SECTION 3. EDUCATION IRAs

Beginning January 1, 1998, taxpayers may deposit up to $500 per year into an Education IRA for a child under age 18. Parents, grandparents, other family members, friends, and a child him/herself may contribute to the child’s Education IRA, provided that the total contributions for the child during the taxable year do not exceed the $500 limit. Amounts deposited in the account grow tax-free until distrib

Q8: How does a parent claim a Lifetime

Learning Credit for the qualified tuition and related expenses of a dependent child? A8: The parent may claim the credit on

his/her Federal income tax return even if the child files his/her own tax return. When a child is claimed as a dependent on the parent’s return, any qualified tuition and related expenses paid by the child during the year are treated as if the parent had paid them and, therefore, are included in calculating the parent’s Lifetime Learning Credit. A child may not claim a Lifetime Learning Credit on his/her tax return for any year if the child’s parent claims the child as a dependent in that same year. Also, a married taxpayer who does not file a joint return is not eligible to claim the Lifetime Learning Credit. (See Sec. 1, Q&A11.) Q9: What is the maximum Lifetime

Learning Credit a taxpayer may claim? A9: The credit is equal to 20 percent of

the taxpayer’s out-of-pocket expenses for qualified tuition and related expenses of all eligible family members, up to a maximum of $5,000 in expenses annually through 2002. Thus, the maximum Lifetime Learning Credit a taxpayer may claim through 2002 is $1,000. After 2002, the credit is equal to 20 percent of the taxpayer’s out-of-pocket expenses up to a maximum of $10,000 in expenses. Thus, the maximum Lifetime Learning Credit a taxpayer may claim after 2002 is $2,000. The maximum credit does not change even if the taxpayer is claiming a credit for the expenses of more than one student in the family. Q10: What does the term “qualified tu ition and related expenses” mean for purposes of the Lifetime Learning Credit? A10: The term “qualified tuition and re lated expenses” for purposes of the Lifetime Learning Credit has the same meaning as it does for purposes of the Hope Scholarship Credit. (See Sec. 1, Q&A5.) Q11: If a student (who is not claimed as a

dependent on anyone’s Federal income tax return) pays qualified tu

ition and related expenses using a combination of a Pell Grant, a loan, a gift from a family member, and some personal savings, what expenses may be taken into account in calculating the Lifetime Learning Credit the student may claim? A11: The student may take into account

only “out-of-pocket” expenses in calculating the Lifetime Learning Credit. Qualified tuition and related expenses paid with the student’s earnings, a loan, a gift, an inheritance, or personal savings (including savings from a qualified state tuition program) are taken into account in calculating the credit amount. However, qualified tuition and related expenses paid with a Pell Grant or other tax-free scholarship, a tax-free distribution from an Education IRA, or tax-free employer-provided educational assistance are not taken into account in calculating the credit amount. Q12: How does a taxpayer claim the

Lifetime Learning Credit? A12: The first year that the credit will be

available is 1998. Taxpayers will not be able to claim the credit until they file their 1998 returns in 1999. Instructions accompanying the 1998 tax forms (for returns required to be filed in 1999) will explain how to calculate the credit and how to claim it on the tax return. Q13: Is there a limit on the number of

years in which a Lifetime Learning Credit may be claimed, as there is for the Hope Scholarship Credit? A13: No. Unlike the Hope Scholarship

Credit, there is no limit to the number of years in which a Lifetime Learning Credit may be claimed for each student. Thus, for example, an individual who enrolls in one college-level class every year would be able to claim the Lifetime Learning Credit for an unlimited number of years, provided the individual meets the income limits and is taking the classes at institutions that meet the eligibility requirements. (See Q&A3 in this section.) Q14: May a parent or student claim a

Lifetime Learning Credit for tuition paid in advance of when the academic period begins?

November 17, 1997 12 1997–46 I.R.B.

uted, and the child will not owe tax on any withdrawal from the account if the child’s qualified higher education expenses at an eligible educational institution for the year equal or exceed the amount of the withdrawal. If the child does not need the money for postsecondary education, the account balance can be rolled over to the Education IRA of certain family members who can use it for their higher education. Amounts withdrawn from an Education IRA that exceed the child’s qualified higher education expenses in a taxable year are generally subject to income tax and to an additional tax of 10 percent. The Hope Scholarship Credit and Lifetime Learning Credit may not be claimed for a student’s expenses in a taxable year in which the student takes a tax-free withdrawal from an Education IRA. Q1: What is an Education IRA? A1: An Education IRA is a trust or custo dial account that is created or organized in the United States exclusively for the purpose of paying the qualified higher education expenses of the designated beneficiary of the account. The account must be designated as an Education IRA when it is created in order to be treated as an Education IRA for tax purposes. Q2: For whom may an Education IRA be

established? A2: An Education IRA may be estab lished for the benefit of any child under age 18. Contributions to the Education IRA will not be accepted after the designated beneficiary reaches his/her 18th birthday. Q3: Where may an individual open an

Education IRA? A3: An individual may open an Educa tion IRA with any bank, or other entity that has been approved to serve as a nonbank trustee or custodian of an individual retirement account (IRA), and the bank or entity is offering Education IRAs. Other entities that wish to offer Education IRAs but are not approved to serve as IRA trustees or custodians may seek approval by following the same IRS procedures used for approval of other IRA nonbank trustees. See Notice 97–57, 1997–43 I.R.B. 19 (October 27, 1997). Q4: When may a taxpayer start contribut ing to an Education IRA for a child?

