1. Educational Expenses Amanda Beavers Eddie Bradford Nichole Hartfield

2. Table of Contents  Suggested Reading  Introduction  Qualified Tuition and Related Expenses Deduction  Student Loan Interest Deduction  Hope Scholarship Credit  Lifetime Learning Credit  Additional Tax Relief Options  Summary  Chart Illustration  Side by Side Comparison  Additional Readings  Appendix

3. Suggested Reading Please click on the link above for a related article and read before continuing with the presentation. Instructions: Double click on the file icon to view the article.

4. Tax Relief for Higher Educational Expenses Higher Educational Expenses Deductions for AGI Qualified Tuition & Related Expenses Deduction Student Loan Interest Deduction Credits against Income tax liability Hope Scholarship Credit Lifetime Learning Credit

5. Introduction to Educational Expenses  The Hope and Lifetime Learning tax credits and the student loan interest deduction were created as a part of the Taxpayer Relief Act of 1997, enacted on August 5, 1997.  These benefits were added to ease the burden of families and students paying for postsecondary education, especially middle-class families who may not qualify for need-based aid but may still be struggling with the costs of higher education.  The Economic Growth and Tax Reconciliation Act of 2001 added the tuition and fees deduction and raised the applicable income limits for existing benefits, expanding eligibility for the Hope and Lifetime Learning tax credits and the student loan interest deduction to include a larger number of Americans. Source: http://www.tgslc.org/resources/history.cfm

6. Qualified Tuition and Related Expenses Deduction

7. What expenses are considered eligible?  Tuition and fees required for the enrollment and attendance of the following parties: the taxpayer, the taxpayer’s spouse, or any dependent (1) of the taxpayer at an eligible educational institution. (2)

8. Qualified Tuition and Related Expenses Deduction What is considered an eligible educational institution?  Any college, university, vocational school, or other postsecondary educational institution, eligible to participate in a federal financial aid program administered by the Department of Education. (3)

9. Qualified Tuition and Related Expenses Deduction Who is considered an eligible student?  A student who has either a high school diploma or a General Educational Development (GED) credential, and who is enrolled in one or more courses at an eligible educational institution. (4)

10. Qualified Tuition and Related Expenses Deduction: Miscellaneous Fees  What fees can qualify as related expenses?  General Test Questions  Is this paid to an eligible institution?  Is this necessary for the student’s enrollment in that institution?  Books, Supplies and Equipment (5)  Non-academic fees (6)

11. Qualified Tuition and Related Expenses Deduction: What costs are NOT included?  Personal expenses (7) – room and board, insurance and medical expenses, transportation, and similar living expenses regardless of whether the fee is required by the institution  Hobby Courses (8) – sports, games and hobbies or any non-credit course unless it is a part of the degree program

12. Qualified Tuition and Related Expenses Deduction: Dollar Limitations  In 2002 & 2003, if AGI is ≤ $65,000 (or ≤ $130,000 if joint return), the taxpayer can deduct $3,000 from adjusted gross income (9)  In 2004 & 2005, if AGI is ≤ $65,000 (or ≤ $130,000 if joint return), the taxpayer can deduct $4,000 from adjusted gross income (10)  In 2004 & 2005, if AGI is ≤ $80,000 (or ≤ $160,000 if joint return), the taxpayer can deduct $2,000 from adjusted gross income (11)  Taxpayers with AGI > $80,000 ( or > $160,000 if joint return), are not eligible for this deduction (12)  This deduction is eligible for four years only (2002- 2005)! This will be the last year that a deduction of this type will be allowed. (13)

13. Qualified Tuition and Related Expenses Deduction: Adjustments An educational expense deduction shall be reduced by the following:  a qualified scholarship that is excluded from gross income (14)  an educational expense allowance (15)  any other payment for an individual’s enrollment at an eligible school, which is excluded from gross income (16)

