Adam Sandler said it best in his famous flick, Billy Madison, "Back to school, back to school; to prove to dad I'm not a fool..." Now, it's Dad's (and Mom's!) turn to be the smarty-pants; many parents have taken advantage of the newer college savings plans such as 529 plans and will now reap the rewards with expanded education benefits in the American Recovery and Reinvestment Act (ARRA).
The most relevant highlights from ARRA for college kids are the following:
- The new American Opportunity Credit modifies the existing Hope Credit for tax years 2009 and 2010, making it available to a broader range of moms and dads, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student –– up $500 over last year's max credit.
- Section 529 plans cover computers - funds from section 529 college savings plans can be used to pay for a computer bought in 2009 or 2010, if the computer is used for college work. This is a big win for parents facing steep technology requirements for their froshman babies.
- Higher income limits: The full credit is available to individuals 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 above these levels. These income limits are higher than under the existing Hope and Lifetime Learning Credits
What does this mean in dollars and cents for your tax return? 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.
For more information, see Publication 970 (Tax Benefits for Education), IRS Form 8863 (Education Credits), Q&A from the IRS or contact your local Liberty Tax office to speak with a tax preparer.