The American Opportunity Credit, a temporary replacement for the federal Hope Credit, provides a tax credit of up to $2,500 per student to offset qualified higher education expenses.
Since every dollar of free money is one that will not have to come from more expensive sources, like loans, parents and students with higher education expenses must remember this all too often overlooked educational benefit.
Here are some key features of the American Opportunity Credit:
The credit is equal to 100 percent of the first $2,000 spent, and 25 percent of the next $2,000 spent on qualified higher education expenses. 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.
Tuition, related fees, books and other required course materials generally qualify.
The full credit is available for taxpayers whose modified adjusted gross income is $90,000 or less (for married couples filing a joint return, the limit is $180,000 or less). The credit is phased out for taxpayers with incomes above these levels.
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.
The American Opportunity Tax Credit is allowed for expenses related to the first four years of college; education expenses beyond the first four years of college may still qualify for the Lifetime Learning tax credit.
This credit applies for the 2009, 2010 and 2011 tax years. Parents and students may claim the credit on their 2010 tax returns, and may amend their 2009 returns if they were eligible but did not take advantage of the credit in 2009.
For details on the American Opportunity Tax Credit and the other education-related tax benefits, see IRS Publication 970.
The Lifetime Learning Credit
Up to $2,000 Lifetime Learning Credit may be claimed for qualified education expenses per tax return. The qualifying student can be anyone in the family who appears on your tax return. If you claim the American Opportunity credit for one or more students in your family, you can’t apply their expenses to a Lifetime Learning credit. However, you can still take a Lifetime Learning credit for family members who have exhausted or are not eligible for the American Opportunity Tax Credit. This may be especially helpful for graduate students.
The maximum credit that can be received is limited to the tax you owe. You are eligible for the credit if your modified adjusted gross income is $60,000 or less (for married couples filing a joint return, $120,000 or less).
Student Loan Interest Deduction
The Student Loan Interest Deduction can reduce your taxable income by as much as $2,500. It is taken as an adjustment to income, which means you can take this deduction, even if you do not itemize deductions on the Schedule A form of Form 1040. You can deduct the interest paid on a student loan taken for yourself, your spouse or a family member. The amount of the deduction is dependent upon the amount of interest paid and your income. You are eligible for the deduction if your modified adjusted gross income is $75,000 or less ($150,000 or less if filing a joint return).
The 1098-T Statement
The information you will need to take the American Opportunity or Lifetime Learning tax credits will be included on a 1098-T statement you should receive from your college either by mail or electronically.
New York State Offers College Tax Relief, Too
New York State offers up to $400 tax credit or up to a $10,000 deduction for each eligible student, depending on which is better for you on your 2010 State taxes.
You must have been a full-year New York State resident, not claimed as a dependent on someone else’s return. You, your spouse or other family member must have been an undergraduate student and paid qualified tuition expenses.
To see if you qualify and determine whether the credit or deduction is best for you, visit the New York State Taxation and Finance Department website and review the instructions for Form IT-272.
Courtesy of the New York State Higher Education Services Corporation