14. Qualified Tuition and Related Expenses: Example (17) In 2004, Jackie paid $3,000 for tuition and $5,000 for room and board at University X. The university did not require her to pay any fees in addition to her tuition in order to enroll in or attend classes. To help pay these costs, she was awarded a $2,000 scholarship and a $4,000 student loan. The terms of the scholarship state that it may be used to pay any of Jackie's college expenses. Because she applied it toward her tuition, the scholarship is tax free. Therefore, for purposes of figuring the tuition and fees deduction, she must first use the $2,000 scholarship to reduce her tuition (her only qualified education expense). The student loan is not tax-free educational assistance, so she does not use it to reduce her qualified expenses. Jackie is treated as having paid $1,000 in qualified education expenses ($3,000 tuition – $2,000 scholarship) in 2004.

15. Student Loan Interest Deduction

16. Student Loan Interest Deduction: General Information (18)  Can be taken as an adjustment to taxpayer’s income if:  Modified Adjusted Gross Income is less than $65,000 (or $130,000 if filing a joint return)  Loan deemed a qualified student loan  Loan was used for an eligible student

17. Student Loan Interest Deduction: General Information (18)  Maximum Benefit: $2,500 reduction in income per taxable year  Loan Qualifications:  Must have been used for qualified education expenses  Cannot be from a related party or made under a qualified employer plan  Time Limit: Interest is deductible during the remaining period of the student loan

18. Student Loan Interest Deduction: General Information (18)  Student Qualifications:  Loan was used for taxpayer, taxpayer’s spouse or qualified dependent  Student must be enrolled at least half-time in a degree program

19. Student Loan Interest Deduction Qualified Education Expenses defined as (18) :  Tuition and fees  Room and Board  Determined by institution and included in cost of attendance  Housing must be owned and operated by the eligible education institution  Books, Supplies and Equipment  Other Miscellaneous Expenses  Transportation

20. Student Loan Interest Deduction: History (18) Year You Made Interest Payments:  Before  1998 – 2001  2002 and later Interest Deduction Allowed:  No deduction allowed.  Interest paid during the first 60 months that interest payments are required on the student loan.  All interest paid on student loan during year, both required and voluntary payments.

21. Student Loan Interest Deduction: Example (18) The payments on Roger's student loan were scheduled to begin in June 2003, 6 months after he graduated from college. He began making payments as required. In September 2004, Roger enrolled in graduate school on a full-time basis. He applied for and was granted deferment of his loan payments while in graduate school. Wanting to pay down his student loan as much as possible, he made loan payments in October and November, 2004. Even though these were voluntary (not required) payments, Roger can deduct the interest paid in October and November.

22. Hope Scholarship Credit

23. Who can qualify for this credit?  A taxpayer who has paid qualified education expenses of higher education.  A taxpayer who has paid qualified education expenses for an eligible student.  If the eligible student is either yourself, your spouse or a dependent for who you are claiming an exemption for on your current year tax return.

24. Hope Scholarship Credit Who CANNOT qualify for this credit?  A taxpayer whose filing status is married filing separately.  A taxpayer who has been claimed as a dependant on another return for the current tax year.  If the taxpayer’s modified adjusted gross income (MAGI) for 2005 is > $53,000 ($107,000 in the case of a joint return). (19)  If the taxpayer claims the lifetime learning credit or tuition and fees deduction for the same eligible student for the current tax year. (20)

25. Hope Scholarship Credit What additional criteria exist to qualify as an eligible student for this credit?  A taxpayer who did not have expenses that were used towards a Hope Credit in any 2 previous tax years. (21)  A taxpayer who has not completed the first two years of postsecondary education. (22)

26. Hope Scholarship Credit: Calculation Per Taxable Year (up to two taxable years) :  100% of the first $1,000 of qualified education expenses paid for the eligible student. (23)  50% of the next $1,000 of qualified education expenses paid for the same student. (24)

27. Hope Scholarship Credit: Example (25) In 1999, Taxpayer A has two dependents, B and C, both of whom are eligible students. Taxpayer A pays $1,600 in qualified tuition and related expenses for dependent B to attend a community college. Taxpayer A pays $5,000 in qualified tuition and related expenses for dependent C to attend University X. Taxpayer A may claim a Hope Scholarship Credit of $1,300 ($1,000 + (.50 * $600)) for dependent B, and the maximum $1,500 Hope Scholarship Credit for dependent C, for a total Hope Scholarship Credit of $2,800.

