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tax incentives
What about tax incentives for savers?
Hope Scholarship Credit (HSC)
- Tax credit up to $1,500/year for each student
- 100% tax credit for the first $1,000 paid for qualified expenses. 50% tax credit for the second $1,000.
- You may claim HSC for two years. Student must be in first or second year and enrolled at least half time for one period of the tax year.
- Covers tuition and fees.
- You qualify by paying tuition and fees for yourself (if independent), your spouse, or your dependent child.
- Student activity fees, athletic fees and other expenses do not count toward your credit.
- Grants and scholarships will reduce the tuition and fees used to determine your credit.
- Eligibility decreases for modified adjusted gross incomes (AGIs) between $40,000 - $50,000 (filing single) and $80,000 - $100,000 (married, filing jointly). Cannot claim with modified AGIs above these limits.
- You benefit from tax credits only to the extent you owe federal income tax. If you don't owe taxes, you won't receive a tax credit.
Lifetime Learning Credit (LLC)
- May save you up to $1,000/year in federal taxes.
- 20% tax credit for the first $5,000 paid for qualified expenses. After 2002, a 20% tax credit on the first $10,000 paid.
- No limit on number of tax years you may claim LLC.
- Covers tuition and fees.
- Available to college juniors, seniors, graduate and professional students - and to students taking individual classes to improve job skills
- You qualify by paying tuition and fees for yourself (if independent), your spouse, or your dependent child.
- Student activity fees, athletic fees and other expenses do not count toward your credit.
- Grants and scholarships will reduce the tuition and fees used to determine your credit.
- Eligibility decreases for modified adjusted gross incomes between $40,000 - $50,000 (filing single) and $80,000 - $100,000 (married, filing jointly). Cannot claim with modified AGIs above these limits.
- You benefit from tax credits only to the extent you owe federal income tax. If you don't owe taxes, you won't receive a tax credit.
Education IRAs
- You may deposit up to $500/year into an IRA for a child under age 18.
- Parents, grandparents, other family members, friends, and the child may contribute to the IRA as long as the total contribution per year does not exceed $500.
- Eligibility to contribute is reduced with a modified adjusted gross income between $95,000 - $110,000 (filing single) and $150,000 - $160,000 (married, filing jointly). Cannot contribute if income is above these amounts.
- IRA grows tax-free until distributed. A child will not owe tax on any IRA withdrawal if the child's expenses at the institution equal or exceed the amount withdrawn.
- NOTE: You can only claim one tax credit or contribute to one education IRA per student per tax year.
Student loan interest deduction
- Parents and independent students may deduct interest on loans borrowed to meet college expenses.
- Deduction is for interest payments made during the first 60 months (5 years) in which interest payments are required.
- Deduction diminishes for modified gross income between $40,000 - $55,000 (single filers) and $60,000 - $75,000 (married, filing jointly). Cannot deduct if income is above these amounts.
- Maximum deduction in 1999, $1,500; in 2000, $2,000; 2001 and beyond, $2,500.
- You are not required to itemize to receive the deduction.
- Dependents may not claim the deduction.
- Married couples must file jointly to receive the deduction.
Using IRA withdrawals for college costs
- You may withdraw from an IRA to pay higher education expenses for yourself, your spouse, your child or grandchild.
- You will owe federal income tax on the amount withdrawn, but will not be subject to the 10% early withdrawal penalty.