Important Changes for 2002

Deduction for higher education expenses. Beginning in 2002, in addition to education benefits available in 2001, you may also 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 Publication 553, Highlights of 2001 Tax Changes.

Student loan interest deduction. Beginning in 2002, you will be allowed to deduct student loan interest you pay even after the end of the 60-month period that began when you were first required to make a payment. Also, the income level at which your deduction will be reduced or eliminated will be increased. For more information about the student loan interest deduction, see chapter 3 in this publication. For more information about the 2002 changes, see Publication 553.

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.
• The final date on which you can make contributions to a Coverdell ESA for any year has been extended to the due date of your return for that year (not including extensions).
• Qualified education expenses will include certain elementary and secondary education expenses.
• You can make contributions to a Coverdell ESA for a special needs beneficiary after his or her 18th birthday.
• 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 Coverdell ESA is not used for the same expenses for which a credit is claimed.
• You can make contributions to a Coverdell ESA and a qualified tuition program in the same year for the same beneficiary.

For more information about Coverdell ESAs, see chapter 4 in this publication. For more information about 2002 changes, see Publication 553.

Employer-provided educational assistance. The tax-free status of up to $5,250 of employer-provided educational assistance benefits each year for undergraduate-level courses was scheduled to end for courses beginning after December 31, 2001. This benefit has been extended and, beginning in 2002, it also applies to graduate-level courses. For more information, see chapter 7 in this publication.

Qualified tuition programs (QTPs). 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 higher education.
• You can make contributions to a QTP established and maintained by one or more eligible educational institutions, but earnings on the account will be taxable if withdrawn before January 1, 2004.
• Amounts in a QTP can be rolled over, tax free, to another QTP set up for the same beneficiary. However, the rollover of credits or other amounts from one QTP to another QTP for the benefit of the same beneficiary 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.
• Calculation of the amount that is considered reasonable for room and board expenses has been changed. You must contact the educational institution for their 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 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 from the QTP is not used for the same expenses for which the credit is claimed.
• You can make contributions to a Coverdell ESA and a qualified tuition program in the same year for the same beneficiary.

For more information about qualified tuition programs, see chapter 8 in this publication. For more information about 2002 changes, see Publication 553.

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