28. Lifetime Learning Credit

29. Lifetime Learning Credit: Comparison to the Hope Credit  The eligibility requirements of the lifetime learning credit are the same as the Hope Scholarship Credit.  A taxpayer cannot claim this credit in addition to Hope Scholarship Credit in the taxable year for the same student. (26)  There is not a year limit on how many years that the lifetime credit can be taken.

30. Lifetime Learning Credit: Comparison to the Hope Credit  The lifetime credit is available for one or more eligible courses taken at an eligible education institution.  The lifetime credit is available for all postsecondary education as well as courses taken to acquire or improve job skills.

31. Lifetime Learning Credit: Calculation Per Taxable Year:  20% of qualified education expenses paid by the taxpayer during the taxable year up to $10,000 (27)  $10,000 in total qualified education expenses relates to taxable years beginning January 1, 2003 and $5,000 in previous years (27)

32. Lifetime Learning Credit: Example (28) Bruce and Toni Harper are married and file a joint tax return. For 2004, their MAGI is $75,000. Toni is attending a local college (an eligible educational institution) to earn credits toward a degree in nursing. She already has a bachelor's degree in history and wants to become a nurse. In August 2004, Toni paid $6,000 of qualified education expenses for her Fall 2004 semester. Bruce and Toni can claim a $1,200 (20% × $6,000) lifetime learning credit on their 2004 joint tax return.

33. Hope/Lifetime Credits: Treatment of Dependent’s Expenses (29) IF you...  claim an exemption on your tax return for a dependent who is an eligible student THEN only…  you can claim the Hope or Lifetime credit based on that dependent's expenses. The dependent cannot claim the credit. IF you...  do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) THEN only…  the dependent can claim the Hope or Lifetime credit. You cannot claim the credit based on this dependent's expenses.

34. Hope vs. Lifetime: Summary (29) Hope Scholarship Credit  Up to $1,500 per eligible student  Available for only 2 years per student  Must be pursuing a degree Lifetime Learning Credit  Up to $2,000 per return  Does not have a year requirement  Do not need to be pursuing a degree

35. Hope vs. Lifetime: Summary (29) Hope Scholarship Credit  Must be enrolled at least half time for at least one period during the year  No felony drug conviction on student’s record Lifetime Learning Credit  Available for one or more courses  Felony drug conviction rule does not apply

36. Additional Tax Relief Options for Educational Expenses  Employer Tuition Reimbursement Program – allows a company to reimburse an employee up to $5,250 per year tax free.  Early Withdrawals from IRAs – the 10% penalty tax can be avoided if used to pay for qualified higher educational expenses.  §529 Plan

37. Summary - How to maximize your education tax benefits:  Since the Hope Scholarship is a tax credit of at least 50% of the amount of the expenses, it is better than the tax deductions and exclusions from income.  Since the Lifetime Learning tax credit is 20% of the amount of the expenses, whether it is better than tax deductions and exclusions from income depends on your tax bracket. If your tax bracket is less than 20%, the Lifetime Learning tax credit is better than the tax deductions and exclusions from income.  However, the tuition and fees deduction is taken as an above-the-line exclusion from income. Since this reduces the AGI, it can potentially make you eligible for additional financial aid next year. If that aid is in the form of grants instead of loans, it can potentially make the tuition and fees deduction more attractive than the Hope Scholarship or Lifetime Learning tax credit.  If you can take either the Hope Scholarship or the Lifetime Learning tax credits for a student, prefer the Hope Scholarship. Source: http://www.finaid.org/savings/taxbenefitcoordination.phtml

