Education tax breaks are plentiful, but finding what's best for you takes patience and planning.

A hard look at the education tax breaks now available reveals a complicated maze. Among the breaks are the Hope and lifetime learning tax credits, a deduction for interest one education loans, education IRAs, Roth IRAs, and penalty-free withdrawals from regular IRAs.

Hope Credits

The Hope tax credit can only be claimed for tuition and fees relating to the first two years of post-secondary education. It's worth a maximum $1,500 in tax savings per student, per year. The student must be enrolled in an accredited school at least half-time during the year.

Lifetime learning credit

The lifetime learning credit can be claimed for tuition and fees relating to any year of post-secondary education and for job-related courses as well. Expenses must have been paid after June 30, 1998. The credit is worth a maximum $1,000 of tax savings per family (rather than per student), per year.

Education IRAs

Nondeductible annual contributions of up to $50 can be made into an education IRA for any child under 18. Funds can accumulate and be paid out tax-free for college expenses, including books, room, and board.

Funds in an education IRA must either be paid out before age 30 or rolled into an education account for another child, or the IRA will be subject to tax and penalties.

Interest deduction

Interest on qualified education loans can now be deducted whether or not you itemize deductions on your tax return. The maximum deduction allowed will be phased in over four years, with a $1,000 maximum deduction for 1998, increasing to $2,500 by 2001.

Roth IRAs

The new Roth IRA, which allows $2,000 non-deductible annual contributions, can provide a way to save for education contributions, can provide a way to save for education, too. Distributions from a Roth IRA are completely tax-free after five years if the money is withdrawn after age 59 ?, on account of death or disability, or to be used for qualifying first-time home buyer expenses. Distributions taken from a Roth to pay education expenses are not a qualifying tax-free withdrawal, but they may be taken without paying a 10% early withdrawal penalty.

Withdrawals from regular IRAs

Money can also be taken from regular IRAs for higher education expenses without paying the 10% early withdrawal penalty. These withdrawals will, however, be subject to income tax.

Income Limits

Income restrictions exist for most of these new education provisions. For example, the Hope and lifetime learning credits start disappearing at income levels of $40,000 for singles and $8,000 for couples. See the chart below for other phase-out levels.

Previous tax breaks

Don't forget the older tax breaks for education. Examples: nontaxable interest on certain Series EE savings bonds, nontaxable employer-paid tuition, and tax-free scholarships.

The earlier you start planning for your family's education expenses, the more effective your efforts will be.

To find the best tax breaks for your family's higher education expenses, you'll have to consider not only your current income level, but also your estimated income in the years when the funds will be needed. Selecting from what's available is made more complicated by the fact that these tax breaks are often mutually exclusive.

Here are some helpful suggestions -

If your income is too high to let you establish education IRAs for your children, make a $500 gift to each child and have the child establish the IRA with himself/herself as the beneficiary.

Because the annual contribution limit is so low, the longer an education IRA can grow, the more useful it will be as a source of funds for college. Start as early in your child's life as you can. You may also find it beneficial to roll an older child's IRA into the IRA of a younger child to get a longer compounding period.

Shop around for an education IRA with reasonable fees. If fees are too high, they may eat up the account's annual earnings.

In your planning, remember that the education credits apply to expenses paid not only for your dependent child, but also to qualifying education expenses paid for you and your spouse.

	Hope tax credit	Lifetime learning credit	Education IRA	Early IRA withdrawal (Roth or regular IRA)	Interest deduction
Amount	Up to $1,500 credits per student for first to years of psot-secondary education.	Up to $1,000 credit per family for unlimited number of years. Maximum credit increases to $2,000 in 2003	Up to $500 annual non-deductible contribution for each child under 18.	Up to the amount of qualified education expenses.	up to $1,000 "above-the-line" deduction for 1998, increasing to $2,500 by 2001.
Income Limits	Credit Phases out at $40,000 - $50,000 for singes; $80,000 - $100,000 for couples.		Phases out at $85,000 - $110,000 for singles; $150,000 - $160,000 for couples.	None. Amounts may be subject to income tax, but the 10% early penalty tax doesn't apply.	Deduction phases out at $40,000 - $55,000 for singles. $60,000 - $75000 for couples.
Can be used for	First two years of post-secondary tuition and fees.	Unlimited years of post-secondary tuition and fees, plus qualifying job-related courses.	Post-secondary tuition, fees, books, supplies, plus room and board.	Post-secondary tuition, fees, books, supplies, plus room and board.	First five years of repayment.

We can help guide you through the maze of education tax breaks and help ensure that you receive the maximum possible benefit. Call us.

The rules governing the tax breaks for education expenses contain numerous exceptions, limitations, and other details which cannot be easily or quickly summarized.

For more information and assistance in planning for best utilization of the available education tax breaks, contact our office. We're here to help.