Educational Tax Benefits

The Taxpayer Relief Act enacted the HOPE tuition tax credit, tax-free status for distribution from state prepaid tuition plans, penalty-free distributions from retirement funds for education, and a tax deduction for education loan interest. Most of the benefits became effective for the 1998 tax year.

The following is intended to give you a brief overview of the new program. Because the specifics on each of the programs vary according to individual circumstances, we encourage you to discuss this with your tax consultant.

Hope Scholarship Credit

Tax credit up to $1,500, limited to the first two years and may not be taken concurrently with the Lifetime Learning Credit or distributions from the EIRA (for a specific beneficiary). Eligibility is reduced for single filers with income greater than $40,000 and joint filers with income greater than $80,000. These income levels will be adjusted annually for inflation. (The IRS has a web site with answers to the most commonly asked questions about the Hope Scholarship Credit.)

Lifetime Learning Credits

Tax credit of 20% of tuition up to a $1,000 credit for an unlimited period of enrollment.

Interest Deductions on Educational Loans

Eligibility is proportionately reduced for single filers with income greater than $40,000 and joint filers with income greater than $60,000.

Penalty-Free Withdrawals from Individual Retirement Plans for Higher Education Expenses

Protection from the 10% additional tax on early distribution of retirement funds up to the cost of qualified higher education expenses.

Education Individual Retirement Accounts (EIRA)

Allows families to establish an educational IRA as trusts created exclusively for the purpose of paying the qualified higher education expenses of the designated beneficiary. EIRAs are exempt from taxation if they meet designated criteria.