President Obama has made higher education a top priority in his administration, as part of his goal of helping the U.S. out of its recession. To provide students that receive the financial aid they need to pursue a college degree, he has implemented a tax break that helps make college more affordable.
Because the economic crisis has put many adults out of work, President Obama is encouraging people to go back to college to improve their existing skills or learn new marketable skills.
By focusing attention and federal aid on the academic and financial issues students face, the administration hopes to increase the number of people who pursue a college degree, as well as the number who complete this degree.
New Tax Break for College Students
Under the American Recovery and Reinvestment Act (ARRA), proposed by the administration to stimulate the economy, more students, and their parents, will qualify for the American Opportunity Tax Credit. This new tax credit, which is a tax deduction of up to $4,000 for qualified college tuition and related fees, modifies the existing Hope Credit for 2009 and 2010.
How the American Opportunity Tax Credit Differs from the Hope Credit
The American Opportunity Tax Credit modifies the Hope Credit by making it accessible to a more broad range of students. For example, families with higher incomes can qualify for the new tax credit, when they would not have been able to qualify for the old credit.
The new credit also allows students to claim a tax deduction for course materials, such as textbooks, equipment and supplies, that are required for courses, and it allows students to claim these deductions for four years of degree, rather than the two years allowed by the Hope Credit. A computer can be a qualified expense provided that it is required for classes.
The American Opportunity Tax Credit provides up to $2,500 of the cost of tuition and related fees paid during that year. The maximum tax credit of the Hope Credit was only $1,800 per year for qualified expenses.
American Opportunity Tax Credit Eligibility
To qualify for this tax credit, you must be a taxpayer who is paying qualified tuition costs and related expenses under the taxable year, and you must have a federal income tax return with a modified adjusted gross income of $80,000 or less. If you file jointly, your modified adjusted gross income must be less than $160,000 to be eligible for this tax credit. You are eligible for a reduced amount if your income exceeds these amounts, up to $90,000 ($180,000) for joint filers, at which point you are not eligible for this credit.
How to Claim This Tax Credit
You will need to complete Form 8863, which is attached to Form 1040 or 1040A, to claim this tax credit. These forms can be downloaded from the IRS website. Keep in mind that the American Opportunity Tax Credit only covers education expenses in 2009 and 2010. Learn more about the American Opportunity Tax Credit.
For education expenses after 2010, you may be eligible to receive a tax break through the Lifetime Learning Tax Credit.
People Who Read This Article Also Read:
Saving for the Future: Short-Term College Planning
Saving for the Future: Long-Term College Planning
Long-Term Savings Plans Overview
529 Plans: The Basics
Tax Benefits for the Graduate Student
Tuition Tax Credits
The Hope/American Opportunity Tax Credit