New education tax breaks help pay college expenses
February 05, 2010
Rick Taphorn, director of financial aid, issued the following statement today to help families understand recent changes to the tax law:
Under the American Recovery and Reinvestment Act (ARRA), more parents and students will qualify over the next two years for a tax credit to pay for college expenses.
The tax credit, known as the American Opportunity Credit, modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.
The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and Lifetime Learning Credits.
Individuals cannot claim the Tuition and Fees Deduction in the same year that they claim the American Opportunity Credit or the Lifetime Learning Credit but must choose among them. Also, individuals cannot claim the Tuition and Fees Deduction if anyone else claims the American Opportunity Credit or the Lifetime Learning Credit for them in the same year. A tax deduction of up to $4,000 can be claimed for qualified tuition and fees paid. Though the credit will usually result in greater tax savings, taxpayers should calculate the effect of both on the tax return to see which is more beneficial—the tax credit or the deduction. Often tax software will automatically compare the two.
There is also a new benefit that applies to college savings plans (commonly known as 529 Plans). A qualified, nontaxable distribution from a Section 529 plan during 2009 or 2010 now includes the cost of the purchase of any computer technology or equipment or Internet access and related services if such technology, equipment or services are to be used by the beneficiary of the plan and the beneficiary’s family during any of the years the beneficiary is enrolled at an eligible educational institution.
The following resources provide further details about the American Opportunity Credit:
- American Opportunity Credit: Questions and Answers
EdFund’s Guide to Federal Tax Benefits for Higher Education