Whole Ball of Tax 2003

What it is: A credit for up to $1,500 per student based on expenses in the first two years of post-secondary education.

How it’s calculated: 100 percent of the first $1,000 in qualifying expenses plus 50 percent of the next $1,000 in qualifying expenses. Use Form 8863.

Qualifying expenses: Tuition, student activity fees and course-related fees paid directly to the educational institution.

Phaseout ranges: $41,000-$51,000 for single filers, $82,000-$102,000 for joint returns.

Who can/can’t claim it: Can’t be taken if married filing separately. Can’t be taken by student claimed as dependent child on another person’s return, but parent can claim credit for paying dependent child’s expenses. Student must be enrolled in program leading to degree or other recognized credential, studying at least half-time.

What to watch out for: Can’t be taken if lifetime learning credit or tuition and fees deduction is taken for the same student.

Can be taken in same year as a distribution from a Coverdell Education Savings Account (ESA) or qualified tuition program, but not for same expenses. Can be taken for expenses paid for with student loan.

What it is: A credit for up to $1,000 per return based on expenses for post-secondary education or courses to improve job skills.

How it’s calculated: 20 percent of the first $5,000 in qualifying expenses. Use Form 8863.

Qualifying expenses: Tuition, student activity fees and course-related fees paid directly to the educational institution.

Phaseout ranges: $41,000-$51,000 for single filers, $82,000-$102,000 for joint returns.

Who can/can’t claim it: Can’t be taken if married filing separately. Can’t be taken by a student if claimed as dependent child on another person’s return, but parent can claim credit for paying dependent child’s expenses.

What to watch out for: Can’t be taken if Hope credit or tuition and fees deduction is taken for the same student.

Can be taken in same year as a distribution from a Coverdell ESA or qualified tuition program, but not for same expenses. Can be taken for expenses paid for with student loan.

What it is: A deduction from gross income (an "above the line deduction") of up to $3,000 based on expenses for post-secondary education.

How it’s calculated: 100 percent of the first $3,000 in qualifying expenses. Taken on Form 1040A or 1040.

Qualifying expenses: Tuition, student activity fees and course-related fees paid directly to the educational institution.

Phaseout ranges: No phaseout, but a cut-off. Deduction is not allowed if modified adjusted gross income is greater than $65,000 for a single filer, $130,000 for a joint filer.

Who can/can’t claim it: Can’t be taken if married filing separately. Can’t be taken if claimed as dependent on another person’s return, but parent can claim credit for child’s expenses.

What to watch out for: Can’t be taken if Hope or lifetime learning credit is taken for the same student.

Can be taken in same year as a distribution from a Coverdell ESA or qualified tuition program, but not for same expenses. Can be taken for expenses paid for with student loan.

What it is: A deduction from gross income of up to $2,500 based on interest paid on a student loan for post-secondary education.

How it’s calculated: 100 percent of the first $2,500 in qualifying expenses. Taken on Form 1040A or 1040.

Qualifying expenses: Loan may cover books, supplies, equipment, room and board, transportation and other necessary expenses in addition to tuition, student activity fees and course-related fees paid directly to the educational institution.

Beginning with payments made in 2002, a rule that limited deductibility to the first 60 months of payments is no longer applicable. Interest payments will be deductible for the entire period of the loan.

Phaseout ranges: $50,000-$65,000 for a single filer, $100,000-$130,000 for a joint filer.

Who can/can’t claim it: Must have been in degree program and at least half-time student to take the deduction. Can’t be taken if married filing separately. Can’t be taken if claimed as dependent on another person’s return. Can only be taken by the person who is responsible for the loan and who actually makes the payments.

What to watch out for: Must reduce qualified educational expenses by total amount paid through tax-free sources such as tax-free withdrawals from Coverdell ESAs.

What it is: The ability of teachers to take an "above the line" deduction based on amounts they spend for unreimbursed classroom expenses.

