There’s a new $2,500 college tax credit for 2009, 2010 and possibly beyond. Even if your family hasn’t qualified for earlier college tax credits, this one might put thousands of extra dollars in your pocket.
Called the American Opportunity Tax Credit, the new benefit was authorized for two years by the stimulus bill enacted in February. But President Barack Obama has already proposed making it permanent and it has some powerful Democratic supporters.
Technically, the new credit is an expansion of the old Hope college credit. But many more families (including both low-income and upper middle-income) qualify. Married couples filing jointly who have modified adjusted gross income of up to $160,000 ($80,000 for single parents) can claim the full credit for 2009 and 2010. Above that income level, the credit gradually phases out, with those earning up to $180,000 ($90,000 for singles) eligible to claim a partial credit. By contrast, the old Hope credit was available in full for 2008 only to couples with incomes below $96,000 ($48,000 for singles). The expanded credit can even by claimed by taxpayers paying the alternative minimum tax (AMT).
The new credit is also partially refundable. What that means is a family which doesn’t earn enough to pay income taxes will get $1,000 back. A family which would otherwise owe, for example, $2,000 in income tax, should qualify for the full $2,500–it would have its $2,000 tax bill wiped out and get $500 back as part of the refundable credit.
The higher income limit is a boon for parents like Russ and Elizabeth Certo of Amherst, N.Y. who didn’t qualify for the Hope credit under the old income limits, but should qualify for the American Opportunity credit for their two college-age children in 2009 and 2010, a $10,000 tax savings over two years. Elizabeth is a physician’s assistant and Russ is a physical therapist turned entrepreneur
who owns the Medically Oriented Gym, a health club facility that offers specialized physical therapy services. They also have two younger children.
“I’m trying to expand my business, keep people employed and maybe hire additional employees. But with kids in college at today’s prices, it is a lot of work,” Russ says. “The new tax break comes at a good time.”
The American Opportunity credit is only for undergraduates going more than half time and doesn’t replace the existing $2,000 Lifetime Learning tax credit. (That one is still useful for graduate and part-time students.) But it can be claimed for all four years of undergraduate study, whereas the old Hope credit was only good for two years.
The amount of the new credit equals 100% of the first $2,000 of qualified tuition and expenses paid and 25% of the next $2,000 of expenses. So a student must have incurred $4,000 in eligible expenses for a family to receive the $2,500.
What are eligible expenses? That’s the amount of qualifying tuition and related expenses, including student activity fees and required books, paid to an eligible educational institution on behalf of a student (the taxpayer, spouse or dependent) who is studying at least half-time.
Virtually all accredited public, nonprofit and proprietary (meaning privately owned and profit-making) postsecondary institutions qualify as eligible schools. That’s simple. Figuring what your family “paid” is trickier.
That’s because you can’t claim the American Opportunity or Lifetime Learning credits for any expenses that were covered by the tax-free portion of a distribution from a 529 state college savings plan, a 529 state prepaid plan or a Coverdell Education Savings Account (ESA).
The credit also can’t be claimed against expenses paid from the following sources:
–Tax-free scholarships and fellowships;
–Pell grants from the federal government;
–Employer-provider educational assistance (tuition reimbursement);
–Veterans’ educational assistance;