Basic College Math

Adding College to Your Deductions:

College, no other word strikes more joy into high school seniors and more fear into their parents or their wallets. The cost of college these days continues to rise each year but fortunately good old Uncle Sam has come up with some ways to help out, namely the new American Opportunity Tax Credit. Here are some of its’ key points.

This credit, which expands and renames the existing Hope Credit, can be claimed for qualified tuition and related expense that you pay for higher education in 2009 and 2010. Qualified tuition and related expenses tuition, related fees, books and other required course material. Sorry that flat screen for your dorm room doesn’t apply.

The credit is equal to 100 percent of the first $2,000 spent and 25% percent of the next $2,000 per student each year. Therefore, the full $2,500 credit may be available to a tax payer who pays $4,000 or more in qualifying expenses for an eligible student.

The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return. The credit is gradually reduced, however, for taxpayers with incomes above these levels.

Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back.

The credit can be claimed for qualified expenses paid for any of the first four years of post secondary education.

You cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction, whichever is more beneficial to you.

So what does this all really mean? The two biggest things to remember are that A. 40% of the credit is now refundable, so now if you owe no tax you can still get money back and B. the qualified expenses has been extended to the first four years of college instead of the previous rule of two years.

If you have questions as to if the deduction or tax credit would be better for you, give us a call or consult your CPA.