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CCH can assist you with stories, including interviews with CCH subject experts. Also, the 2007
CCH Whole Ball of Tax is available in print. Please contact:

Leslie Bonacum
(847) 267-7153
mediahelp@cch.com

Neil Allen
(847) 267-2179
neil.allen@wolterskluwer.com

Link to special CCH Tax Briefings on key topics from 2006:

2007 CCH Whole Ball of Tax

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2007 CCH Whole Ball of Tax

Contact: Leslie Bonacum, 847-267-7153, mediahelp@cch.com
Neil Allen, 847-267-2179, neil.allen@wolterskluwer.com

Parents Need Playbook to Figure Out Best Education Savings Moves

Section 529 Plans Now Permanent, Other Deductions Extended - But You Need to Know Where to Claim on the Form 1040

(RIVERWOODS, ILL., January 2007) – The amount of savings in Section 529 college saving plans more than doubled in 2005, despite the cloud of uncertainty that hung over their future. With the passage of the Pension Protection Act in 2006, these plans are now a permanent part of the tax code, and will likely become an even more popular tax-advantaged savings option for individuals – including not just parents, but grandparents and other relatives – saving for the growing cost of higher education, according to CCH, a Wolters Kluwer business and a leading provider of tax and accounting law information, software and services (CCHGroup.com). The Pension Protection Act also adds stricter rules to the operation of 529 plans to make their cost structure more transparent.

Qualified tuition plans, which include 529 college savings plans and prepaid tuition plans, are tax-advantaged savings options available to anyone regardless of income. With prepaid tuition programs, the taxpayer is allowed to pay for a designated beneficiary’s future college education using current-year dollars. With 529 plans, a taxpayer opens a savings plan sponsored by a state that allows proceeds to be used to attend a state or private university.

Contributions to state-sponsored programs may be partially or fully deductible on state tax returns. For example, Colorado, Illinois, New Mexico, South Carolina and West Virginia allow deductions for the full amount of the contribution (in Illinois this applies only to the savings plan). Eighteen other states and the District of Columbia offer deductions on some portion of the contribution.

“Section 529 qualified tuition programs got off to a slow start when they were first introduced in 2001,” said CCH Senior Federal Tax Analyst John W. Roth, JD, LLM. “And, even though they gained in popularity, some people remained unconvinced of their long-term value because they were not a permanent part of the tax code and many individuals were concerned that high fees assessed by some of the plans – which they couldn’t readily identify – were chipping away at their returns.”

Extenders Save Popular Deductions – If You Can Figure Out How to Claim

The eleventh hour passage of the Tax Relief and Health Care Act of 2006 in December, extended through 2007 both the above-the-line higher education tuition deduction and the teacher’s classroom expense deduction for those teaching students K-12. However, you won’t see lines for these deductions on the 1040 you receive from the IRS.

“The higher education tuition deduction has been an important deduction for middle class taxpayers because it’s one of the only education tax breaks that has an income phase-out range high enough to allow them to qualify,” said Roth.

But figuring out how to claim these deductions can get a bit tricky as the 1040 form for the 2006 tax year was printed before the deductions were extended. As a result, the 1040 taxpayers receive in the mail will not have lines reserved for these deductions. Rather, to take the tuition deduction, eligible taxpayers need to place the letter “T” on line 35 of the 1040 tax return. This is actually the line for claiming domestic production activities deduction. If eligible for both the tuition and the domestic production activities deduction, taxpayers should put the letter “B” on line 35 and include a separate statement explaining the combined deductions. Individuals claiming the educator deduction should place a letter “E” on line 23 of Form 1040, which is the line for the Archer MSA deduction. Those eligible to claim both the educator deduction and the Archer MSA should place a “B” on line 23 and include a separate statement explaining the combined deductions.

The Playbook: Comparing Education Savings, Credits, Deductions, Exclusions Options

While there continues to be a variety of tax-advantaged options available to help lessen education costs, not all options are available to all individuals and, in some instances, choosing one option may preclude you from choosing others. Below CCH compares the more popular tax-related education options for 2006 and 2007 and identifies which forms to use to take the tax break.

