TAXPAYER RELIEF ACT

Tax Benefits for Higher Education

The following information was prepared to inform students about the benefits and requirements contained in the Tax Relief Act of 1997. It is based upon our understanding of the provisions contained in the law and should not be considered an official document. Students should rely upon the advice of their tax accountant or the Internal Revenue Services as appropriate. Colleges and Universities are unable to provide students and families with tax advice. For assistance, please contact a tax professional or refer to IRS Publication 970 (Tax Benefits for Higher Education).

An up-to-date document is the Tax Benefits for Higher Education, Publication 970, available at the IRS website. http://www.irs.gov/publications/p970/index.html

Important Changes
There are many new tax benefits for persons who are saving for or paying higher education costs for themselves and members of their families or who are repaying student loans. These benefits include:

  • New Tax Credits
  • Individual Retirement Accounts (IRA) Options

NEW TAX CREDITS

Several new tax benefits are available to help families meet the cost of postsecondary education. These tax benefits are intended to help students and their parents as well as all working Americans to fulfill a variety of educational objectives.

Taxpayers can claim one of the new tax credits if they are eligible, reducing the expenses of putting themselves or their children through college. These tax credits can directly reduce the amount of federal income tax for returns filed in 1999 or later. The Hope Scholarship Credit is available on a per-student basis for the first two years of postsecondary education, while the Lifetime Learning Credit applies on a tax-return basis and covers a broader time frame and range of educational courses. Education expenses paid for with tax-free grants, scholarships, and employer-education assistance are not eligible for either tax credit. Education expenses paid with loans are eligible for these tax credits.

Hope Scholarship Credit
A tax credit equal to all of the first $1,000 of tuition and fees (less scholarships, grants, and tax-free tuition benefits) and half of the next $1,000 of tuition and fees is available to parents of dependent students or to students who are not claimed as dependents on their parents' return. The maximum credit of $1,500 will increase for inflation after 2001. The Hope credit can be claimed only for two tax years and applies only to the first two years of postsecondary education. Students must be enrolled at least half-time during at least one academic period that begins during a tax year and cannot have had a drug felony conviction in a year that the credit applies. Education expenses paid on or after January 1, 1998, are eligible for the Hope credits.

Lifetime Learning Credit
This credit applies to tuition and fees for undergraduate, graduate, and continuing-education course work. A family can claim on its tax return a credit equal to 20 percent of $5,000 of educational expenses; so the maximum benefit is $1,000 each tax year. Eligible education expenses are offset by scholarships, grants, and other tax-free tuition benefits. Starting in 2003, the amount of eligible education expenses increases to $10,000, resulting in a $2,000 maximum tax credit. Education expenses paid on or after July 1,1998, are eligible for the Lifetime Learning credit.

Who is Eligible for the Education Tax Credits?
The full value of both education tax credits is available to married taxpayers filing jointly with an adjusted gross income (AGI) of $80,000 or less and to single taxpayers with an AGI of $40,000 or less. The tax credits phase out gradually. Once married taxpayers' AGI exceeds $100,000 or single taxpayers' AGI exceeds $50,000, they are not eligible for these credits. The income limits will be adjusted for inflation after 2001. Also, taxpayers cannot use both credits for the same student in a single year nor may they combine these credits with tax-free withdrawals from education IRAs (see next page). Individuals should save their records of tuition and financial aid for tax purposes. Colleges and universities will need to collect Social Security numbers from all students so they can issue information reports to assist families when they file their taxes.

IRA OPTIONS

Education IRA
Through the Education IRA, a taxpayer can invest up to $500 on an after-tax basis per child. Contributions must stop when a child reaches age 18. Earnings accumulate tax free, and money withdrawn to pay for qualified education expenses (tuition, fees, books, equipment, room and board) is tax free. By the time the child reaches age 30, money must be transferred to a younger beneficiary or be withdrawn, otherwise subjecting the earnings to tax and a 10 percent penalty. While more than one person can contribute to an Education IRA for a child, no more than $500 for that child can be saved in any year. Taxpayers cannot take a tax-free distribution from an Education IRA in a year when they use either education tax credit. Also, if the taxpayer contributes to a qualified state tuition program for a child, then no Education IRA contributions for that child can be made in that year.

Roth IRA
The Roth IRA is another after-tax savings option, with an annual maximum contribution of $2,000 per year for single taxpayers and $4,000 for couples filing jointly. These maximums are reduced by amounts contributed to a deductible IRA. Earnings accumulate tax free and contributions can continue beyond age 70 ½. Distributions from a Roth IRA are tax free if make five years or more after the taxpayer established the Roth IRA and the taxpayer is age 59 ½ or older, or upon disability or death, or to cover the costs of first-time homebuyer expenses, up to $10,000. Withdrawals for education expenses have no special provision bur are tax free as long as the taxpayer maintained the Roth IRA for at least five years and is age 59 ½ or older.

Who Can Contribute to New After-Tax IRAs?
Married couples with an AGI under $150,000 and single taxpayers with an AGI under $95,000 can contribute the maximum to either or both after-tax IRAs. At higher income limits, the amount that can be contributed to these IRAs phases down gradually until married taxpayers with an AGI $110,000 cannot contribute to either account.

Penalty-Free IRA Withdrawals
Starting on January 1, 1998, individuals can withdraw funds from IRAs to pay for tuition, fees, books, and if enrolled at least half-time, room and board without facing the 10 percent penalty for early (before age 59 ½) withdrawals. Taxpayers can use these funds for their education expenses or those of their spouses, children, and grandchildren. Taxpayers making withdrawals from traditional before-tax or rollover IRAs would have to pay income tax on the full amounts withdrawn but no penalty tax.

Purchase College Tuition & College Fee

Tuition (per semester) for Undergraduates*

Residency Full-time (12 or more credits) SUNY College Fee Part-time (per credit) SUNY College Fee (per credit)
NYS Residents $2,485.00 $12.50 $207.00 $0.85
Out of State Residents $6,435.00 $12.50 $536.00 $0.85

Tuition (per semester) for Graduates*

Residency Full-time (9 or more credits) SUNY College Fee Part-time (per credit) SUNY College Fee (per credit)
NYS Residents $4,185.00 $12.50 $349.00 $0.85
Out of State Resident $6,625.00 $12.50 $552.00 $0.85