The Taxpayer Relief Act of 1997 included a number of higher education tax incentives that will help students and families finance their education. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) provided further incentives. Here are some examples of favorable treatment of higher education expenses in the tax code.
Hope Tax Credit: In an effort to make the first two years of college universally available, taxpayers are eligible for a tax credit of up to $1,500 for students in their first two years of post-secondary education or training (100% of the first $1,000 of tuition and fees, and 50% of the second $1,000). The credit is phased out for joint filers with between $80,000 and $100,000 of income, and for single filers, between $40,000 and $50,000.
Lifetime Learning Credit: For those beyond the first two years of postsecondary education (such as college juniors and seniors, graduate and professional degree students, and adults taking classes part time to improve their skills or change careers), a per-taxpayer credit of 20% of the first $5,000 in tuition and fees through 2002, and of the first $10,000 thereafter, is available. This tax credit is phased out at the same income levels as the Hope credit.
Student Loan Interest Deduction: To help make loan repayment less burdensome, the interest paid on loans for postsecondary education and training expenses is tax-deductible. It is an "above-the-line" deduction, meaning the taxpayer does not need to itemize in order to benefit. For qualified higher education expenses, a maximum deduction of $4,000 for taxpayers with adjusted gross income of $65,000 or less ($130,000 for joint returns) or $2,000 for taxpayers who earn between $65,000 and $80,000 ($130,000 to $160,000 for joint returns) are available. The income levels at which the deduction phases out are $65,000 for single returns and $130,000 for joint returns.
Employer-Provided Educational Assistance (Section 127): Section 127 of the tax code allows workers to exclude up to $5,250 of employer-provided education benefits from their taxable income each year. This benefit is now available for both graduate and undergraduate students.
IRA Withdrawals: IRAs aren't necessarily for retirement only. Taxpayers may withdraw funds from an IRA, without penalty, for their higher education expenses, or for those of their spouse, child, or grandchild. The amount that can be withdrawn without penalty is limited to the cost of tuition, fees, books, equipment, and room and board.
Education Savings Accounts ( ESA) : To promote savings for college, Congress created the Education Savings Account. For each child under age 18, families may deposit $2,000 per year and earnings will accumulate tax-free. In addition, no taxes will be due when funds are withdrawn for qualifying postsecondary education expenses. This benefit is phased out for families with incomes between $150,000 and $160,000, and for single filers, between $95,000 and $110,000.
Tuition Tax Deduction: The Economic Growth and Tax Relief Reconciliation Act of 2001 will allow a new, temporary above-the-line deduction for tuition and required fees. For 2004 and 2005, the maximum deduction is $4,000. In addition, individuals with an AGI between $65,000 and $80,000 (joint returns between $130,000 and $160,000) can claim a deduction of up to $2,000. The deduction sunsets on December 31, 2005. The new tax deduction is coordinated with other tax rules to prevent a double benefit.
Legislative Update:
On March 17, 2005, Representative English of Pennsylvania introduced H.R. 1380, which includes several key provisions to expand tax incentives for education. Following are some of the highlights of his Higher Education Affordability and Equity Act of 2005. Please contact your
Member of Congress to request support for this important legislation. Representative Holt and Representative Pallone, both of New Jersey, have already shown their support by co-sponsoring this bill.
- Allows scholarships covering room and board to be treated like those covering tuition for tax purposes.
Currently, amounts received for fellowships and scholarships are excluded from gross income and are not subject to tax if a recipient is a student at a primary, secondary, or postsecondary educational institution and the funds are used for the payment of tuition and required fees, book, supplies, and equipment. However, amounts used for living expenses, including room and board, are not excludable from income and are therefore subject to tax.
Other forms of educational assistance, such as amounts withdrawn from an Education Savings Account ( ESA) or 529 plans, provide favorable tax treatment for qualified higher education expenses, which include limited living expenses, such as room and board. This uneven treatment imposes an additional tax on certain students. In addition, this treatment creates unneeded complexity and administrative burdens on schools and students and undermines the policy and goals of student aid.
The proposal makes the Internal Revenue Code (IRC) definition of qualified educational expenses equal to the one in the Higher Education Act of 1965 (HEA) to include scholarship funding for room and board among those expenses exempt from tax. This adjustment would require that scholarships and education savings accounts be subject to the same treatment. Graduate students, in particular, have been advocates of this key change to the tax code.
- Expands the interest deduction for student loans by repealing the dollar limitation and increasing the income phase-out beginning point.
- Increases annual contributions to Education Savings Accounts to $5,000 per year and changes the reporting deadline.
- Makes permanent the deduction for qualified tuition and related expenses first enacted by EGTRRA .
The U.S. tax code has become an important mechanism for making college more affordable for many families. Write to your
Member of Congress and write to your
Senators to let them know about the higher education tax incentives you think should be included if a tax bill is passed into law this year!
For more information about existing tax breaks for higher education, check out the Department of Education's
Office of Postsecondary Education.
Rutgers, The State University of New Jersey
Office of Federal Relations
444 North Capitol St. Suite 351
Washington, DC 20001
Phone: 202/ 220-1336
Fax: 202/ 220-1337
