University of Wisconsin - Extension

MADISON, Wis.-If you've been paying higher education bills for the past year, you may be eligible for some significant tax benefits when you prepare your 2002 income taxes, according to Linda Boelter, Certified Financial Planner¿ and family financial management specialist for University of Wisconsin-Extension.

These benefits include education tax credits, deductions for higher education expenses and for student loan interest. Here is a brief summary of some of the benefits:

During the first two years of post secondary education, parents of dependent students or independent students not claimed as an exemption on their parents' tax return may qualify for a Hope Scholarship tax credit of up to $1,500 per student per year for tuition and related expenses.

"A tax credit is much better than a deduction because a tax credit is subtracted from the amount of income tax you have to pay. A deduction only reduces the amount of income that is subject to tax," Boelter explained.

The Hope credit equals 100 percent of the first $1,000 and 50 percent of the next $1,000 paid to a qualifying institution for tuition and fees required for enrollment and attendance (not room or board).

The Lifetime Learning Credit allows taxpayers a credit up to $1,000 annually (20 percent of the first $5,000 paid for qualified tuition and fees) for undergraduate, graduate or professional degree courses for students enrolled at least half time in a degree or certificate program. Tuition and fees for courses at an eligible institution to acquire or improve job skills are also eligible, even if the student is enrolled on a less than half-time basis. This credit increases to $2,000 in 2003.

Both the Hope and Lifetime Learning credits are available to single taxpayers with modified adjusted gross income (AGI) up to $41,000 (phasing out between $41,000 and $51,000), or up to $82,000 for joint filers (phasing out between $82,000 and $102,000). However, you can't get both credits for the same student in the same year.

If you don't meet the income requirements for the Hope or Lifelong Learning credits, you may be eligible for the new tuition and fees deduction that can reduce your taxable income up to $3,000. It's available to single filers with AGIs up to $65,000 and married filers with AGIs up to $130,000. And you don't have to itemize deductions to qualify for this deduction.

Lastly, if you paid interest on a student loan in 2002, you may be able to deduct up to $2,500 of the interest paid on a federal or private student loan (not loans from a relative or employer). Beginning in 2002, there is no longer a 60-month limit on this deduction and voluntary interest payments may qualify. For interest paid after Dec. 31, 2001, the deduction is phased-out for single filers with incomes between $50,000 and- $65,000 and joint between $100,000 and- $130,000.

For more complete details, see IRS Publication 970, "Tax Benefits for Education." It is available on the Internet at http://www.irs.gov/pub/irs-pdf/p970.pdf . If you have specific tax questions, consult your tax specialist.