First hope, now opportunity. As in the American Opportunity Tax Credit.
This is Uncle Sam's new program for providing tax breaks for parents and students on tuition and other college education expenses. If you're the parent of an undergraduate college student and haven't filed your tax return yet, this is a potentially lucrative benefit to pay attention to.
The tax credit, which was part of the economic stimulus package signed into law in February 2009, essentially replaces the Hope tax credit. The program is in effect for only the 2009 and 2010 tax years, although there are proposals to make these credits permanent.
What are the breaks? Who qualifies?
The American Opportunity Tax Credit improves upon the Hope in the following ways:
The tax law change provides a credit of up to $2,500 for higher education expenses at colleges, universities and trade schools. That compares with a maximum of $1,800 for the Hope.
But here's the biggie - the credit reimburses taxpayers for 100 percent of the first $2,000 in educational costs. That's followed by 25 percent of the next $2,000. Granted, $2,500 is still a drop in the deep tuition bucket for many families, but every dollar returned to you helps.
MORE PEOPLE QUALIFY
Income limits are higher. Single filers with adjusted gross income of up to $80,000 are eligible for the full credit, with partial credit available up to $90,000.
Married taxpayers filing jointly with adjusted gross income of up to $160,000 can receive the full credit, with partial credit phasing out above $180,000.
Also, students who are not claimed as a dependent on their parent's tax return can qualify. That means that many adults who are pursuing job training can recover much of their educational expenses, according to an analysis of the new credit by Vanguard Funds.
MORE EXPENSES ELIGIBLE
Textbooks and other course materials have been added as qualifying expenses along with tuition and fees.
MORE YEARS COVERED
The credit covers expenses in the first four years of higher education. The Hope credit applied only to the freshman and sophomores.
In addition to those changes, families or individual students who owe little in federal taxes can receive up to 40 percent of the credit in the form of a refund. Even low-income students who have no tax liability can obtain a partial benefit.
If you have multiple children in college, the maximum American Opportunity credit of $2,500 is available for each student.
Of course, tax issues always come with caveats.
Consider families with incomes that exceed the eligibility requirements. Higher-income parents can waive claiming their student as a dependent. This could allow their student to claim the education credit on his or her own return, said Julie Welch, a tax expert with the Kansas City firm Meara Welch Browne P.C.
However, compare whether the benefit of claiming the credit on your student's own return exceeds all the tax rewards of keeping your college dependent on your return. Run the numbers.
Steve Rosen is assistant business editor at The Kansas City Star. Readers may write to him at firstname.lastname@example.org.
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