How it’s calculated: 100 percent of the first $250 in qualifying expenses. Taken on Form 1040A or 1040.

Qualifying expenses: Unreimbursed expenses in connection with books, supplies, computer equipment and supplementary materials used in the classroom.

Phaseout ranges: No income limitations.

Who can/can’t claim it: Teachers, instructors, counselors, principals and aides who work for at least 900 hours during a school year in a school that provides elementary or secondary education as determined by state law.

What to watch out for: Nonathletic supplies for courses in health or physical education do not qualify.

What it is: A savings account for educational expenses in which earnings grow free of tax. Withdrawals are tax-free if used to pay for qualified educational expenses.

How it’s calculated: $2,000 maximum annual contribution per year per beneficiary.

Qualifying expenses: For both K-12 and post-secondary education, Coverdell ESAs can be used to pay for tuition and fees, books, supplies and equipment.

For K-12, they can also pay for uniforms, transportation, supplementary items and services such as extended day programs, room and board and purchase of computer technology and Internet access (but cannot be used for sports, games or hobby software unless it is predominantly educational).

For post-secondary education, can cover expenses for room and board if the student is enrolled at least half-time and the amount meets certain guidelines.

Monies from a Coverdell ESA can be used to fund a qualified tuition program.

Phaseout ranges: $95,000-110,000 for single filers, $190,000-$220,000 for joint returns, no phaseout for entities such as corporations and trusts.

Who can/can’t claim it: Beneficiary must be less than 18 years old, or be a "special needs" beneficiary, in year contributions are made.

What to watch out for: Beneficiary is taxed on any withdrawals not used to pay for qualified educational expenses. All funds must be withdrawn by the time beneficiary reaches age 30, but an account can be transferred from one beneficiary to another. All contributions must be in the form of cash. As with conventional IRA, owner of the account can exercise wide discretion as to investments. Cannot be used to reimburse the taxpayer for home schooling.

What it is: Savings programs in which investment earnings are not taxed if withdrawals are used for qualified expenses. Contributions are deductible on some state tax returns. Programs are sponsored by states and educational institutions, generally with professional third-party investment management. (Distributions from programs sponsored by educational institutions will be taxable if made before January 1, 2004.)

How it’s calculated: Contributions cannot be more than is necessary to provide for the higher educational expenses of the beneficiary. These amounts are set by the state or educational institution sponsoring the plan and may be in excess of $250,000. No specific annual contribution limit.

Qualifying expenses: Distributions can be used for books, supplies, equipment, room and board, transportation and other necessary expenses in addition to tuition, student activity fees and course-related fees paid directly to the educational institution.

Phaseout ranges: No income limitations.

Who can/can’t claim it: Someone funding a qualified tuition program for someone else can use the annual gift tax exclusion (currently $11,000) or combine five years’ worth of exclusions in a single year. The beneficiary can exclude funds withdrawn from the qualified program from income if they are used for qualified expenses.

What to watch out for: Check tax treatment of contributions for state income tax purposes. Limited ability to change investment options. Possible 10-percent penalty if distributions are not used for qualified expenses. Beneficiary can be changed if new beneficiary is member of the same family

What it is: The ability to exclude from your income all or part of the interest on the proceeds of qualified savings bonds cashed in to pay educational expenses.

How it’s calculated: If total received from bonds is not more than qualified expenses, all interest on the bonds is tax-free. Otherwise, divide the educational expenses by the total proceeds and then multiply by the interest portion of the proceeds to determine tax-free amount of interest. Use Form 8815.

Qualifying expenses: Tuition, student activity fees and course-related fees paid directly to the educational institution. Also, contributions to a Coverdell Education Savings Account or a qualified tuition program.

Phaseout ranges: $57,000-$72,000 for single filers, $86,000-$116,000 for joint returns.

Who can/can’t claim it: Can’t be taken if married filing separately. Can’t be taken if claimed as dependent child on another person’s return, but parent can claim credit for child’s expenses.

