Tax Relief Act of 1997

Education Incentives

Credits

Two new credits are provided:

Hope Scholarship Credit (Effective date: expenses after December 31, 1997)

• A credit is allowed for 100% of the first $1,000 of qualified tuition and fees paid during the tax year plus 50% of the next $1000 for a maximum credit of $1500 per eligible student. Qualified tuition includes only those amounts for academic periods beginning in the year.

• This credit applies only for the first two years of post-secondary education.

• This credit can be elected for any eligible student for only two taxable years.

Lifetime Learning Credit (Effective date expenses after June 30, 1998)

• This credit equals an amount up to 20% of the qualified tuition and related expenses not to exceed $5,000 ($10,000 for years after December 31, 2002). Thus, the maximum allowable credit is $1,000.

• The Lifetime Learning Credit allows additional expenses with respect to any course of instruction at an eligible educational institution to acquire or improve job skills of the individual.

• There is a coordination with the Hope Scholarship credit. Any qualified expenses allowed for the Hope Scholarship credit are not allowed for the Lifetime Learning credit.

Special rules applicable to both credits

• The credits are phased out for taxpayers with modified AGI between $40,000 and $50,000 ($80,000 to $100,000 for joint returns).

• Qualified tuition and expenses are reduced by amounts that are excluded from income under any other provisions of the law. For example, excludable scholarships and educational assistance allowances which are not taxable.

• A person who can be claimed as a dependent is not allowed the credit. The taxpayer claiming the dependency exemption would be entitled to claim the credit. Qualified expenses paid by the dependent are treated as paid by the taxpayer claiming the exemption. Thus, parents would be allowed to claim the credit for tuition amounts paid by their dependent child.

• The credits are not allowed if married individuals file separate returns.

• The credits are not allowed if a taxpayer is a nonresident alien for any portion of the tax year.

Deductions

• Taxpayers allowed to deduction interest on education loans. The deduction is allowed whether or not the taxpayer itemizes.

• The maximum deduction of $2,500 is phased in over several years starting in 1998. The amount allowed for 1998 is $1,000.

• The deduction is allowed only for interest paid during the first 60 months in which interest payments are required.

• Limitations are based on modified AGI. The deduction is phased out for modified AGI between $40,000 and $55,000 ($60,000 and $75,000 for joint filers).

• Dependents are not eligible for the deduction but similar to the education credits the taxpayer claiming the dependency exemption would be allowed the deduction. Thus, parents would be eligible to claim the interest paid on child�s educational loan if the child is a dependent.

• Married couples must file joint return to take the deduction.

Savings Incentives for Education

Education Individual Retirement Accounts (Effective after Dec. 31, 1997)

• Cash contributions up to $500 per year can be made for a beneficiary until age 18

• Contributions are not deductible.

• The trust is exempt from taxation.

• Distributions are not taxable if used for qualified educational expenses

• Limitations based on modified AGI.

Other incentives

• An exception applies to the early withdrawal penalty on distributions from a regular IRA. This exception is provided for distributions used to pay higher education expenses. This can be expenses paid for the taxpayer, spouse, child, or grandchild.

• Modifications are made to Qualified State Tuition Programs to encourage saving.

• The exclusion for employer-provided educational assistance is extended to May 31, 2000

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