Higher Education Tax Benefits

Beginning in 1998, a number of tax benefits are available to families who are saving for or paying higher education costs or who are repaying student loans. These benefits are briefly explained here. For more detailed information, see Publication 970, Tax Benefits for Higher Education.

You cannot claim more than one type of tax benefit for the same expense.

Education credits. For qualified tuition and related expenses paid after December 31, 1997, for academic periods beginning after that date, you may be able to claim a Hope credit of up to $1,500 for each eligible student. For qualified tuition and related expenses paid after June 30, 1998, for academic periods beginning after that date, you may be able to claim a lifetime learning credit of up to $1,000 for all students. However, you cannot take the Hope credit and the lifetime learning credit for the same student in the same year.

Student loans. For payments due and paid on a qualified student loan after 1997, you may be able to deduct interest you pay for the first 60 months that interest payments are required. The deduction is an adjustment to income, so you can claim it even if you do not itemize your deductions on Schedule A (Form 1040).

Education IRA. You may be able to contribute up to $500 each year to an education IRA to finance a child's qualified higher education expenses. Contributions to an education IRA are not deductible and can be made only until the child reaches age 18, but amounts deposited in the account grow tax free until withdrawn. Withdrawals from an education IRA to pay the child's qualified higher education expenses are also tax free.

Withdrawals from traditional or Roth IRAs. Generally, if you make withdrawals from your traditional or Roth IRA before you reach age 59, you must pay a 10% additional tax on the early withdrawal. (A traditional IRA is an IRA that is not a Roth IRA, SIMPLE IRA, or education IRA.) However, the additional tax will not apply to withdrawals you make from your traditional or Roth IRA if the withdrawals are not more than your qualified higher education expenses. You will still owe income tax on at least part of the withdrawal, but you will not have to pay the 10% additional tax on the early withdrawal.

Education Savings Bond Program

Beginning in 1998, the new education tax benefits explained earlier may affect the tax treatment of your U.S. savings bond interest.

When figuring the amount of U.S. savings bond interest you can exclude from your income under the Education Savings Bond Program, count any contribution to a qualified state tuition program or to an education IRA as a qualified higher educational expense. But do not count any expense you use to claim the Hope credit or the lifetime learning credit. Also, do not count any expense you use to figure how much of a distribution from an education IRA you can exclude from your income.

For more information about the exclusion of interest from qualified U.S. savings bonds, including the definition of qualified higher educational expenses, see Education Savings Bond Program in chapter 1 of Publication 550, Investment Income and Expenses.

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