Suze Orman

Taxes and Charitable Giving

Tax Relief Act ยป Education Tax and Saving Incentives

The Act provides roughly $29 billion in direct tax and saving incentives to help towards funding education. For parents and grandparents who are saving or currently paying for children's educational expenses (either college or, as of 2002, secondary or primary school educational expenses), there are new and quite beneficial privileges for you in the bill as well.

Educational IRA

The educational IRAs was something I have never been excited about because the previous limit was only 500. Effective 2002, the annual limit has increase to $2,000 making it now an effective savings vehicle.

For the first time ever, starting in 2002, contributions and earnings can be used to pay for educational expenses for grades K-12 as well as for college expenses. Qualified educational expenses now include: tuition, academic tutoring, special needs services, books, supplies, room and board, uniforms, transportation, supplementary items or service (such as extended day programs), and the purchase of any computer technology, equipment, or internet access. (Computer software primarily involving sports, games, or hobbies is not considered a qualified school expense unless it is educational in nature). Although the money you contribute to an Education IRA is still not tax deductible, as of 2002 the earnings will be tax free if spent on qualified educational expenses.

Furthermore, as of 2002, using money from an Education IRA no longer disqualifies you from taking a Hope Scholarship or Lifetime Learning Credit in the same year (as long as the Education IRA money and the tax credits are not used for the same expenses).

Also, starting in 2002, the income cap to qualify for an Education IRA will go up to $110,000 for single filers and to $220,000 for married filers (from $95,000 and $150,000, respectively, in 2001).

The tax relief act now allows contributions to be made up until April 15th of the year following the year for which the contribution would be designated (instead of December 31 of the taxable year under the old law). Contributions to accounts after the beneficiary reaches age 18 is allowed in the case of a special needs beneficiary. The Tax Relief Act also clarifies that corporations and other entities (including tax-exempt organizations) would be permitted to make contributions to Education IRAs, regardless of the income of the corporation entity during the year of the contribution.

The Tax Relief Act now allows contribution to an Education IRA in the same year that a contribution is made to a qualified state tuition program for the benefit of the same beneficiary. Please keep in mind, distributions from an educational IRA and a qualified tuition program can not exceed the beneficiary's qualified higher education expenses for any year. Any distribution in excess of expenses needs to returned by May 31 of the following tax year or taxes will be imposed.

The following example show then impact investing 2,000 a year (starting with the beneficiaries birth),and the account provides a 7% annual rate of return:

Age Cumulative Tax-Free Total Account
Contribution Earnings Value

Source: Deloitte & Touche

For these reasons, I have now switched from not liking Education IRAs to liking them very much as an education savings program.



© 2021 Suze Orman Media, Inc. All rights reserved.
Privacy Policy  |  Terms Of Use