By John Stylianou, Accountant
September is back-to-school month. Here’s a quick reminder of some education tax benefits that are new or improved in recent years.
Formerly known as Education IRAs, these savings accounts have two attractive features. First, savings can be used to pay qualified expenses at elementary and secondary schools as well as at college. And the schools can be public, private, or religious. Second, the income eligibility is relatively high – contributions don’t start to phase out until income reaches $190,000 for joint filers. You can contribute up to $2,000 annually.
Prepaid tuition plans at private colleges
Beginning on January 1, 2004, distributions from prepaid tuition plans run by private institutions will be nontaxable. Currently, only state plans qualify for this tax benefit. These plans allow you to purchase tuition credits, at today’s rates, that your child can redeem tax-free when he or she attends college.
U.S. savings bonds used to pay for higher education expenses
If you redeem a US savings bond and use the proceeds to pay for qualified higher education expenses, the interest is not taxable. There are income limits, and only certain expenses qualify. (Bonds must be purchased after 1989 by someone at least 24 years old.)
Deductions for higher education expenses and student loan interest
You can now take a deduction for up to $3,000 of qualified expenses at accredited colleges or vocational schools. You can also deduct up to $2,500 of interest expense on student loans.
Deduction for classroom supplies
If you’re a teacher and you buy classroom supplies out of your own pocket, you can deduct up to $250 of the cost.
Increase in the lifetime learning credit
The lifetime learning credit doubles for 2003, to a maximum of $2,000. The credit is calculated as 20% of the qualified tuition expenses you pay.
Contact our office to learn more about any of these tax breaks.