09 Nov

Limited Time Tax Credit Can Help Pay for College

If your family has been feeling pinched by the reported 4.4 – 6.5% increase in college costs this year, you’ll be happy to know that the stimulus bill that provided extra money for so many families has also created a new temporary tax credit–and it might be just what the doctor ordered.

The American Opportunity Credit

Effective only for 2009 and 2010, families can potentially add another tax credit to the list of college-eligible tax reduction options. The American Opportunity Credit replaces the existing Hope Credit to provide up to $2,500 in tax credit to eligible families. Here is a brief summary of how it works:

  • Claim credit for 100% of the first $2,000 of qualified tuition, fees, and textbook costs, and an additional 25% of the second $2,000.
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  • 40% of the credit is refundable, so even families who owe absolutely no taxes can get up to $1,000 per student.
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  • Families with a modified adjusted gross income (MAGI) of $80,000 (single) or $160,000 (married) or less can access the full credit; families who make up to $180,000 can still receive a partial credit.

This temporary new education tax credit is good news for some families in higher tax brackets, because it provides eligibility for a broader range of families by increasing income limits above the previous maximum for either the Hope or Lifetime Learning education tax credits.

The American Opportunity Tax Credit can be claimed all four years of college, rather than only the first two as was the case with the Hope credit.

The Credit and Tax-Advantaged Savings Plans

Another benefit of the American Opportunity Tax Credit is that it expands the ways you can use tax-advantaged college savings plans. It allows families to withdraw funds from these plans for the purchase of computer equipment and internet access as a qualified education expense.

However, there are stipulations about how you can use the credit. Make sure you consult with your tax professional to determine if and how you can claim the credit for 2009 or 2010.Ā  For many parents with a student in college the next year or two, the American Opportunity Tax Credit will provide some much-appreciated income tax relief!

All the best,
Deborah Fox

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