The Taxpayer Relief Act of 1997 made extensive changes in the area of education incentives. As their appears to still be confusion as to what is available, we have discussed the options below.

Old and/or updated incentives Interest earned on Series EE bonds issued after 1989 can be excluded from income provided that the proceeds are used to pay for higher education.

Employees can exclude up to $5,250 annually for education expenses paid by their employer under a tax qualified education plan. This can now be used for graduate courses.

Degree candidates can exclude from income scholarships used for tuition, fees, books. etc, for secondary and graduate school education.

The forgiveness of student loans can be excluded from income if the forgiveness is contingent on the student working for a number of years in a stipulated profession. As an example, some states will provide a prospective teacher with four years of free education (via loans), in return for the student agreeing to teach in an inner-city school for five years (where the loans are forgiven over the five-year period).

Education investment account The Act created an Education IRA, that primarily benefits low and middle income taxpayers, It allows joint filers to make a maximum annual contribution of $500 to an educational IRA and to take a tax deduction for this amount. The earnings within the account accumulate free of tax, and are non-taxable when distributed, provided that the money is used to pay for post secondary education expenses. This tax deduction is only available to joint filers whose adjusted gross income is less than $150,000 (before the earned income and housing exclusions).

A separate account can be set up for each child in the family and amounts not used by one child, can be used by another. This tax break will result in an individual being allowed to accumulate a maximum of approximately $9,000 (plus accumulated interest) per child for college expenses.

Hope scholarship credit A new tax credit provides a tax credit of $1,500 (100 percent of the first $1,000 of tuition and 50 percent of the next $1,000 of tuition) per student for the first two years of post secondary education. This credit is available to joint filers with adjusted gross income of less than $80,000.

Lifetime learning credit Thereafter, a lifetime learning tax credit of 20 percent of the first $5,000 of tuition expenses can be claimed per family with the same adjusted gross income limitations.

Qualified state tuition programmes As the above incentives are primarily available for low and middle income families, changes to the qualified state tuition programmes have brought both changes to the programmes and are now of greater interest to higher income taxpayers.

Qualified state tuition programmes have now been established by 41 states which maintain programmes where a person may purchase, in cash, tuition credits or certificates that entitle the named beneficiary to a college education in any of the state colleges or universities participating in the state plan. The expenses covered include tuition, room and board.

While the programmes vary widely by state, they basically fall within two categories. The first is a plan with a guaranteed return where all tuition, room and board is guaranteed. The contributions vary by state. The second plan is now akin to putting your money into a mutual fund sponsored by the state.

While there is no guaranteed return, the current stock market has been outperforming the guaranteed return which is more linked to the bond market.

Most states will allow you to put up to $100,000 per child into the plan.

While you do not obtain a tax deduction or credit for money contributed to the plan, the amounts in the plan accumulate free of tax. When the funds are distributed and used to pay for qualified education expenses, the distribution is deemed to be income to the child and taxed at their rate which will probably be 15 percent.

Hence, for a parent in the 31 percent or 36 percent tax bracket, the double benefit of allowing the income to accumulate free of current tax and the ultimate taxation at the child's tax rate can be very attractive.

If there is a need to withdraw the funds early, or if the child chooses not to attend college in that state, parents usually can get the principal back along with a modest return, with the gains being taxed at the parents tax rate, plus a potential penalty tax.

*** The tax advice given in this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

*** James Paul Sabo, CPA, is the president of Expatriate Tax Services LLC, PO Box 617, Bernardsville, New Jersey, and is associated with GulfStream Financial Ltd. in Bermuda.