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Education Tax Credit Increases by $700 to $2,500

Education Tax Credit Increases by $700 to $2,500


Education Tax Credit Increases by $700 to $2,500

by Sandor Lenner

The new law temporarily increases the existing Hope Credit and renamed it The American Opportunity Tax Credit. This new tax credit modifies the existing Hope Credit for tax year's 2009 and 2010, by making the Hope Credit available to more taxpayers, including many with higher incomes and those that owe no tax. It also adds required course materials as a qualifying expense and allows the credit to be claimed for four post-secondary education years instead of two. The credit is also increased to $2,500

Limitations - You may be eligible to receive a tax credit equal to 100% of the first $2,000 of fees,tuition, and course materials paid during 2009, plus 25% of the following $2,000 of tuition, fees and course materials paid during 2009. The full credit is available to taxpayers whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes greater than those levels. These income limitations are greater than under the existing Hope and Lifetime Learning Credits.

Changes for 2009 - The American Recovery and Reinvestment Act of 2009 increased the number of years that the credit can be claimed. Prior thereto, the Hope Credit applied to the first two years of college. The credit has been extended to the first four years of post-secondary education. This tax credit has been increased from $1,800 to $2,500 for the cost of qualified tuition and related expenses paid during the taxable year. The definition of "qualified tuition and related expenses" has been expanded to include expenditures for "course materials", whereas "course materials" is defined as books, supplies and equipment required for a course of study whether or not the materials are purchased from the educational institution as a condition of attendance or enrollment. The American Recovery and Reinvestment Act of 2009 expands the list to include expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Unfortunately, software designed for games ,sports and hobbies do not qualify, unless it is substantially educational in nature.

Tax Refund Amount - Taxpayers will be able to reduce their tax liability dollar for dollar of credit,as defined. If the amount of the credit is greater than taxpayer's tax liability, then such excess is refundable to the taxpayer, up to a refund of 40% of the amount of the credit for which taxpayers is eligible.

How do We Benefit from the Credit? - To claim the credit you are required to complete Form 8863, and attach it to either Form 1040 or 1040A. If you customarily filed form 1040EZ, then for this year, you must consider file Form 1040 or 1040A to benefit from the credit.

Can I Deduct the Qualified Tuition and Fees Paid and also Take the Credit - Taxpayers cannot take both the deduction and the credit. The credit will usually result in greater tax savings, however each taxpayer should calculate the effect of the credit as compared to the deduction on their tax return and evaluate which is more beneficial. A tax deduction of up to $4,000 can be claimed for qualified tuition and fees paid.

Conclusion - The American Recovery and Reinvestment Act of 2009 improves the Hope Scholarship Credit. The education tax credit has a higher maximum credit amount, is refundable in part, and has greater income phase-outs and covers the first four years of post secondary education

This article is not intended to be legal or accounting advice. Tax laws are complex, change constantly and each situation is unique. The reader is advised to do his or her own due diligence and consult competent professionals in these areas.

About the Author:
Learn more about how we can help determine if you are eligible for the Education Tax Credit and other available income tax credits and about our competitively priced internet and paperless based approach to tax preparation at affordable prices . Sandor(Sandy) E. Lenner,C.P.A.-M.B.A. has been providing small business and accounting services for 35 years and works part-time at his wife's CPA firm.

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