CU: Tax-cut bill passed recently has benefits for employees and students and their families

By Jacquie Powers

There's good news for many members of the Cornell community in the new $1.35 trillion tax-cut bill approved by the Congress over the Memorial Day weekend and signed by President Bush June 7.

In fact, the higher education lobbyists and benefits administrators are pointing with satisfaction to the $27 billion in education-related provisions in the bill. Those include a nine-year extension of Section 127, allowing employer-provided educational assistance for both undergraduates and graduates; improvements to the student loan interest deduction; increased tax incentives for families to save for college, including equal tax treatment for private college pre-paid tuition plans; and a new deduction for tuition.

"Many of these items now signed into law have been long-standing tax lobbying issues for the university community," said Stephen Philip Johnson, assistant vice president for government affairs and head of Cornell's federal relations efforts. "We're very pleased."

The bill also contains provisions for those saving for retirement, according to Paul Bursic, Cornell's director of benefit services. Those provisions generally increase contribution rates directly and eliminate some restrictive factors in current calculations of contributions. Rollovers between retirement plans from different employers will be simpler, and IRAs have been revised.

Currently Section 127 allows employers to spend up to $5,250 each plan year on undergraduate educational pursuits, including degrees, without taxing the value of the benefit to the employee. Bursic explained that for several years in the 1980s, graduate coursework was included in this dollar limit and also accorded tax-free status. However, graduate work was eliminated from a subsequent extension.

"Thus, Cornell employees taking graduate coursework are taxed on the value of the benefit," Bursic said. "Amending section 127 to exclude from income the value of graduate study subsidies for employees is a great development in tax law. This really enhances the benefit of the Employee Degree Program and the Extramural Studies Program. Beginning in 2002, we will be able to offer the $5,250 in educational assistance to our employees for graduate as well as for undergraduate study and know that the employee will not have an adverse tax consequence.

"In addition, the various graduate programs around campus may see renewed interest from employees of area companies that will use the tax break to realize their educational goals," Bursic said.

Along with the extension and expansion of Section 127, the new tax bill includes the following benefits for higher education:

• Provides authorization for private colleges to offer pre-paid tuition plans with the same favorable tax provisions now available to public colleges.
• For Education Savings Accounts (ESAs), previously known as education IRAs, it increases the annual contribution limit to $2000, up from $500. It also allows plan users to qualify for the Hope and Lifetime Learning tax credits for expenses not paid with ESAs.
• Changes current law relating to student loan interest deductions. It eliminates the 60-month lifetime limit on claiming the deduction and eliminates the restriction that voluntary payments of interest are not deductible. It also increases the income thresholds for eligibility.
• Allows a new deduction for tuition to families at higher income levels than those currently eligible to claim the Hope and Lifetime Learning tax credits. Up to $3,000 may be deducted for individuals earning $65,000 (or $130,000 for couples) in 2002 and 2003, and up to $4,000 in 2004 and 2005 for individuals earning up to $80,000 ($160,000 for couples).

Bursic said that while details are still sketchy on the new retirement provisions, the news centers around greater flexibility in contributions and investment planning.

He explained that all employees will be able to put $11,000 into their Cornell-sponsored Tax Deferred Annuity with TIAA-CREF or Fidelity Investments in 2002. This contribution limit will increase by $1,000 each year until it hits $15,000. The old rules still in effect this year limited contributions in many other ways as well, he said. The new contribution limits will be uniform and much easier to understand.

In addition, Bursic said:

• Employees over age 50 in 2002 will be able to add an additional $1,000 into their TIAA-CREF or Fidelity Investments in 2002, for a total of $12,000. This is to help late starters get caught up on building their retirement nest egg. This bonus contribution opportunity also will increase by $1,000 each year until it hits $5,000.
• Employees in future years will be able to move their retirement plan balances between employers with greater ease.
• Contribution limits to Individual Retirement Accounts will be increased.
• The estate tax will be phased out.

Both TIAA and Fidelity will be releasing detailed information shortly to their investors, Bursic added.