Education Tax Credit Increases by $700 to $2,500
The new law which was signed on February 17, 2009 increases this tax credit to $2,500 and also renamed this credit as the The American Opportunity Tax Credit. This new credit modifies the Hope Credit for tax years 2009 and 2010, by making the Hope Credit available to more taxpayers, including many with higher incomes and those that owe no tax. Required course materials are now considered qualifying expenses and allows the credit to be claimed for 4 post-secondary education years instead for 2 years.
Limitations – Taxpayers will receive a tax credit based on 100% of the first $2,000 of tuition, fees and course materials paid during the taxable year, plus 25% of the next $2,000 of tuition, fees and course materials paid during the taxable year. 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 greater than under the existing Hope and Lifetime Learning Credits.
Changes for 2009 – The American Recovery and Reinvestment Act of 2009 increased the number of years that the credit can be claimed. Prior thereto, the Hope Credit applied to the first two years of college. The credit has been extended to the first four years of post-secondary education. This tax credit has been increased from $1,800 to $2,500 for the cost of qualified tuition and related expenses paid during the taxable year. The definition of “qualified tuition and related expenses” has been expanded to include expenditures for “course materials”, whereas “course materials” is defined as books, supplies and equipment required for a course of study whether or not the materials are purchased from the educational institution as a condition of attendance or enrollment. The American Recovery and Reinvestment Act of 2009 expands the list to include expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Unfortunately, software designed for games ,sports and hobbies do not qualify, unless it is substantially educational in nature.
Tax Refund Amount – Taxpayers will be able to reduce their tax liability dollar for dollar of credit,as defined. If the amount of the credit is greater than taxpayer’s tax liability, then such excess is refundable to the taxpayer, up to a refund of 40% of the amount of the credit for which taxpayers is eligible.
How do I Claim the Credit – To claim the credit you must complete Form 8863, and attach the form 8863 to your Form 1040 or Form 1040A. If you ordinarily filed a form 1040EZ, then you should consider filing a Form 1040 or 1040A to claim the credit.
Can I Take the Credit and Deduct the Expense ?- Taxpayers are not allowed to take both the the credit and the deduction. The credit will usually result in a larger tax savings, however each taxpayer should compute the effect of the credit and compare the deduction on their tax return to determine which is more beneficial. A tax deduction of up to $4,000 may be claimed for qualified tuition and fees paid.
Quick Summary – The Hope Scholarship Credit has been extended and improved. It is now called The American Recovery and Reinvestment Act of 2009. This education tax credit has a higher maximum credit amount which is partially refundable, and has greater income phase-outs and includes the first four years of post secondary education.
Tax laws are complex, change constantly and each situation is unique. This article is not intended to provide legal or accounting advice. The reader should perform his or her own due diligence and consult competent professionals in this area.
Are you interested in learning more about how we can help determine if you are eligible for the Education Tax Credit and other available income tax credits and about our competitively priced internet and paperless based approach to tax preparation at affordable prices . Sandor(Sandy) E. Lenner,C.P.A.-M.B.A. has provided business and accounting services for 35 years and works part-time at his wife’s CPA firm.
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