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2005 Tax Act
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Higher
education is an investment in everyone’s future. According
to recent statistics, parents only save an average of $9,956 for
their children’s higher education. Money Magazine
reported that nearly half of the parents have no savings at all.
In 18 years, the average four year college education is expected
to cost $95,000 for public schooling and more than $240,000 for
a private education according to a recent data from the College
Board. The continuing rise in college costs, however, leaves many
parents wondering how they’ll fund their children’s
education.
Source: Trends in College Pricing 2001, the College Board
To help you plan for present or
future education expenses, there are a number of tax breaks and
education incentives for students and their families. You may
eligible to take advantage these money-saving benefits.
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HOPE
Credit, a nonrefundable credit, can be claimed
against federal income taxes up to $1,500 per student, per year,
for qualified tuition and related expenses for the first two years
of a college education. The $1,500 maximum HOPE credit amount
and the AGI phase-out ranges are indexed for inflation.
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Lifetime
Learning Credit, a nonrefundable credit, can
be claimed against federal income taxes up to $2,000 of education
costs each year. The credit can be used for the education beyond
the first two years of college, or taking classes part-time to
acquire or improve job skills, the credit is equal to 20% of first
$10,000 tuition and fees.
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Qualified tuition and
related expenses: Include tuition and fees required to
be paid to an eligible educational institution as a condition
of enrollment or attendance of an eligible student. Books, supplies,
insurance, travel, meals & lodging, and similar personal,
living or family expenses do not qualify. A student may use HOPE
in only two different tax years, and can’t use Lifetime
Learning Credit in the same year. Under HOPE, a student must be
enrolled at least half-time. The Lifetime Learning Credit has
no half-time rule – even a single class qualifies.
Who is Eligible?
You, your spouse, or any child claimed as your dependent. If the
child is your dependent, the money is considered to be paid by
you even if it is paid by the child.
Phase Out. Both
Credit phase out as your modified AGI is between $87,000 and $107,000
for joint returns ($43,000 and $53,000 for single filers) in 2005.
*The HOPE Credit is computed
on a per-student basis, while Lifetime Learning Credit is computed
on a family or per-return basis.
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Taxpayers within certain income ranges can now
take a deduction for qualified higher education expenses.
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Years
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Qualifying AGI Ranges
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Deduction
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2004 and 2005
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Single AGI $65,000 or less
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$4,000
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Joint AGI $130,000 or less
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$4,000
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2004 and 2005 |
Single AGI $80,000
or less |
$2,000 |
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Joint AGI $160,000
or less |
$2,000 |
The education expenses you can deduct follow
the rules of the Hope Credit. However, if you take this deduction,
you can't take the Hope Credit at the same time.
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Taxpayers can contribute up to
$2,000 in 2005 per account to pay the educational expenses of
a designated beneficiary who is under age18. A phase-out begins
at modified AGI of $95,000-Single ($190,000-MFJ).
If the distribution exceeds qualified
expenses, a portion of the distribution will be taxable if the
distribution are more than the beneficiary's adjusted qualified
education expenses for the year, and that amount may also be subject
to the 10% early distribution penalty.
In addition, you may now make
early withdrawals from traditional and Roth IRAs without tax penalty
to pay for qualified higher education expenses.
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Student
Loan Interest Deduction
Beginning in 2003, up to $2,500 of loan interest on qualified
education loans for college tuition, books and supplies. Both
the limit on the numbers of months for interest payments and the
restriction that voluntary payments of interests are not deductible
will be eliminated..
To qualify for the deduction, your modified AGI on a joint return
is between $100,000 and $130,000. ($50,000 and $65,000 for single
filer).
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