A4: A taxpayer may start making contri butions on January 1, 1998, or at any time thereafter. Q5: How much may be contributed to a

child’s Education IRA? A5: Up to $500 per year in aggregate

contributions may be made for the benefit of any child. The contributions may be placed in a single Education IRA or in multiple Education IRAs. Q6: What happens if more than $500 is

contributed to an Education IRA on behalf of a child in a calendar year? A6: Aggregate contributions for the ben efit of a particular child in excess of $500 for a calendar year are treated as excess contributions. If the excess contributions (and any earnings attributable to them) are not withdrawn from the child’s account (or accounts) before the tax return for the year is due, the excess contributions are subject to a 6 percent excise tax for each year the excess amount remains in the account. Q7: May contributions other than cash be

made to a child’s Education IRA? A7: No. Education IRAs are permitted

to accept contributions made in cash only. Q8: May contributors take a deduction

for contributions made to an Education IRA? A8: No. Q9: Are there any restrictions on who

can contribute to an Education IRA? A9: Any individual may contribute up to

$500 to a child’s Education IRA if the individual’s modified adjusted gross income for the taxable year is no more than $95,000 ($150,000 for married taxpayers filing jointly). (See Sec. 1, Q&A6 for a description of modified adjusted gross income.) The $500 maximum contribution per child is gradually reduced for individuals with modified adjusted gross income between $95,000 and $110,000 (between $150,000 and $160,000 for married taxpayers filing jointly). For example, an unmarried taxpayer with modified adjusted gross income of $96,500 in a taxable year could make a maximum contribution per child of $450 for that year. Taxpayers with modified adjusted gross income above $110,000

($160,000 for married taxpayers filing jointly) cannot make contributions to anyone’s Education IRA. Q10: May a child contribute to his/her

own Education IRA? A10: Yes. Q11: Does a taxpayer have to be related

to the designated beneficiary in order to contribute to the designated beneficiary’s Education IRA? A11: No. Q12: How many Education IRAs may a

child have? A12: There is no limit on the number of

Education IRAs that may be established designating a particular child as beneficiary. However, in any given taxable year the total aggregate contributions to all the accounts designating a particular child as beneficiary may not exceed $500. Q13: May a designated beneficiary take a

tax-free withdrawal from an Education IRA to pay qualified higher education expenses if the designated beneficiary is enrolled less than full-time at an eligible educational institution? A13: Yes. Whether the designated bene ficiary is enrolled full- time, halftime, or less than half-time, he/she may take a tax-free withdrawal to pay qualified higher education expenses. Q14: What happens when a designated

beneficiary withdraws assets from an Education IRA to pay for college? A14: Generally, the withdrawal is tax free to the designated beneficiary to the extent the amount of the withdrawal does not exceed the designated beneficiary’s qualified higher education expenses. Q15: What are “qualified higher educa tion expenses”? A15: “Qualified higher education ex penses” mean expenses for tuition, fees, books, supplies, and equipment required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Qualified higher education expenses also include amounts contributed to a qualified state tuition program. Qualified higher education expenses also include room

1997–46 I.R.B. 13 November 17, 1997

A20: Yes, provided: (1) the terms of the

particular trust or custodial account permit a change in designated beneficiaries (each trustee or custodian will control whether options like this one are available in the accounts they offer), and (2) the new designated beneficiary is a member of the previous designated beneficiary’s family. (See Q&A18 in this section). Q21: May a student or the student’s par ents claim the Hope Scholarship Credit or Lifetime Learning Credit for the student’s expenses in a taxable year in which the student receives money from an Education IRA on a tax-free basis? A21: No. If a student is receiving a tax free distribution from an Education IRA in a particular taxable year, none of that student’s expenses may be claimed as the basis for a Hope Scholarship Credit or Lifetime Learning Credit for that year. However, the student may waive the tax-free treatment of the Education IRA distribution and elect to pay any tax that would otherwise be owed on an Education IRA distribution so that the student or the student’s parents may claim a Hope Scholarship Credit or Lifetime Learning Credit for expenses paid in the same year the Education IRA distributions are received. Q22: May contributions be made to both

a qualified state tuition program and an Education IRA on behalf of the same designated beneficiary in the same taxable year? A22: No. Any amount contributed to an

Education IRA on behalf of a designated beneficiary during any taxable year in which an amount is also contributed to a qualified state tuition program on behalf of the same beneficiary will be treated as an excess contribution to the Education IRA. (See Q&A6 in this section for the treatment of excess contributions.)