TRA97: Higher Education Tax Benefits
Memo to: University Students and Families
From: Ed Steinmetz, Assistant Vice President For Finance
Subject: Higher Education Tax Benefits
As you know, the Taxpayer Relief Act of 1997 (TRA97) and later additions provided several tax benefits to help families meet the cost of post-secondary education. These provisions include the Hope Scholarship tax credit, the Lifetime Learning tax credit, Education IRA's, and the ability to deduct interest paid on student loans.
The University of Scranton is pleased to comply with a provision in the legislation for eligible institutions to provide to families that may be used in determining how these tax benefits might apply to them. The enclosed information should help you to understand the differences between these credits and deductions in order to decide which benefits might best apply to you. First, we are enclosing a detailed summary of your University of Scranton student account for the 2002 tax year listing all transactions. We are also including a guide that explains some of the descriptions that appear on the account summary.
Please keep in mind that the tax benefits relate to "qualified tuition and related expenses" paid via "qualified payments." The IRS describes qualified tuition and related expenses as mandatory charges required for enrollment at an eligible institution. Non-qualifying related expenses and charges include room and board; fees involving athletics and insurance, transportation and similar personal or living expenses. The IRS defines qualified payments as those made "out-of-pocket" including from student's earnings, a loan, a gift, an inheritance, or personal savings. Non-qualifying payments include those made from a Pell Grant or any other tax-free grant or scholarship, a tax-free distribution from an education IRA, or tax-free employer-provided educational assistance programs.
The second piece of information we are providing is IRS form 1098T which institutions must issue to students. This form does not need to be submitted with your tax return, but should be kept with your tax records. Please keep in mind that receipt of form 1098T does not guarantee eligibility for any of the tax credits. You must read the eligibility requirements to determine if you qualify.
We also strongly encourage you to obtain IRS form 8863, which is the actual form that must be filed to claim the education tax credits. The instructions for form 8863 provide some useful information that may be helpful in determining the best way to proceed to maximize tax benefits. You can access the form and instructions via the IRS website listed at the end of this letter.
The following summaries may help in your understanding of the new programs.
- The Hope Scholarship is a per student tax credit for the first two years of postsecondary education. It is a direct, non-refundable tax credit with a $1,500 annual maximum for payments made on qualified tuition and related expenses due to enrollment within the 2002 calendar year. A tax credit equal to all of the first $1,000 of tuition and fees (less scholarships, grants, and tax-free tuition benefits), and half of the next $1,000 of tuition and related expenses is available to parents of dependent students or to students who are not claimed as dependents on their parents' federal tax return. The income tests that must be met are described on form 8863.
Lifetime Learning Credit
- The Lifetime Learning Credit is a per family tax credit which applies to qualified tuition and fee payments made due to enrollment within the 2002 calendar year. The Lifetime Learning Credit applies to tuition and related expenses for undergraduate, graduate, and continuing-education course work. A family can claim on its tax return a credit of 20 percent of the first $5,000 of qualified expenses for a maximum benefit of $1,000 each tax year. An eligible taxpayer must file a tax return and have an income tax liability to claim the credit. As with the Hope Scholarship Credit, there are income and dependency tests that must be met in order to qualify for the credit. Please refer to IRS form 8863 for more information. Keep in mind that you cannot take the Hope Credit and the Lifetime Learning Credit for the same student for the same tax year.
Student Loan Interest Deduction
- Where applicable, IRS Form 1098E will be issued by lenders to assist you in taking advantage of the deduction for interest paid on student loans, which is now a direct deduction from income. For the 2002 tax year, the maximum interest allowed is $2,500.
- Coverdell Education Savings Accounts and Roth IRA's were introduced in 1998, which may be used to save or pay for education-related expenses. There have also been changes in the taxation of U.S. Savings Bonds interest, and early withdrawals from IRAs for use in the payment of higher education expenses. The IRS website listed at the end of this letter will provide useful information on these new tax savings opportunities.
The recent changes in tax legislation provide many opportunities for tax savings. It is extremely important that you understand the particular provisions of each of these credits or deductions so that you can make the best decision for your particular circumstances. The University of Scranton cannot advise you as to which credit or deduction is best for you because these decisions must be based on your personal tax situation. Due to the complexity of these changes, it may be beneficial to consult with a tax preparer or accountant to help you make the most informed decision.
We recommend that you take the following steps.
- Read the enclosed information and access the websites listed at the end of this letter to learn more about the particulars of the higher education tax provisions. IRS Publication 970 is an excellent resource to use. Consult with professional tax advisors if necessary.
- Review the enclosed student statement in order to determine "qualified tuition and related expenses.
- Review the enclosed student statement in order to determine "qualified payments."
- Determine which credits are applicable based on the enrollment status of the student.
- Maximize tax benefits based on the student and family circumstances.
We hope this information is helpful to you. If you have any questions about the account information we have provided, please contact the Bursar's Office at 570-941-5877. Again, keep in mind that we cannot advise you as to which of the tax provisions would be best for you. The following web addresses and phone numbers may provide you with additional information to help you better understand the new tax legislation. We have set up links on The University of Scranton's Treasurer's Office Home Page to help you access these on-line references.
Other Web Sites:
IRS general web site http://www.irs.ustreas.gov
IRS Publication 970 http://www.irs.ustreas.gov/pub/irs-pdf/p970.pdf
Dept. of Education http://www.ed.gov/prog_info/SFA/StudentGuide/
1-800-4Fed-Aid -- Federal Student Aid Information Center
1-800-USA-Learn -- U.S. Department of Education
1-800-829-1040 -- Internal Revenue Service