What to watch out for: Applies only to series I bonds or qualified series EE bonds issued after 1989.

What it is: The ability to exclude employer-provided educational assistance from income.

How it’s calculated: There is a $5,250 annual limit on the exclusion.

Qualifying expenses: Assistance may cover books, supplies and equipment in addition to tuition, student activity fees and course-related fees paid directly to the educational institution.

Phaseout ranges: No income limits.

Who can/can’t claim it: Must be employed by the employer offering the benefit.

What to watch out for: Assistance in excess of $5,250 is subject to income and payroll taxes.

What it is: The ability to exclude scholarship money or tuition reduction from income.

How it’s calculated: There is no limit on the exclusion.

Qualifying expenses: Scholarships are excludable up to the amount spent on books, supplies and equipment in addition to tuition, student activity fees and course-related fees paid directly to the educational institution.

Phaseout ranges: No income limits.

Who can/can’t claim it: The exclusion applies to the income of the student who receives it. Generally cannot claim exclusion if scholarship or tuition reduction represents payment for teaching, research or other services. However, as of the 2002 tax year, exclusion can be applied to Armed Forces and NHSC scholarship programs even though a future service obligation is connected to them.

What to watch out for: Exclusion does not apply to scholarships for correspondence education. Funds from relatives do not count as scholarships.

What it is: The ability to exclude the amount of a cancelled student loan from income. (Normally, a cancellation of indebtedness counts as income.)

How it’s calculated: There is no limit on the exclusion.

Qualifying expenses: The amount of the loan that is cancelled.

Phaseout ranges: No income limits.

Who can/can’t claim it: The discharge must be made under the terms of a loan agreement and made because the person works for a specified period in certain professions for certain kinds of employers – for example, as a doctor or nurse in a rural area.

What to watch out for: Loan must have been made by federal, state or local government, certain tax-exempt corporations controlling public hospitals or, under certain circumstances, an educational institution.

What it is: The ability to exclude amounts paid to an educational institution on behalf of someone else from gift tax.

How it’s calculated: There is no limit on the exclusion.

Qualifying expenses: Exclusion applies only to tuition, student activity fees and course-related fees paid directly to the educational institution.

Phaseout ranges: No income limits.

Who can/can’t claim it: Exclusion applies to the donor and the donor’s estate.

What to watch out for: Exclusion applies only to payments made directly to the educational institution. Payments made to a student or other individual do not qualify, even if the funds are ultimately used to pay tuition.

What it is: A miscellaneous itemized deduction for education that meets educational requirements for current job or maintains and enhances skills for current job.

How it’s calculated: No limit on annual expenses that can be claimed, but only the amount in excess of 2 percent of adjusted gross income is deductible. Use Schedule A, Form 1040.

Qualifying expenses: Include books, supplies, equipment, room and board, transportation and other necessary expenses in addition to tuition, student activity fees and course-related fees paid directly to the educational institution.

Phaseout ranges: No income limitations, but deductibility is tied to percentage of gross income.

Who can/can’t claim it: Can only be taken if total of itemized deductions exceed standard deduction. Only deductible to the extent that educational expenses exceed 2 percent of adjusted gross income.

What to watch out for: Education cannot qualify student for new job. Professional education, such as law school courses, generally are not allowed for this reason, even if student does not intend to enter a new profession.

What it is: The ability to escape the 10-percent penalty on early withdrawals from IRAs when the proceeds are used for educational expenses.

How it’s calculated: No limit on amount of withdrawal.

Qualifying expenses: Withdrawal may be used to pay for books, supplies, equipment, tuition, student activity fees and course-related fees paid directly to the educational institution. Room and board qualifies if at least half-time student.

Phaseout ranges: No income limitations.

Who can/can’t claim it: Owner of IRA can use it for educational expenses of self, spouse, child and grandchild.

What to watch out for: Withdrawals are generally subject to income tax. Income tax does not apply, however, to withdrawals from Roth IRAs up to the amount contributed to the account.