Tax credits improving for college students
While filing your taxes is the last thing you want to think of as the remaining free days of summer tick away, now is a good time to remind your college student to start saving book receipts and keep track of other college expenses before they start spending.
As part of the American Recovery and Reinvestment Act, more parents and students will qualify for the tax credit called the American Opportunity Credit for tax years 2009 and 2010, and their tax credits will increase from $1,800 under the Hope Credit, to $2,500 under the new plan.
"It is a very valuable benefit. It is really about putting more money in your pocket," said Bob Meighan, vice president of tax software giant TurboTax.
While the American Opportunity Credit is an extension and expansion of the Hope Credit, some taxpayers may need tax software to determine if other deductions or credits, such as the Lifelong Learning Credit, are better for them and "give the biggest bang for the buck," Meighan said.
Basically, anyone paying $4,000 or more a year for college qualifies for the maximum American Opportunity annual benefit of $2,500 per student.
"This presumably opens the door for kids who wouldn't be able to afford it," he said.
The new credit adds books and required course materials to the list of qualifying expenses, as well as tuition and fees, and allows the credit to be claimed for four post-secondary education years instead of two.
The full credit is for individuals with modified adjusted gross incomes of $80,000 or less, or $160,000 or less more married couples filing a joint return, according to the IRS. Partial credit is given to single filers making $80,000 to $90,000, and married couples making $160,000 to $180,000.
The tax break is also partially refundable, allowing lower income families with little or no tax liability to claim some of the credit.
Meighan points out that it's important to know the different between credits and deductions. The full amount of a tax credit, such as $2,500 for the American Opportunity Credit, can be deducted from the tax you'd pay. Deductions are taken out at your tax rate, typically 25% more for many people.
For example, $5,000 in college expenses being used as a tax deduction at a 25% tax rate would equal a $1,250 deduction.
For keeping track of tuition and fees paid at college, your student's college should send out a 1098T form listing such fees, Meighan said. Books won't be on there, so students should keep receipts. The tax credit is for the first $2,000 of qualifying expenses and 25% of the next $3,000. Interest paid on student loans are also deductible from taxes.
"None of us likes taxes," Meighan said. "None of us are experts on them. We tend to think there are breaks out there, but we're not sure."
If you're in college or have a child in college, the American Opportunity Credit is one tax credit you don't want to miss out on when filing taxes next year.
Aaron Crowe is a freelance journalist in the San Francisco Bay Area. Reach him at www.AaronCrowe.net