DATE: Monday, September 1, 1997             TAG: 9708310090

SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 

SOURCE: Jane Bryant Quinn

DATELINE: NEW YORK                          LENGTH:   80 lines

IF YOU HAVE KIDS IN COLLEGE, TAX RELIEF COULD BE ON THE WAY

Whether the new education tax credits are as generous as they look is going to depend on what happens to student financial aid.

The credits take effect next year and are designed for families with middle incomes. They reduce your tax bill, dollar for dollar, by certain amounts that you pay for higher education.

But by lowering your taxes, these credits raise your after-tax income. Under current law, the higher your income, the less student aid you're going to get.

So think of your tax credit as spare cash for college and put it away, rather than spending it on other things.

Roughly half your tax credit could be offset by reduced student aid from other sources, says planner Bonnie Hepburn of Moneysense Financial Planning in Acton, Mass.

Jack Joyce, of the College Board's College Scholarship Service in New York, adds that any reduction in your eligibility for aid will affect federal, state and private-college programs. Upcoming federal regulations will specify just how these tax credits will work.

Student aid is generally based on your previous year's income. The new credits will raise your after-tax income in 1998, so student aid won't be affected until the 1999-2000 school year.

If applicants qualify for less aid, the colleges that dispense their own aid funds are going to be left with more money in the till. They may use it for other purposes or they may improve their current student-aid programs.

There are two new tax credits - the HOPE Scholarship and Lifetime Learning. They have several things in common:

They're for you, your spouse or your dependent child. Divorcing parents need to think about this. If you claim the child as a dependent but your spouse pays the tuition, neither of you will get the credit.

The credits offset the amount you pay for tuition and eligible fees (after deducting any grants) at qualified institutions of higher learning: trade schools, community colleges, four-year schools. You don't get credits for room and board.

Singles get a full tax credit if their adjusted gross income is under $40,000. Over that amount, the credit shrinks. At $50,000, it phases out entirely. Married couples get the full credit up to $80,000, phasing out at $100,000.

Starting in 2002, the size of the HOPE credit and the income limits will be adjusted for inflation.

You can't use both of these credits at once for the same child. But you can use different credits simultaneously for different children.

When you claim your child as a dependent, the credits go on your tax return, not the child's. Independent students get the credit on their own return, as long as they also pay the tuition.

The HOPE Scholarship Credit is available only for the first two years of school. For each student in the family, you get 100 percent of the first $1,000 you pay in tuition and fees and 50 percent of the second $1,000, for a total of $1,500.

HOPE students have to go to school at least half-time. You get the credit for expenses incurred after Jan. 1, 1998.

The new Lifetime Learning Credit is worth up to $1,000 a year (20 percent of the first $5,000 paid in tuition and fees) in 1998 through 2002. Starting in 2003, you get up to $2,000 (20 percent of the first $10,000 paid). Effective date: July 1, 1998.

You get the same Lifetime Learning credit on your tax return no matter how many students you have in school. This tax break is available even for incidental study, say, a single course to improve your job skills.

This credit is usable for any year of school, for an unlimited number of years.

But in any calendar year, a student can benefit from only one of the following three tax breaks: the HOPE credit, Lifetime Learning or the education IRA just authorized by Congress. You'll have to decide which one is best.

If you have more than one student in school, you can use different tax breaks for different children.

The new education IRA, effective next year, lets you save an annual $500 in after-tax dollars for every child under 18, accumulate the money deferred, then withdraw it tax-free for higher education.

Hepburn suggests that you start the IRA when your child is young. When college time comes, use all the money in a single calendar year of school, so you'll lose only one year of tax credits.

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