38. Chart Illustration The following chart illustrates the coordination restrictions by assigning each program to a column and a row, and placing a letter at each intersection to indicate the nature of any coordination restrictions. If the letter 'X' is used, it indicates that the same expenses may not be used as the basis for both programs. If the letter 'C' is used, it indicates that the programs may not be used for the same child during the same year. If the intersection is blank, it means that there are no coordination restrictions. Source: http://www.finaid.org/savings/taxbenefitcoordination.phtml

39. 529ESAHopeLifetimeBonds TuitionStudentTax-Free DeductionLoanEduc. InterestAssist. Deduction 529 XXX X ESAX XXXX HopeXX CXC X LifetimeXXC XC X Bonds XXX X X Tuition XXCCX X Deduction Student Loan Interest Deduction Tax-Free XXXX Educ. Assist.

40. Side by Side Comparison (30) Program Amount QualifiedIncomeOther NameExpensesPhaseoutsConstraints 529 PlansAmount of distribution is not taxed. Higher education expenses. Includes room and board for students enrolled at least half-time (e.g., actual charges from school, or school's official budget for students living off- campus but not at home). None. Coverdell ESAAmount of distribution is not taxed. Higher education expenses including tuition and fees, books, supplies, equipment, and room and board. Room and board are limited to the school's actual charges for students living on campus and $2,500 for students living off campus and not at home. Certain elementary and secondary school expenses may be included. On contributions only. Contributions limited to $2,000 per beneficiary. Contributions phased out between $95,000 and $110,000 (single filers) and $190,000 and $220,000 (married filing jointly). Contributions end at age 18 and must withdraw assets by age 30, unless special needs.

41. Hope Scholarship$1,500 tax credit per student (100% of first $1,000, 50% of next $1,000). Capped at amount of tax (not refundable). Higher education expenses, limited to tuition and fees required for enrollment or attendance. Does not include room and board. Single filers: $41,000 to $51,000; Married filing jointly: $82,000 to $102,000. First two years of postsecondary education. Must be enrolled at least half-time in a degree program. No felony drug convictions. Must be able to claim an exemption for the student on your income tax return. Lifetime Learning$1,000 tax credit per tax return (20% of the first $5,000 paid for all eligible students). Capped at amount of tax (not refundable). Higher education expenses, limited to tuition and fees for courses. Single filers: $41,000 to $51,000; Married filing jointly: $82,000 to $102,000. Available for all years of postsecondary education. Does not need to be pursuing a degree. Must be able to claim an exemption for the student on your income tax return. Savings BondsInterest on redeemed bonds excluded from income. Higher education expenses limited to tuition and fees. Does not include room and board or non- degree courses. Single filers: $55,750 to $70,750; Married filing jointly: $83,650 to $113,650 (2001 figures) None. Tuition Deduction$3,000 in 2002 and 2003, $4,000 in 2004 and 2005. TuitionSingle filers: $65,000 to $80,000; Married filing jointly: $130,000 to $160,000 Must be able to claim an exemption for the student on your income tax return. Adjustment to income, so do not need to itemize deductions. Interest Deduction$2,500 tax deductionAmount of student loan interest paid for higher education expenses. Higher education expenses include tuition, fees, books, supplies, equipment, room and board, transportation, etc. Single filers: $40,000 to $55,000; Married filing jointly: $60,000 to $75,000. Adjustment to income, so do not need to itemize deductions. Student must have been enrolled at least half-time in a degree program. Tax-Free$5,250 in employer-paid benefits not taxed. Undergraduate and graduate courses, including tuition, fees, books, supplies and equipment. Does not have to be for work- related courses. Does not include courses involving sports, games or hobbies unless required as part of a degree program or related to business of employer. None.Excess also tax free if working condition fringe benefit (i.e., if paid by employee deductible as employee business expense). Employer Educational Assistance

