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A New Way To Save on College Costs |
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A new way to save on college costs
Higher education
- $25,143 private college
- $6,585 public college
Average costs for tuition and fees, 2008-2009.
Source: The College Board.
A single semester at a private college can cost as much as a new car. Some parents spend more on tuition than they do on their home mortgage.
Now, hard-pressed parents (as well as independent students paying their way through college) may catch a break on higher education costs.
A recent change in tax law provides a tax credit of up to $2,500 for higher education expenses in 2009 and 2010. (A tax credit is a dollar-for-dollar reduction in the taxes you owe. It is far more valuable than a deduction, which reduces the amount of income subject to taxation.)
The credit effectively reimburses tuition payers 100% of the first $2,000 spent on tuition and related educational expenses (including student fees and required books) and 25% of the next $2,000 in qualifying expenses, providing you meet certain income limits.
In addition, those income limits are higher now (see below), which means a lot more moms and dads may get some college money back next April 15.
Those footing the bill for higher education have had an array of tax breaks in the past: the Lifetime Learning tax credit, the Hope tax credit, and a deduction for some student loan expenses.
But the most rewarding now appears to be the new American Opportunity Tax Credit. A part of the economic stimulus bill signed into law February 17, 2009, it improves upon the existing Hope credit in three ways:
1. More money. The new tax credit is larger, up to $2,500 per student versus a maximum of $1,800 for the Hope credit in 2008.
2. Covers all four years. You can claim the new credit for expenses incurred by students in any of the four years of college. The Hope credit applied only to freshmen and sophomores.
3. More people will qualify. The qualifying income limits were raised significantly so more middle- and upper-income families should be eligible to receive the credit.
New qualifying income limits*
Filing Status |
Full Credit |
Partial Credit |
No Credit |
Single |
Up to $80,000 |
$80,001 to $90,000 |
Above $90,000 |
Married filing jointly |
Up to $160,000 |
$160,001 to $180,000 |
Above $180,000 |
*Limits refer to modified adjusted gross income (MAGI), which is taxable income minus certain deductions including tax-deductible IRA contributions and alimony payments.
Old qualifying income limits*
Filing Status |
Full Credit |
Partial Credit |
No Credit |
Single |
Up to $48,000 |
$48,000 to $58,000 |
Above $58,000 |
Married filing jointly |
Up to $96,000 |
$96,000 to $116,000 |
Above $116,000 |
*2008 MAGI limits for Hope credit.
Source: IRS
Students can qualify
Students who are not claimed as a dependent on another’s tax return can qualify for the education tax credit.
That means that many adult students who are pursuing job training could have a substantial portion of their educational expenses repaid in the form of the tax credit. The credit applies to expenses at a broad array of higher educational institutions, including colleges, universities, and public or private trade schools.
Eligible expenses include tuition, student fees, and required textbooks. Taxpayers who qualify for the credit would see their tax bills reduced next April 15, when they file their 2009 tax return. The credit also applies in 2010; however; it does not count toward higher education expenses from 2008.
It can result in a refund
Families who owe little in federal taxes could receive up to 40% of the credit in a refund in 2009 and 2010.
For example, suppose a married couple filing a joint tax return qualified for the full education tax credit of $2,500 but owed only $1,000 in taxes for the year. The credit would reduce their $1,000 tax obligation to zero and entitle them to a $1,000 refund ($2,500 x 40% = $1,000).
This hypothetical example is for illustrative purposes only.
Note
This article is for educational purposes only. It is not intended to be a complete summary of the American Recovery and Reinvestment Act or the law’s higher education provisions.
Please be aware that the changes discussed may or may not apply to you, and that other tax laws not discussed may affect how these changes apply to you. We recommend that you consult with a tax advisor about your individual situation.
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