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Julie M. Sturgeon: College tuition and tax credits

It's Your Money

Posted: April 8, 2009 11:39 p.m.
Updated: April 9, 2009 4:30 a.m.
In February, Congress enacted the American Opportunity Tax Credit, which includes a new $2,500 college tax credit for 2009, 2010 and possibly beyond. Your family may have not qualified for earlier college tax credits, but it just might for this one.

The new credit is an expansion of the old Hope college credit. The idea is that more families will qualify for it. Married couples filing jointly who have modified adjusted gross income of up to $160,000 ($80,000 for single parents) can claim the full credit for 2009 and 2010.

Above that income level, the credit gradually phases out, with those earning up to $180,000 ($90,000 for singles) eligible to claim a partial credit. By contrast, the old Hope credit was available in full for 2008 only to couples with incomes below $96,000 ($48,000 for singles). The expanded credit can even by claimed by taxpayers paying the alternative minimum tax (AMT).

The new credit is also partially refundable. That means a family which doesn’t earn enough to pay taxes could get $1,000 back. A family which would otherwise owe, for example, $2,000 in income tax, should qualify for the full $2,500 — it would have its $2,000 tax bill wiped out and get $500 back as part of the refundable credit.

The American Opportunity credit is only for undergraduates going more than half time and doesn’t replace the existing $2,000 Lifetime Learning tax credit. But it can be claimed for all four years of undergraduate study, whereas the old Hope credit was only good for two years.

The amount of the new credit equals 100 percent of the first $2,000 of qualified tuition and expenses paid and 25 percent of the next $2,000 of expenses. So a student must have incurred $4,000 in eligible expenses for a family to receive the $2,500.

Eligible expenses include qualifying tuition and related expenses. Related expenses include student activity fees and required books, paid to an eligible educational institution on behalf of a student (the taxpayer, spouse or dependent) who is studying at least half-time.

All accredited public, nonprofit and privately owned and profit-making postsecondary institutions qualify as eligible schools.

You can’t claim the American Opportunity or Lifetime Learning credits for any expenses that were covered by the tax-free portion of a distribution from a 529 state-college savings plan, a 529 state-prepaid plan, or a Coverdell Education Savings Account, otherwise known as ESAs.

The credit also can’t be claimed against expenses paid from tax-free scholarships and fellowships, Pell grants, employer-provided educational assistance, veterans’ educational assistance or any other tax-free payments received as educational assistance.

You can claim the credit in the same year as any of the above, just not for the same expenses. For example, if a child has $4,000 in qualified educational expenses attending a state university and gets $4,000 in Pell grant money, he has no remaining qualified educational expenses left to claim a tax credit against.

If he’s got $8,000 in expenses and a $4,000 Pell, he can qualify for the full $2,500 American Opportunity credit too. If his family has too little income to pay any income tax, it can still get a $1,000 refundable credit.

Above-the-line adjustment:
For 2009 you can deduct up to $4,000 of college tuition and fees paid for you, your spouse or any other person claimed as a dependent on your return. This deduction is taken even if you don’t itemize.  The $4,000 figure is the annual maximum, regardless of how many students may be in your family. There are other rules as well:

n You don’t get the full deduction if you are unmarried with modified adjusted gross income above $65,000, or if you are a joint-filer with modified AGI above $130,000. If your modified AGI is between $65,001 and $80,000 for singles or between $130,001 and $160,000 for joint filers, you are entitled to a reduced deduction of up to $2,000.

n Not eligible if you’re married and file separately from your spouse.

n Deduction is allowed only of the person who can be claimed as a dependent on your return. So your dependent college-age child can’t claim the deduction when your own AGI is too high to qualify or if they are claimed by anyone else such as your ex-spouse.

n No deduction can be claimed for expenses paid with earnings from a Section 529 plan or withdrawals from a Coverdell Education Savings Account. Also, you can’t claim the deduction in the same year you claim the  Hope Scholarship or Lifetime Learning tax credit for the same student.

Julie M. Sturgeon is a certified public accountant in Valencia, specializing in individual and business tax issues. “It’s Your Money” appears Thursdays and rotates between a handful of the valley’s financial professionals. Her column represents her own views and not necessarily those of The Signal.


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