Savings Vehicles

Coverdell Education Savings Account (ESA)

Qualified Tuition Program (529 Plans)

What it is:

A savings account for educational expenses in which earnings grow tax-free. Withdrawals also are tax-free if used to pay for qualified educational expenses.

Three general types of 529 plans exist:

Pre-paid tuition plans – generally guaranteeing future tuition coverage at a state university.

State 529 college savings plans – generally sponsored by a state allowing you to use saving plan proceeds to attend a state or private university.

Independent 529 plans –sponsored by a consortium of private colleges, whereby you can lock in current tuition rates for future years at participating schools.

In each savings program, investment earnings are not taxed if withdrawals are used for qualified expenses.

Contributions to state-sponsored programs are partially or fully deductible on some state tax returns.

Contribution limits:

$2,000 maximum annual contribution per year per beneficiary. As with IRAs, contribution can be made up to April 15 of following year.

Can contribute to both a Coverdell ESA and a qualified tuition plan in the same year.

Contributions cannot be more than is necessary to provide for the higher education expenses of the beneficiary. These amounts are set by the state or educational institutions sponsoring the plan and may be in excess of $300,000. In the case of many 529s, accounts can be opened with as little as $25 and contributions as little as $15 per pay period.

There are no other specific annual contribution limits for the plans.

Qualifying expenses:

Can be used to pay for tuition, fees, books, supplies and equipment for both K-12 and post-secondary.

For K-12, 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. Can also be used to fund a qualified tuition program.

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

Contribution phaseout ranges:

For 2006, modified adjusted gross income (AGI): $95,000-$110,000 for single filers, $190,000-$220,000 for joint returns, no phaseout for corporation or other entities, including tax-exempt organizations.

Phaseout is not income adjusted, and reverts to 2001 levels after 2010.

No income limitations.

Who can/can’t claim it:

Beneficiary must be under 18 years old or be a special needs beneficiary in the year contributions are made.

Anyone can set up an account for a beneficiary as long as the annual contribution limits for that beneficiary are not exceeded.

Someone funding a qualified tuition program for another individual can use the annual gift tax exclusion ($12,000 for single filers or $24,000 for joint filers for 2006 and 2007) 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:

Beneficiary is taxed on any withdrawals not used to pay for qualified educational expenses. (Penalty-free withdrawals can be made in connection with service academy appointments, for example, Annapolis or West Point.)

All funds must be withdrawn by the time beneficiary reaches age 30 (except if special needs individual), but an account can be transferred from one beneficiary to another.

All contributions must be in the form of cash.

As with a conventional IRA, owner of the account can exercise wide discretion as to investments. The funds, however, cannot be used to reimburse the taxpayer for home schooling.

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 a member of the same family.

In the case of the Independent 529 plans, if your child does not attend a member college and you either withdraw the money or transfer it to a state-run plan, you won’t be able to collect more than a 2-percent gain on the money you invested – even if the return you realized was in excess of this.

Penalty-free withdrawals can be made in connection with service academy appointments, for example, Annapolis or West Point.

Tax Credits

	Hope Credit	Lifetime Learning Credit
What it is:	A credit of up to $1,650 (adjusted for inflation) per student based on expenses in the first two years of post-secondary undergraduate education.	A credit of up to $2,000 per return based on expenses for post-secondary education or courses to improve job skills.
Credit amount:	For 2006: 100 percent of the first $1,100 in qualifying expenses plus 50 percent of the next $1,100 in qualifying expenses (remains the same for 2007). Use Form 8863.	20 percent of first $10,000 in qualifying expenses, to a maximum $2,000 credit. Use Form 8863.
Qualifying expenses:	Tuition, student activity fees and course-related fees paid directly to the educational institution.	Tuition, student activity fees and course-related fees paid directly to the educational institution.

Credit phaseout ranges:

For 2006 modified AGI: $45,000-$55,000 for single filers, $90,000-$110,000 for joint returns;

For 2007 modified AGI increases to: $47,000-$57,000 for single filers, $94,000-$114,000 for joint returns.

