College Tax Credits
The tax bill signed Tuesday by President Clinton contains a mix of tax credits (dollar-for-dollar reductions in federal taxes) and deductions (subtractions from income before taxes are calculated) for college education. Here are some of the provisions:
Not a true scholarship but a tax credit of up to $1,500 per year for the costs of the first two years of college. Applies to tuition paid beginning Jan. 1, 1998. Credit not available for individuals earning more than $50,000 a year or couples earning more than $100,000. Nor is credit available for students convicted of a felony drug violation under state or federal law.
Tax credit of up to $1,000 per year for the third and fourth years of college and for graduate study. Applies to tuition paid beginning July 1, 1998. Subject to same income limits as Hope scholarships.
Student Loan Interest
A tax deduction for the interest paid on student loans during the first five years of repayment. The maximum deduction is $1,000 in 1998 and rises by $500 per year to a maximum of $2,500 in 2001. The deduction can be taken without itemizing.
Employers can provide a worker up to $5,250 per year for undergraduate education, and the worker will not have to pay tax on the amount. Deduction available for tuition paid beginning Dec. 31, 1996. Workers will pay taxes on the value of tuition for graduate courses.
Individual Retirement Accounts
Money can be withdrawn from existing IRAs for college education without triggering a 10 percent penalty, but withdrawals will be taxed. Withdrawals can be made beginning Jan. 1, 1998, for education in 1998. Not available for individuals making more than $110,000 a year or couples making more than $160,000.
Education IRAs can be opened beginning Jan. 1 for each child under age 18. Families can contribute up to $500 per year per child and pay no taxes on interest as long as money is spent on education.