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Tax-cut package includes higher-education benefits
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• Expansion of student-loan interest deduction. The law eliminates the current 60-month limit on education- loan interest that qualifies for this deduction. Under the bill, single taxpayers with modified adjusted gross incomes of $50,000 to $65,000 would be able to take a partial deduction. Taxpayers with incomes below $50,000 would qualify for the full deduction. Under current law, the deduction phases out for single taxpayers with incomes between $40,000 and $55,000. Married taxpayers with modified adjusted gross incomes of between $100,000 and $130,000 also would qualify for a partial deduction. Under current law, the deduction phases out for married taxpayers with incomes of between $60,000 and $75,000. The changes take effect for the 2002 tax year.
• Increase of maximum Education IRA contribution. The measure increases to $2,000 from the current $500 the maximum amount that taxpayers would be able to contribute to education IRAs each year.
• Enhancements to private prepaid-tuition programs. The law permits one or more education institutions, including private institutions, to establish tax-exempt prepaid-tuition programs. Only state-sponsored programs are tax-exempt under current law. Beginning with the 2002 tax year for state-sponsored programs (and the 2004 tax year for other institution tuition programs), taxpayers could exclude from their taxable income withdrawals from such plans, as long as they use the proceeds to pay qualified education expenses.
• Expansion of tax savings for employer-provided education benefits. The legislation allows taxpayers to exclude from their taxable income employer-provided assistance for graduate-education costs, as well as for undergraduate expenses, which already qualify for this benefit. The bill also makes this provision permanent; it had been scheduled to expire at the end of the year.
• Addition of a new deduction for higher-education expenses. The law permits taxpayers to deduct up to $3,000 in qualified higher-education expenses. For 2002 and 2003, the deduction would be available to single taxpayers with adjusted gross incomes of $65,000 or less, or married couples who file joint returns reporting incomes of $130,000 or less. For 2004 and 2005, those taxpayers would be allowed to deduct up to $4,000, and single taxpayers with incomes between $65,000 and $80,000 ($130,000 to $160,000 for married couples filing jointly) would be allowed a maximum $2,000 deduction. Taxpayers would not be allowed to claim both the deduction and higher-education tax credits in the same year.