Same as Hope credit.

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.

Can’t be used for graduate or professional level programs.

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 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 ESA or qualified tuition program, but not for same expenses.

Can be taken for expenses paid for with student loan.

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.

'Above-the-line' Deductions

	Tuition and Fees Deduction	Student Loan Interest Deduction	Educator Expenses Deduction
What it is:	A deduction from gross income (an above-the-line deduction) of up to $4,000 ($2,000 if modified AGI exceeds $65,000) based on expenses for post-secondary education.	A deduction from gross income of up to $2,500 based on interest paid on a student loan for post-secondary education.	The ability of teachers to take an above-the-line deduction based on amounts they spend for unreimbursed classroom expenses.

Deduction amount:

100 percent of the first $4,000 in qualifying expenses. Taken on Form 1040A or 1040.

*For 2006, taxpayers must note they are taking the tuition deduction by placing the letter “T” on line 35; or the letter “B” if taking both the tuition deduction and the domestic production activities deduction and include a separate statement explaining the combined deductions.

100 percent of the first $2,500 in qualifying expenses. Taken on Form 1040A or 1040.

100 percent of the first $250 in qualifying expenses ($500 for joint filers who are both qualified educators). Taken on Form 1040A or 1040.

*For 2006, taypayers must note they are taking the educator deduction by placing the letter “E” on line 23; or the letter “B” if taking both the educator deduction and the Archer MSA deduction and include a separate statement explaining the combined deductions.

Qualifying expenses:

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

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. Interest payments are deductible for the entire period of the loan.

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

Deduction phaseout ranges:

Deduction is only allowed if modified AGI for 2006 is not greater than $65,000 for a single filer, $130,000 for a joint filer.

Taxpayers whose income exceeds that limit but does not exceed $80,000 for a single filer or $160,000 for joint filers may deduct up to $2,000 in qualified expenses in 2006.

For both 2005 and 2006 modified AGI: $50,000-$65,000 for a single filer, $105,000-$135,000 for a joint filer.

No income limitations.

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.

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 be taken only by the person who is responsible for the loan and who actually makes the payments.

Can be taken only by 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:

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.

Deduction is not available on Form 1040EZ.

Must reduce qualified educational expenses by the total amount paid through tax-free sources such as tax-free withdrawals from Coverdell ESAs.

Deduction is not available on Form 1040EZ.

Nonathletic supplies for courses in health or physical education do not qualify.

Deduction is not available on Form 1040EZ.

Exclusions

Several exclusions also are available for taxpayers related to education including:

Bond interest: All or part of the interest on proceeds of qualified savings bonds (specifically, Series I bonds or qualified Series EE bonds issued after 1989) cashed to pay education expenses; 2006 modified AGI eligibility phaseout ranges are $63,100–$78,100 for single filers, $94,700–$124,700 for joint returns; and increase for 2007 to $65,600–$80,600 for single filers, $98,400–$128,400 for joint returns.
Employer assistance: Employer-provided educational assistance (up to $5,250 annually) from income for undergraduate or graduate level coursework and expenses.
Scholarship funds: Scholarship money or tuition reduction from income up to the amount spent on qualified expenses; generally cannot claim exclusion if scholarship or tuition reduction represents payment for teaching, research or other services, but exclusion can be applied to Armed Forces and National Health Service Corps scholarship programs even though future service obligation is connected to them.
Student loans: The amount of a cancelled student loan from income (normally, a cancellation of indebtedness counts as income). 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.
Gifts: Amounts paid to an educational institution on behalf of someone else from gift tax; payments made to a student or other individual do not qualify, even if the funds are ultimately used to pay tuition.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax and accounting law information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® Tax Research NetWork™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.

Wolters Kluwer is a leading global information services and publishing company. The company provides products and services for professionals in the health, tax, accounting, corporate, financial services, legal and regulatory, and education sectors. Wolters Kluwer has annual revenues (2005) of €3.4 billion, employs approximately 18,400 people worldwide and maintains operations across Europe, North America, and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. Its shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. For more information, visit www.wolterskluwer.com.

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