Revamped tax credit relief for education costs
The Hope post-secondary education tuition tax credit has been re-named and now is available to more families for more years.
In addition, some savers for higher education may get a break on that high-ticket necessity: a computer.
Under the American Recovery and Reinvestment Act — the federal economic stimulus package passed earlier this year — the American Opportunity Tax Credit replaces the Hope credit for the 2009 and 2010 tax years, said Valorie Anderson, an enrolled agent at Anderson Tax Services in Wayland and president of the Michigan chapter of the National Association of Tax Professionals.
The American Opportunity credit expands the income levels required in order to claim it and extends the number of years it can be claimed from two to four.
“The key here is parents and students should not leave this money lying on the table,” Internal Revenue Service Media Relations Specialist Eric Smith says in a podcast on the IRS Web site.
The tax credit covers 100 percent of the first $2,000 of tuition, fees and course materials, then 25 percent of the next $2,000. That puts the maximum credit at $2,500, which is $700 more than the Hope credit maximum.
Even those who don’t have to pay income taxes, such as low-income students who are not dependents of their parents, can get up to $1,000 in a refund under the American Opportunity credit. The Hope credit did not apply to those who paid no income taxes.
Eligible costs include tuition, fees and course materials such as books, lab supplies and software for the first four years of post-secondary education.
Qualifying income levels were raised to $80,000 for individuals and $160,000 for married couples filing jointly. The credit is phased out at incomes between $80,000 and $90,000 for individuals and $160,000 to $180,000 for married couples filing jointly, and disappears above that level.
To reach the maximum benefit, eligible spending must be $4,000. The credit may be claimed for each student.
The tax credit is not financial aid, pointed out Ed Kerestly, director of financial aid at Grand Valley State University.
“The hope is this tax credit puts some additional dollars in the pocket of a family in their tax refund,” Kerestly said. “It’s up to the family to determine how they incorporate that into their plan to pay for college.”
For example, knowing that the tax credit would be available early in 2010, a family might choose to apply that savings toward bills due near the end of the winter semester, Kerestly said.
He noted the credit will be based on calendar year payments made to a college, not on the academic year. So the payments made may cover, for example, the second semester of the freshman year that began in January as well as the first semester of the sophomore year that began this month.
The credits are based on amounts reported in the annual IRS form 1009T, Kerestly said. Expenses that are covered by tax-free scholarships and grant would not be qualified, but those covered by a loan are qualified, IRS Media Specialist Dan Boone said.
Issued early in the year for tax filing purposes, the forms detail amounts paid to the higher education institution and any scholarships or grants. The form also may be available at any time on the student’s online account at the educational institution. It does not provide any details on loans, so an amount covered by a loan is still counted for tax credit purposes, he said.
You can’t use the credit for expenses that were covered by a distribution from a 529 college savings plan; a prepaid tuition program such as the Michigan Education Trust; scholarships and grants; tuition reimbursement from an employer; veteran’s benefits; a Coverdell Education Savings Account; or Pell grants.
In another change, computers and Internet access have been added to the list of expenses eligible to be paid by money from a 529 savings plan.
Also still available is the Lifetime Learning Credit, which provides a tax credit of 20 cents per dollar spent on higher education, up to $2,000. It can’t be used for the same expenses at the American Opportunity Tax Credit, but it can be used for graduate studies. You’d have to spend $10,000 on eligible items to gain the full Lifetime credit.
While a tax credit is subtracted from tax liability, the deduction reduces taxes by reducing adjusted gross income.
If the Lifetime or American Opportunity credits don’t apply, Americans are able to deduct higher education costs of up to $4,000, for incomes of $65,000 or less for a single filer and $130,000 for married couples.
For more information, IRS Media Specialist Dan Boone points to a FAQs page on the Web at www.irs.gov.