WASHINGTON (AP) -- A host of tax law changes makes it smart money to take advantage of new opportunities to save for education.
One of the biggest changes involves state-sponsored plans often referred to by Section 529 of the tax code. Effective in 2002, money withdrawn from these 529 plans will be tax-free if it is used for qualified higher education expenses, including tuition and room and board.
In the past, these distributions were taxable. There's one caveat: distributions not used for higher education are subject to a 10 percent excise tax.
Other changes for 529 plans include a chance each year to roll benefits from one plan to another for the same beneficiary; the ability for students to also claim an education tax credit or tax-free distribution from an education savings account; and an increase in the room and board dollar limits to reflect a college's published ''cost of attendance'' amounts.
There's more. Education IRAs -- renamed Coverdell Education Savings Accounts for late Georgia Sen. Paul Coverdell -- have several new benefits.
The annual tax-deferred contribution limits to these accounts rises from $500 to $2,000 per beneficiary. The income eligibility ceiling for a married couple to contribute to an account is now $190,000. Above that level, the contribution limits begin to phase out until they end completely at $220,000.
In addition, corporations can now contribute and distributions from the accounts can be tax-free for some elementary and secondary school costs.
Other important tax-related education issues for 2002:
- Taxpayers with incomes up to $65,000 for an individual and $130,000 for a married couple filing jointly may deduct up to $3,000 in higher education expenses. Taxpayers do not have to itemize to claim this deduction.
- Taxpayers cannot claim both an education tax credit and the higher education tax deduction for the same student in the same year. In addition, a taxpayer cannot claim the deduction for the same expenses covered by a Coverdell account, a 529 plan or an education savings bond.
- Employers can provide workers up to $5,250 each year in tax-free education benefits. This benefit, now made permanent, also was expanded to apply to graduate studies beginning in 2002.
- Interest on a student loan can be deducted regardless of when it was paid or how old the loan is. Previously, only payments made within the first 60 months of the due date were counted. The deduction is available to individual taxpayers with incomes up to $65,000 and $130,000 for married couples -- but it begins phasing out as income rises above $50,000 for indiviudals and $100,000 for joint returns.
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