42. Additional Readings Here are a few links to additional sources related to this topic:  http://www.finaid.org/savings/taxbenefitcoordination.phtml http://www.finaid.org/savings/taxbenefitcoordination.phtml  http://www.turbotax.com/articles/DeductionforHigherEducation Expenses.html http://www.turbotax.com/articles/DeductionforHigherEducation Expenses.html

43. Appendix (1) IRC § 25A(g)(3)(B) – “ qualified tuition and related expenses paid by a dependent is treated as being paid by the taxpayer” (2) IRC § 25A(f) (3) Reg. §1.25A-2(b) (4) IRC § 25A(b)(3) (5) Reg. §1.25A-2(d)(2)(ii) “ must be used in a particular course of study and are paid to the eligible educational institution” (6) Reg. §1.25A-2(d)(2)(iii) “ must be paid to the eligible educational institution for the enrollment or attendance of the student”

44. Appendix cont. (7) Reg. §1.25A-2(d)(3) “ Qualified tuition and related expenses do not include the costs of room and board, insurance, medical expenses (including student health fees), transportation, and similar personal, living, or family expenses, regardless of whether the fee must be paid to the eligible educational institution for the enrollment or attendance of the student at the institution.” (8) Reg. §1.25A-2(d)(5) “ Qualified tuition and related expenses do not include expenses that relate to any course of instruction or other education that involves sports, games, or hobbies, or any noncredit course, unless the course or other education is part of the student's degree program, or in the case of the Lifetime Learning Credit, the student takes the course to acquire or improve job skills.” (9) IRC § 222(b)(2)(A)(i) (10) IRC § 222(b)(2)(B)(i) (11) IRC § 222(b)(2)(B)(ii)

45. Appendix cont. (12) IRC § 222(b)(2)(B)(iii) (13) IRS Publication 970 Chapter 6 “The tuition and fees deduction is available for 4 years, 2002 through 2005.” (14) IRC § 25A(g)(2)(A) (15) IRC § 25A(g)(2)(B) (16) IRC § 25A(g)(2)(C) (17) Example taken from IRS Publication 970 Chapter 6

46. Appendix cont. (18) Information and example taken from IRS Publication 970 Chapter 4 (19) http://www.savingforcollege.com/tutorial101/federal_tax_incentives_ to_education.php (20) IRS Publication 970 Chapter 2 (21) IRC § 25A(b)(2)(A) “CREDIT ALLOWED ONLY FOR 2 TAXABLE YEARS. An election to have this section apply with respect to any eligible student for purposes of the Hope Scholarship Credit under subsection (a)(1) may not be made for any taxable year if such an election (by the taxpayer or any other individual) is in effect with respect to such student for any 2 prior taxable years.” (22) I.R.C. § 25A(b)(2)(C) “CREDIT ALLOWED ONLY FOR FIRST 2 YEARS OF POSTSECONDARY EDUCATION. --The Hope Scholarship Credit under subsection (a)(1) shall not be allowed for a taxable year with respect to the qualified tuition and related expenses of an eligible student if the student has completed (before the beginning of such taxable year) the first 2 years of postsecondary education at an eligible educational institution.”

47. Appendix cont. (23) IRC § 25A(b)(1)(A) (24) IRC § 25A(b)(1)(B) (25) Example taken from Reg. §1.25A-2 (26) IRC § 25A(c)(2)(A) “COORDINATION WITH HOPE SCHOLARSHIP. --The qualified tuition and related expenses with respect to an individual who is an eligible student for whom a Hope Scholarship Credit under subsection (a)(1) is allowed for the taxable year shall not be taken into account under this subsection.” (27) IRC § 25A(c)(1) (28) Example taken from IRS Publication 970 Chapter 3

48. Appendix cont. (29) Tables from IRS Publication 970 Chapters 3-4 (30) Chart taken from http://www.finaid.org/savings/taxbenefitcoordination.phtml http://www.finaid.org/savings/taxbenefitcoordination.phtml