2002 Tax Help Archives  

Publication 970 2002 Tax Year

Tax Benefits for Education

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This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Important Changes for 2002

Hope and lifetime learning credits.   Beginning in 2002:

  • You may be able to claim an education credit in the same year in which you receive a distribution from a Coverdell education savings account (ESA) or a qualified tuition program (QTP). However, you cannot use the same expenses to figure both the credit and the taxable portion of a Coverdell ESA or a QTP distribution.
  • The amount of your education credit is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $41,000 and $51,000 ($82,000 and $102,000 if you file a joint return). You cannot claim a credit if your MAGI is $51,000 or more ($102,000 or more if you file a joint return). This is an increase from the 2001 limits of $40,000 and $50,000 ($80,000 and $100,000 if filing a joint return).

For more information about the Hope and lifetime learning credits, see chapters 1 and 2.

Student loan interest deduction.   Beginning in 2002:

  • All student loan interest payments you make on or after January 1, 2002, may be deductible. You are no longer limited to deducting interest paid only during the first 60 months that interest payments are required.
  • The amount of your deduction will be phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $50,000 and $65,000 ($100,000 and $130,000 if you file a joint return). You will not be able to take a deduction if your MAGI is $65,000 or more ($130,000 or more if you file a joint return). This is an increase from the 2001 limits of $40,000 and $55,000 ($60,000 and $75,000 if filing a joint return).

See chapter 3 for more information about the student loan interest deduction.

Tuition and fees deduction.   Another education benefit has been added for tax years 2002 through 2005. Beginning in 2002, you may be able to deduct the cost of higher education for yourself, your spouse, or a dependent, even if you do not itemize deductions on Schedule A, Form 1040. For more information, see chapter 4.

Coverdell education savings account (ESA).   Beginning in 2002:

  • The most you can contribute each year to a Coverdell ESA is increased from $500 to $2,000.
  • If you are married and filing a joint return, your contribution limit is not reduced if your modified adjusted gross income (MAGI) is $190,000 or less. Your contribution limit is gradually reduced (phased out) if your MAGI is more than $190,000 but less than $220,000. If your MAGI is $220,000 or more, you cannot contribute to a Coverdell ESA. This is an increase from the 2001 limits of $150,000 and $160,000.
  • The final date on which you can make contributions to a Coverdell ESA for any year has been extended from the end of that year to the due date of your return for that year (not including extensions).
  • In addition to higher education expenses, qualified education expenses include certain elementary and secondary education expenses. Also included are the expenses necessary for a special needs beneficiary to enroll in or attend an eligible institution.
  • The limit on the amount that is considered reasonable for room and board expenses has been changed. You must contact the educational institution for its qualified room and board costs.
  • Age limitations are waived for special needs beneficiaries. You can make contributions to a Coverdell ESA for a special needs beneficiary after his or her 18th birthday. Also, you can leave assets in a Coverdell ESA set up for a special needs beneficiary after the beneficiary reaches age 30.
  • You can claim the Hope or lifetime learning credit in the same year you take a tax-free withdrawal from a Coverdell ESA, provided that the distribution from your ESA is not used for the same expenses for which a credit is claimed.
  • For purposes of rollovers and changes of beneficiaries, the definition of family member is expanded to include first cousins of the designated beneficiary.
  • You can make contributions to a Coverdell ESA and a qualified tuition program (QTP) in the same year for the same beneficiary.

For more information about Coverdell ESAs, see chapter 5.

Qualified tuition program (QTP).   Beginning in 2002:

  • Qualified state tuition programs (QSTPs) are renamed qualified tuition programs (QTPs).
  • A distribution from a QTP established and maintained by a state (or an agency or instrumentality of the state) can be excluded from your income if the amount distributed is used for qualified higher education expenses.
  • You can make contributions to a QTP established and maintained by one or more eligible educational institutions. However, earnings on the account will be taxable if withdrawn before January 1, 2004. The 10% additional tax will not be assessed on taxable earnings that are used for the qualified higher education expenses of the designated beneficiary.
  • Amounts in a QTP can be rolled over, tax free, to another QTP for the same beneficiary. However, such a rollover cannot apply to more than one transfer within any 12-month period.
  • For purposes of rollovers and changes of designated beneficiaries, the definition of family members is expanded to include first cousins of the beneficiary.
  • The limit on the amount that is considered reasonable for room and board expenses has been changed. You must contact the educational institution for its qualified room and board costs.
  • The definition of qualified higher education expenses has been expanded to include expenses of a special needs beneficiary necessary for that person's enrollment or attendance at an eligible educational institution.
  • You can claim the Hope or lifetime learning credit in the same year you receive a tax-free distribution from a QTP if the distribution is not used for the same expenses for which the credit is claimed.
  • QTP earnings that are taxable only because an education credit was claimed are not subject to the 10% additional tax on taxable withdrawals.
  • You can make contributions to a Coverdell ESA and a QTP in the same year for the same beneficiary.

