Thursday, April 30, 2009


The parents of college students are big winners under ARRA 2009.

Both the amount and the availability of the Hope Education Tax Credit are expanded for tax years 2009 and 2010 and the credit, originally named for the town of Hope in Arkansas (and not the “hope” that you kid will graduate from college), is renamed the “American Opportunity Tax Credit”.

The maximum credit is increased from $1,800 to $2,500. This is calculated as 100% of the first $2,000 of qualified expenses and 25% of the next $2,000. In order to get the maximum credit you must have at least $4,000 in qualified expenses.

Remember that a credit is a dollar-for-dollar reduction of tax. So a $2,500 tax credit will reduce a $3,000 tax liability to $500. Basically a $2,500 credit could mean $2,500 in your pocket.

The credit is available for the first four (4) years of post-secondary education in a degree or certificate program. Previously the HOPE was only available for the first (2) years of qualified education (Freshman and Sophomore at beginning of year) and could only be claimed in 2 tax years. Education after the first two years would then qualify for the Lifetime Learning Credit, which was 20% of qualified expenses up to a maximum of $2,000.

In addition to tuition and fees the credit is expanded to include required “course materials”, such as books, as qualified expenses.

The credit is phased-out for single taxpayers with “modified” AGI between $80,000 and $90,000 and joint filers with MAGI of $160,000 to $180,000. Here “modified” AGI begins with your regular AGI (i.e. Line 37 on the 2008 Form 1040) and adds back any exclusion or deduction for foreign income, foreign housing costs, income for residents of American Samoa and income from Puerto Rico.

Previously single taxpayers with MAGI above $58,000 and joint filers with MAGI above $116,000 were not eligible for any education tax credit and those with incomes above $80,000 or $160,000 were not eligible for any “above-the-line” deduction for tuition and fees.

So many of my clients who were denied any tax benefits for their kids’ college costs will be able to realize some tax savings in 2009 and 2010. This is good.

As with the HOPE credit, the $2,500 maximum is per student and not per return. So if you have two kids in college at the same time you can get up to $5,000 from “Sam”. The Lifetime Learning Credit maximum of $2,000, which would apply to graduate school, is per return, regardless of the number of students. If you had one dependent child eligible for the maximum AOTC and one dependent child in graduate school eligible for the maximum LLC you could claim a total of $4,500 in education credits on your tax return.

Generally a tax credit is only allowed up to the amount of tax liability. If your tax liability is $500 the credit is limited to $500. However up to 40% of the allowable American Opportunity Tax Credit is “refundable”. So if you have a “0” tax liability you could get up to $1,000 in your pocket as a “gift” from Uncle Sam. As with the Earned Income Credit you could “make a profit” by filing a tax return. If the student is subject to the “kiddie tax” this will affect the refundable portion of the excess credit.

You know how I feel about “refundable” credits.

When originally proposed there was talk of requiring students to engage in some kind of “community service” to be eligible for the AOTC. However the final bill merely instructs the Treasury Department to “study” the “feasibility” of requiring students to perform community service. It also directs Treasury Department studies on -
· Coordination with non-tax student financial assistance;
· Coordinating the credit allowed under the Federal Pell Grant program to maximize their effectiveness at promoting college affordability; and
· Examining ways to expedite the delivery of the tax credit.
The credit is for tuition, fees and course materials actually paid in calendar years 2009 and 2010. Qualified expenses related to a college semester beginning in calendar year 2009 that were paid in calendar year 2008 will be eligible for the HOPE or Lifetime Learning Credit on the 2008 Form 1040 (or 1040A) under the old tax rules.

As an added benefit for college students, for tax years 2009 and 2010 computer equipment and computer “technology”, including internet access costs, will be considered “qualified education expenses” under Section 529 college savings plans. Students will be able to use tax-free 529 monies to purchase computers and pay for internet access if they are enrolled in an eligible educational institution in 2009 and 2010.


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