you're even allowed to use Ed IRA distributions to purchase computers or computer-related equipment if that equipment is required for specific course work. So these changes allow for even more options for either establishing or ridding yourself of an Ed IRA.
Student-loan interest deduction
One of the other restrictions to this deduction in the past was the income limitation. If your income was above certain limits, you couldn't claim the deduction. But the new Tax Act has raised those income limits to $65,000 for single taxpayers and $130,000 for married folks. So now even more of you are eligible for the student-loan deduction in 2002.
Don't forget -- this deduction is an "above the line" deduction, i.e., you don't have to itemize your deductions in order to take a deduction for student-loan interest paid. So, if you otherwise qualify, you can claim the student-loan interest deduction even if you use the standard deduction.
Higher-education expense deduction
What happens in 2006? Unless legislation is passed that would make this provision in the law permanent, it will be automatically repealed at the end of the 2005 tax year.
You'll have to be careful if you plan to use this new deducti