For more information about qualified tuition programs, see chapter 6.

Early withdrawals from IRAs.   Beginning in 2002:

  • The definition of qualified higher education expenses has been expanded to include certain expenses for special needs students.
  • The limit on the amount that is considered reasonable for room and board expenses has been changed. You must contact the educational institution for its qualified room and board costs.

See chapter 7 for more information.

Education savings bond program.   The amount of your interest exclusion for 2002 will be phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $57,600 and $72,600 ($86,400 and $116,400 if you file a joint return). You will not be able to exclude any interest if your MAGI is $72,600 or more ($116,400 or more if you file a joint return). This is an increase from the 2001 limits of $55,750 and $70,750 ($83,650 and $113,650 if filing a joint return). For more information on this program, see chapter 8.

Employer-provided educational assistance.   The tax-free status of up to $5,250 of employer-provided educational assistance benefits each year has been extended through 2010. Beginning in 2002, it applies to both undergraduate- and graduate-level courses. See chapter 9 for more information.

Important Changes for 2003

Lifetime learning credit.   Beginning in 2003, the amount of qualified tuition and related expenses you may take into account in figuring your lifetime learning credit increases from $5,000 to $10,000. The credit will equal 20% of these qualified expenses, with the maximum credit being $2,000.

Student loan interest deduction.   Beginning in 2003, the income ranges for phasing out the student loan interest deduction may be adjusted annually for inflation.

Coverdell education savings account (ESA).   There will be no excise tax on excess contributions if the excess (and earnings on that amount) is withdrawn before the beginning of the sixth month following the year of the contribution. Generally, a calendar year taxpayer will have until May 31, 2003, to withdraw an excess contribution for 2002.

Important Reminder

Photographs of missing children.   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Introduction

This publication explains tax benefits that may be available to you if you are saving for or paying higher education costs for yourself or another student.

What is in this publication.   Two tax credits for which you may be eligible are explained in chapters 1 and 2. These benefits, which reduce the amount of your income tax, are:

  • The Hope credit, and
  • The lifetime learning credit.

Eight other types of benefits are explained in chapters 3 through 9. With these benefits, you may be able to:

  • Deduct student loan interest,
  • Receive tax-free treatment of canceled student loans,
  • Deduct tuition and fees for higher education,
  • Establish and contribute to a Coverdell education savings account (ESA), which features tax-free earnings,
  • Participate in a qualified tuition program (QTP).
  • Make early withdrawals from any type of individual retirement arrangement (IRA) for education costs without paying the 10% additional tax,
  • Cash in savings bonds for education costs without having to pay tax on the interest, and
  • Receive tax-free educational benefits from your employer.

Note.   You generally cannot claim more than one of the benefits described in the lists above for the same qualifying education expense.

Comparison table.   Some of the features of each of these benefits are highlighted in Appendix B on page 55 of this publication. This general comparison table may guide you in determining which benefits you may be eligible for and which chapters you may want to read.

Analyzing your tax withholding.   After you estimate your education tax benefits for the year, you may be able to reduce the amount of your federal income tax withholding. Also, you may want to recheck your withholding during the year if your personal or financial situation changes. See Publication 919, How Do I Adjust My Tax Withholding, for more information.

What is not in this publication.   Some educational benefits are not covered in this publication.

IF you need information on...   THEN see...
work-related education expenses that you claim as an itemized deduction   Publication 508, Tax Benefits for Work-Related Education.
scholarships that you may be able to exclude from income   Publication 520, Scholarships and Fellowships.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

You can e-mail us while visiting our web site at www.irs.gov.

You can write to us at the following address:

Internal Revenue Service
Tax Forms and Publications
W:CAR:MP:FP
1111 Constitution Ave. NW
Washington, DC 20224

We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.

Useful Items You may want to see:

Publication

  • 508   Tax Benefits for Work-Related Education
  • 520   Scholarships and Fellowships
  • 525   Taxable and Nontaxable Income
  • 550   Investment Income and Expenses
  • 553   Highlights of 2002 Tax Changes
  • 590   Individual Retirement Arrangements (IRAs)

Form (and Instructions)

  • 1040   U.S. Individual Income Tax Return
  • 1040A   U.S. Individual Income Tax Return
  • 5329   Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
  • 8815   Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989
  • 8863   Education Credits (Hope and Lifetime Learning Credits)

See chapter 10, How To Get Tax Help, for information about getting these publications and forms.

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