What exactly does the new tax law mean for you? This, the third in a five-part series examining that question, looks at the bill's implications for education expenses.
Here's how to take advantage of the breaks:- Use the Hope college tax credit. The Hope credit is worth 100 percent of the first $1,000 paid for college tuition and fees and 50 percent of the next $1,000 - so unless your son or daughter goes to an extremely inexpensive school or gets a ton of scholarships, you'll get the full $1,500 credit. It is available for freshman and sophomore years.
For additional schooling, including graduate school, a "lifetime learning credit" is worth 20 percent of the first $5,000 of college costs, for a maximum annual credit of $1,000.
If you have more than one child in school, you can claim a Hope credit for each one. But only one lifetime credit can be claimed each year, regardless of how many students you're supporting. The credits are phased out as adjusted gross income (AGI) rises between $40,000 and $50,000 on an individual return and between $80,000 and $100,000 on a joint return.
- Set up an education IRA. Starting in 1998, education individual retirement accounts can be set up for children, and up to $500 a year can be contributed to the account by parents, grandparents and others. There's no deduction, but earnings are tax-free if withdrawals are used to pay college costs.
- Dip into an IRA early. Also starting next year, penalty-free withdrawals can be taken from regular IRAs to pay college costs.
- Write off student-loan interest. If your AGI is below $40,000 on an individual return or $60,000 on a joint return, up to $1,000 in interest paid on student loans in 1998 is deductible even if you don't itemize. The limit will rise to $2,500 in 2001.