Tax Edge

By Robert Steere, Toolkit Staff Writer

Many parents and college students will be able to offset up to $2,500 of the cost of college over the next two years under the new American Opportunity Tax Credit enacted as part of the American Recovery and Reinvestment Act of 2009. If you think that you may qualify for this tax credit, the IRS wants you to be aware of the following facts:

This credit expands and renames the pre-existing Hope Credit. The credit can be claimed for qualified tuition and related expenses that you pay for your own or your dependent's college education in 2009 and 2010. Qualified tuition and related expenses include tuition, related fees, books and other required course materials. Under the pre-existing Hope Credit, books and other required course materials were not covered.

The maximum American Opportunity Tax Credit is $2,500 per eligible student--a $700 increase over the pre-existing Hope Credit. The credit is equal to 100 percent of the first $2,000 paid for qualified tuition and related expenses plus 25 percent of the next $2,000 paid for such expenses each year. Therefore, the full $2,500 credit is available to a taxpayer who pays at least $4,000 in qualifying expenses for an eligible student. Parents who pay for qualifying expenses for more than one dependent child can claim a separate credit up to $2,500 for each child who is an eligible student. Parents can claim the credit only with respect to a child claimed as a dependent on their return, and a student can claim the credit only if he or she is not eligible to be claimed as a dependent by his or her parents on their tax return.

The full American Opportunity Tax Credit is generally available to an individual taxpayer who makes less than $80,000 or to a married couple filing a joint return that makes less than $160,000. The credit is gradually reduced for taxpayers with incomes above these levels, and is not available to an individual making more than $90,000 or a married couple making more than $180,000.

Forty percent of the American Opportunity Tax Credit is refundable. This means that even if you don't owe any federal income tax for the year, you can still get up to $1,000 of the credit for each eligible student as a tax refund when you report it on your tax return for the year.

Unlike the Hope Credit, which could be claimed only for expenses related to the first two years of college, the American Opportunity Tax Credit can be claimed for qualified expenses paid for any of the first four years of post-secondary education.

If you claim the American Opportunity Tax Credit with respect to an eligible student for a tax year, you cannot claim the tuition and fees tax deduction or the Lifetime Learning Credit for the same student in the same year. You must choose only one of these tax breaks--whichever one is most beneficial for you. If you are taking a tax break for more than one eligible student, you may use the American Opportunity Tax Credit for one and either the tuition and fees tax deduction or the Lifetime Learning Credit for the others.

Complete details on the American Opportunity Tax Credit and other key tax provisions relating to education, see Publication 970 at the official IRS Web site. Don't miss this opportunity to reduce your taxes to cover some of the costs of college education.

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Posted October 3, 2009.