In 2001, a $1.35 trillion federal tax-cut package was signed into law and approved by Congress. The bill provides some $30 billion in higher education benefits over the next decade. Many of the education provisions are designed to help students and parents save for college and repay student loans.

Experts say that the education tax breaks in the bill could encourage families to put more money into college-savings accounts that would shelter up to $250,000 from taxes.

The new higher education tax provisions:

• Eliminate the current 60-month limit on the amount of time student borrowers can deduct student-loan interest payments and increase the annual income limit for claiming the interest deduction from $55,000 to $65,000 for single taxpayers and $75,000 to $130,000 for married taxpayers filing jointly.
• Make permanent the tax deduction for employer-paid tuition assistance (Section 127) and expand it to cover graduate and professional courses.
• Eliminate taxes on interest earned under state prepaid-tuition programs and college-savings plans. Private institutions will be allowed to set up prepaid-tuition plans, defer taxes on interest earned in those plans starting in 2002, and make the plans tax-free beginning in 2004.
• Increase the annual limit on contributions to tax-free federal education savings accounts, also known as Educational IRAs, from $500 to $2,000.
• Provide a new deduction for taxpayers earning too much to qualify for the lifetime Learning or HOPE tax credits. The new credit would allow an above-the-line deduction for qualified higher education expenses. Taxpayers making less than $65,000 annually ($130,000 for married couples filing jointly) can deduct $3,000 per year in college tuition from their taxable income in 2002 and 2003, and $4,000 per year in 2004 and 2005. This provision expires in 2005 and will have to be renewed by lawmakers. Taxpayers will only be allowed to use one of these three tax breaks at a time.

Importantly, these tax breaks will all expire on December 31, 2010, unless Congress and the president pass legislation to extend them.

However, not all provisions of interest to higher education made it into the bill. For example, the bill does not allow tax-free withdrawals from IRAs for charitable contributions and does not include a proposal to allow non-itemizers to take deductions for charitable giving. The American Council on Education and the higher education community have stated they will continue to push for enactment of these provisions.

Provisions also Benefit Pension Savings Plans

The tax bill also includes important changes to pension benefits that allow people to save significantly more in retirement accounts.  It expands the maximum contribution to 401(k), 403(b) and 457 plans offered by employers'  to increase gradually from $10,500 to $15,000. The maximums were raised to $11,000 in 2002, $12,500 in 2003, $13,000 in 2004, $14,000 in 2005, and $15,000 in 2006 with adjustments for inflation in later years.

The bill also increases the maximum contribution to individual retirement accounts (IRAs) gradually from $2,000 to $5,000. The maximum was increased to $3,000 for 2002-2004, then to $4,000 for 2005-2007 and finally to $5,000 in 2008. Increases will be allowed for inflation in $500 increments.

Taxpayers age 50 and over are now permitted to  make additional contributions to both IRAs and plans like 401(k)s' -  $500 extra in 2002 and $1,000 extra in each subsequent year.

The Joint Tax Committee summary is available at: www.house.gov/jct/x-50-01.pdf