Friday, May 1, 2009


Yesterday, as part of my continuing series on the American Recovery and Reinvestment Act of 2009 (ARRA 2009), I discussed the new “American Opportunity Tax Credit” (AOTC), which replaces the HOPE Education Tax Credit for tax years 2009 and 2010.

Today I would like to bring you, as a supplement to yesterday’s discussion, some reminders of the HOPE carryover rules that will continue to apply to the AOTC.

Continuing for 2009 and 2010, in the case of both the American Opportunity and Lifetime Learning education credits and the “above-the-line” deduction for tuition and fees the amount of qualified tuition, fees (and with ATOC required course materials) paid must first be reduced by 100% of all tax-free scholarships, fellowships and grants, employer-paid educational assistance, veteran’s education benefits, and any other nontaxable payments (other than gifts or inheritances) when determining the expenses eligible for the credit or deduction

In addition to tuition, fees and course materials in many cases the cost of attending college includes room and board, either on-campus or off-campus. Scholarships, grants, fellowships, and assistance payments are not allocated between qualified (tuition and fees and perhaps materials) and non-qualified (room and board) education expenses. To repeat, these payments are applied 100% first to qualified tuition, fee and material expenses.

Say your son’s total qualifying tuition and fees for the year is $10,000, and you pay $5,000 a year for room and board. If he receives a scholarship for $7,000 only $3,000 is eligible for a credit or deduction ($10,000 - $7,000 = $3,000). If you receive a scholarship of $12,000 then you are not eligible for any credit or deduction ($10,000 - $12,000 = $0.00).

In this situation qualified expenses paid from student loans do not affect the availability of the credit or deduction – regardless of whose name the loan is under. Monies from student loans, gifts from or payments made by relatives, and payments made from the student’s own funds are all considered to be payments made by the taxpayer(s) claiming the credit, which in most cases are the student’s parents.

FYI, expenses qualifying for tax-free distributions from a Section 529 “Qualified Tuition Program” include required books, supplies and equipment and “reasonable” room and board costs.
You also cannot “double-dip”. You cannot claim an education credit or tuition and fee deduction for qualifying expenses paid for by a tax-free distribution from a Coverdell Education Savings Account or a Section 529 plan. You cannot claim a Deduction for Tuition and Fees if an education credit is claimed for the same student.

Any questions?


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