| Q1. Are there any changes to the tax credits for college
expenses? A. The American opportunity tax credit, which
expanded and renamed the already-existing Hope credit, can be claimed
for tuition and certain fees you pay for higher education in 2009 and
2010.
Q2. The Hope credit originally applied only to the first two
years of college. Has that changed?
A. Yes. The American opportunity tax credit can be claimed for
expenses for the first four years of post-secondary education.
Q3. How much is the American opportunity tax credit worth?
A. It is a tax credit of up to $2,500 of the cost of qualified
tuition and related expenses paid during the taxable year. That is a
$700 increase from the previous Hope credit.
Q4. What education expenses qualify for the American
opportunity tax credit?
A. The term "qualified tuition and related expenses" has been
expanded to include expenditures for "course materials." For this
purpose, the term "course materials" means books, supplies and equipment
needed for a course of study whether or not the materials are purchased
from the educational institution as a condition of enrollment or
attendance.
Q5. Does an expenditure for a computer qualify for the
American opprtunity tax credit?
A. Whether an expenditure for a computer qualifies for the credit
depends on the facts. An expenditure for a computer would qualify for
the credit if the computer is needed for enrollment or attendance at the
educational institution.
Q6. How is the American opportunity tax credit calculated?
A. Taxpayers will receive a tax credit based on 100 percent of the
first $2,000 of tuition, fees and course materials paid during the
taxable year, plus 25 percent of the next $2,000 of tuition, fees and
course materials paid during the taxable year.
Q7. How will the American opportunity tax credit affect my
income tax return?
A. You will be able to reduce your tax liability one dollar for each
dollar of credit for which you're eligible. If the amount of the
American opportunity tax credit for which you're eligible is more than
your tax liability, the amount of the credit that is more than your tax
liability is refundable to you, up to a maximum refund of 40 percent of
the amount of the credit for which you’re eligible.
Q8. Who is eligible for the American opportunity tax credit?
A. A taxpayer who pays qualified tuition and related expenses and
whose federal income tax return has a modified adjusted gross income of
$80,000 or less ($160,000 or less for joint filers) is eligible for the
credit. The credit is reduced ratably if a taxpayer’s modified adjusted
gross income exceeds those amounts. A taxpayer whose modified adjusted
gross income is greater than $90,000 ($180,000 for joint filers) cannot
benefit from this credit.
Q9. What is "modified adjusted gross income" for the purposes
of the American opportunity tax credit?
A. It is the taxpayer's adjusted gross income increased by foreign
income that was excluded, and by income excluded from sources in Puerto
Rico or certain U.S. possessions.
Q10. How is the credit claimed?
A. The credit is claimed using Form 8863, attached to Form 1040 or
1040A.
Q11. I'm just beginning college this year. Can I claim the
American opportunity tax credit for all four years I pay tuition?
A. The American opportunity tax credit is for amounts paid in 2009
and 2010 only. You may be eligible for the lifetime learning credit for
any tuition and fees required for enrollment you pay after 2010.
Q12. Can I also claim the tuition and fees tax deduction in
addition to claiming the American opportunity tax credit?
A. No. You cannot claim the tuition and fees tax deduction in the
same year that you claim the American opportunity tax credit or the
lifetime learning credit. You must choose among them. You also cannot
claim the tuition and fees tax deduction if anyone else claims the
American opportunity tax credit or the lifetime learning credit for you
in the same year. A tax deduction of up to $4,000 can be claimed for
qualified tuition and fees paid. Though the credit will usually result
in greater tax savings, taxpayers should calculate the effect of both on
the tax return to see which is most beneficial — the tax credit or the
deduction. Often tax software will automatically compare the two for
you.
Q13. Is there a new benefit that applies to college savings
plans (commonly known as 529 Plans)?
A. Yes. A qualified, nontaxable distribution from a Section 529 plan
during 2009 or 2010 now includes the cost of the purchase of any
computer technology or equipment or Internet access and related
services, if such technology, equipment or services are to be used by
the beneficiary of the plan and the beneficiary's family during any of
the years the beneficiary is enrolled at an eligible educational
institution.
Related Items:
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IR-2009-78, Special IRS Web Section Highlights Back-to-School
Tax Breaks; Popular 529 Plans Expanded, New $2,500 College Credit
Available
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Fact Sheet 2009-12, How 529 Plans Help Families Save for College
and How the American Recovery and Reinvestment Act of 2009 Expanded
529 Plan Features
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