Education Savings Programs
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) affected several tax credits and savings programs for education:
- Coverdell Education Savings Account (ESA)
Formerly known as Education IRAs, ESA accounts allow nondeductible annual contributions of up to $2,000 per child under the age of 18. Eligibility phases out for single taxpayers with incomes between $95,000 and $110,000, and for married individuals filing jointly with incomes between $190,000 and $220,000. ESA ontributions have the potential for tax-deferred accumulation and can be withdrawn tax-free for qualified education expenses. ESA funds may be used to pay for elementary and secondary school costs, as well as college expenses. Distributions not used for qualified education expenses may be subject to a 10% federal income tax penalty in addition to ordinary income taxes.
- Hope Scholarship Credit
This federal tax credit gives families a maximum tuition credit of $1,650 per student during the student's first two years of enrollment. The EGTRRA boosted the income eligibility limits for the Hope credit, and they are now annually indexed for inflation: in 2006, Hope credit eligibility phases out for single filers with modified adjusted gross incomes (MAGIs) of $45,000 and for joint filers with MAGIs of $90,000.
- Lifetime Learning Credit
This is a 20% credit toward the first $10,000 of tuition and/or other educational expenses incurred to learn or improve job skills, available to college juniors and seniors, graduate students, and working Americans. The income eligibility limits for this federal tax credit are the same as for the Hope credit, and are also indexed for inflation.
These new tax benefits may help ease the burden of education expenses for many American families.