Education Incentives

What is it?
To encourage higher education, Congress is expanding the range and choice of tax benefits associated with education costs.

What's Changing?
Certain higher education expenses are deductable even if you don't itemize starting in 2002 if your income does not exceed $65,000 ($130,000 for joint returns). The deduction is $3,000 in 2002-2003 and $5,000 in 2004-2006, after which it ends.

Also beginning in 2002, the annual contribution limit for education savings accounts will increase from $500 to $2,000, and qualified education expenses expand to include K-12 public and private schools.

More taxpayers will be eligible to deduct the interest on student loans. Starting in 2002, the phase-out range on student loan deductions increases to $100,000 for single taxpayers and $130,000 for those married filing jointly. And the bill eliminates the rule in which only the first 60 months of interest can be deducted.

What does it mean to me?
Taxpayers will be able to choose between existing credits, new and improved deductions, or expanded exclusions. Education savings accounts become more attractive through increased contribution limits. If you take full advantage of these savings opportunities, you will accumulate up to $83,051 as compared to $22,381 under current law.

The Details ...
Under current law, taxpayers with a modified AGI (MAGI)of $50,000 ($100,000 MFJ) may claim the Hope or Lifetime Learning credit (whichever is applicable) for qualifying education expenses. One of the education incentive provisions in the 2001 Act is the choice to deduct qualifying education expenses rather than claim the Hope or Lifetime Learning Credit.

For 2002–2003 the maximum deduction is $3,000 for taxpayers with a modified adjusted gross income (MAGI) up to $65,000 ($130,000 MFJ). In 2004–2005 the maximum deduction is increased to $4,000 for the same income range. For 2004 and 2005, taxpayers with a modified AGI between $65,000 and $80,000 ($130,000 and $160,000 MFJ) may deduct up to $2,000. The deduction does not apply to tax years after 2005.

As the charts below demonstrate, the deduction for education expenses primarily benefits those taxpayers who are at or above the phaseout range for the credit. To illustrate the tax benefit of the education credits versus the new deduction, we've calculated the tax for a family of four assuming that the qualified education expenses equal the maximum deduction. The scenarios assume 2002 adjusted tax rates are in effect. The 2001 standard deduction and personal exemptions are used.

HOPE CREDIT

MAGI	Tax after Credit*	Tax after Deduction	Best Option
$10,000	$0	$0	Indifferent
$20,000	$0	$0	Indifferent
$30,000	$0	$780	Credit
$40,000	$1,020	$2,070	Credit
$50,000	$2,520	$3,570	Credit
$60,000	$4,020	$5,070	Credit
$70,000	$6,192	$6,882	Credit
$80,000	$8,893	$9,583	Credit
$90,000	$12,343	$12,283	Deduction
$100,000	$15,794	$14,984	Deduction
$110,000	$18,494	$17,684	Deduction
$120,000	$21,195	$20,385	Deduction
$130,000	$23,942	$23,086	Deduction

*The credit is phased out for married taxpayers with a MAGI $80,000 – $100,000. Fully phased out at $100,000 MAGI.

LIFETIME LEARNING CREDIT

MAGI	Tax after Credit*	Tax after Deduction	Best Option
$10,000	$0	$0	Indifferent
$20,000	$0	$0	Indifferent
$30,000	$0	$780	Credit
$40,000	$1,520	$2,070	Credit
$50,000	$3,020	$3,570	Credit
$60,000	$4,520	$5,070	Credit
$70,000	$6,692	$6,882	Deduction **
$80,000	$9,393	$9,583	Deduction **
$90,000	$12,593	$12,283	Deduction
$100,000	$15,794	$14,984	Deduction
$110,000	$18,494	$17,684	Deduction
$120,000	$21,195	$20,385	Deduction
$130,000	$23,942	$23,086	Deduction