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New Education Credits Attached To Dependency Exemptions Make Exemptions Even More Valuable

NEW TAX CREDITS FOR THOSE WHO HAVE DEPENDENCY EXEMPTION

NEW TAX CREDITS FOR THOSE WHO HAVE DEPENDENCY EXEMPTION

The $500-per-child credit

This credit is available for the direct descendent, stepchild or foster child. Phase Outs depend on filing status and adjusted gross income as follows:

Joint Returns, $110,000; Single Returns and Heads of Household, $75,000; Married Filing Separately, $55,000. When these levels are exceeded, the total credit for all dependent children is reduced by $50 for each $1,000 of income or part thereof.

There will be no adjustment for inflation as to the amount of the credit or the phase-out amounts. For those who don’t owe taxes against which the credit can be applied, they may qualify for a payment from the government in place of the credit if they have three or more children based on a complex formula.

The Hope Scholarship Credit

Maximum – $3,000 per Child

This credit is available for up to $1,500 per child per year of tuition and related educational expenses incurred during the first two academic years of post-high school education. The credit is determined each year as follows: 100% of the first $1,000 of tuition and educational fees, and 50% of the next $1,000 for a maximum of two years. The credit applies to expense paid after 1997.

This credit phases out at adjusted gross income levels between $80,000 and $100,000 for joint filers, and between $40,000 and $50,000 for others. Both the amounts of the credit and the phase-out figures will begin to be adjusted for inflation in 2001.

This credit can not be used for a child in a year in which any part of the child's education expenses were paid with tax-free distributions from an "Education IRA" which was created by the new tax law.

The Lifetime Learning Credit

Used for tuition and related expenses in regard to undergraduate and graduate education and job training courses, this credit differs from the Hope Scholarship Credit which is calculated on a "per child" basis. This credit is the maximum amount that can be taken each year for all children combined.

Beginning with educational expenses beginning and paid after June 30, 1998, until the year 2002, the credit will be equal to 20% of up to $5,000 of educational expenses – a maximum credit per year for all children of $1,000.

Beginning in 2002, the credit will be calculated at 20% of up to $10,000 of educational expenses – a maximum credit per year for all children of $2,000.

The credit phase-out schedule for this credit follows that of the Hope Scholarship Credit: Between $80,000 and $100,000 for joint filers, and between $40,000 and $50,000 for others. Both the amounts of the credit and the phase-out figures will begin to be adjusted for inflation in 2001.

Like the Hope Credit, this credit can not be used for a child in a year in which any part of the child's education expenses were paid with tax-free distributions from an "Education IRA" which was created by the new tax law.

This is a basic outline of the new tax law and is not intended to be construed as either legal advice or tax advice. Because all situations are different, make sure to contact your tax advisor before making any decisions or taking any action.

© 1997, Flying Solo

 

 



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