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Affordable Education Act of 2001

The Senate Finance committee has approved legislation to make higher learning more affordable by repaying the trust confided in them by the American taxpayers. Capitol Hill is making it easier to send our young ones through colleges.

Following are the reforms put forth:

  • Educational IRAs – They will be renamed education savings accounts. The contribution limit will be increased from $500 to $2000, the new annual limit for that account. In the case of special needs beneficiary, the contributions won’t stop at the age of 18 and the balance would not be cleared out of the account by the age of 30. Corporations and other entities such as tax-exempt organizations are allowed to make contributions to educational IRAs. For tax purposes, all contributions made by April 15th of the following year would be considered for the income tax return of the preceding year. If the distribution from the account is not used for the same educational expenses that you are going to claim the HOPE credit or lifetime learning credit for; then these claims are allowed. In the past you weren’t allowed to use these credits. No more excise tax on contributions made to an education savings account even if other contributions from qualified state tuition programs were made for the same beneficiary.
  • Qualified Tuition Programs – Broadens the definition of “Qualified Tuition Program”, by including one or more eligible private education institutions that run prepaid tuition programs. Most individuals will be able to purchase tuition credits or certificates on behalf of the beneficiaries but won’t be allowed to make any contributions to a savings account. Distributions that are used for expenses resulting from qualified higher education will be excluded from the gross income. Starting in 2004, any distributions made from qualified tuition programs run by private education institutions other than the “state or agency or instrumentality thereof”, will be excluded from gross income. The definition of “members of the family” now included first cousins for the purposes of rollovers and change of designated beneficiary. Transfer of credits from a qualified tuition program to another will not be considered a distribution.
  • Employer provided Educational Assistance – Graduate education has been included in the exclusion claimed for employer provided education assistance and the exclusion has been made permanent.
  • Student Loan Interest Deduction – Income phase out ranges will be adjusted for inflation in 2002.
  • Tax-Free Treatment of Qualified Scholarships – Recipients of NHSC Scholarship Program or the Armed Forces Scholarship Program have something to celebrate. The amounts received from these scholarships are eligible for tax-free treatment without regard to their service obligations.
  • Tax Benefits for Certain Types of Bonds for Educational Facilities and Activities – Increase in the amount of government bonds that are issued and allowing the issuance of tax-exempt bonds for privately held facilities in public schools.