If you have been excluded from the education tax credits in the past, the new credits may now change that. The new American opportunity credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.
The American opportunity credit, in many cases, offers greater tax savings than existing education tax breaks. Here are some key features of the credit:
• Tuition, related fees, books and other required course materials generally qualify. In the past, books usually were not eligible for education-related credits and deductions.
• The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
• The full credit is available for taxpayers whose modified adjusted gross income is $80,000 or less (for married couples filing a joint return, the limit is $160,000 or less). The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.
• Forty percent of the American opportunity credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed at the parent’s rate, commonly referred to as the kiddie tax. See Publication 929, Tax Rules for Children and Dependents, for details.
Tax planning may be in order to see how this credit change effects your tax liability. As we have discussed in the past, we do not recomend overpaying your taxes this year in case federal or state governments decide they may repay with I.O.U.’s. With tax planning and coaching, we can help you adjust your withholdings to increase your net pay now instead of being at the mercy of the taxing authorities to grant you your own money back in the form of a “refund”.