The IRS has several tax incentives regarding saving for college and paying tuition. The American Reinvestment and Recovery Act of 2009 (ARRA) expanded some education related tax incentives for 2009-2010. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 extended these tax incentives for 2011 and 2012. For additional information from the IRS on educations savings plans and other related tax credits and deductions, see here: http://www.irs.gov/newsroom/article/0,,id=213044,00.html
One notable change is the inclusion of computer technology and Internet access to the list of qualified expenses payable by 529 Plan distributions. Currently, distributions from 529 Plans are tax-free as long as they are used to pay for qualified higher education expenses for a designated beneficiary. These expenses include qualified tuition, required fees, books, supplies, equipment and special needs services. For students enrolled at least half-time, room and board also qualify. For 2009 and 2010, the ARRA change adds expenses for computer technology and equipment, Internet access, and related services to be used by the student while enrolled at an eligible educational institution. With computer ownership for incoming students becoming a requirement on more and more campuses every year, this inclusion is a welcome change to the current 529 Plan rules. In general, expenses for computer technology are not qualified expenses for the lifetime learning credit.
American Opportunity Credit
The 2009 Act also created the American Opportunity Tax Credit (AOTC), which modifies the Hope credit for the years 2009-2010, making it available to a broader range of taxpayers. Again, this has been extended for 2011 and 2012. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Here are some key features of the new credit:
- This credit is available for four years, unlike the old Hope credit, which was only available for two years. If you have already claimed the Hope credit for two years, you are now eligible to claim the AOTC for an additional two years.
- Tuition, related fees, books and other required course materials generally qualify. In the past, books usually were not eligible for education related credits and deductions.
- The credit is equal to 100% of the first $2,000 spent and 25% of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student. This is higher than the prior maximum Hope credit of $1,800.
- People who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Existing education-related credits and deductions do not provide a benefit to people who owe no tax. However, the refundable portion of the credit is not available to any student whose investment income is taxed at the parent’s rate, commonly referred to as the “kiddie tax.”
Students who have already completed four years of college still qualify for the lifetime learning credit and the tuition and fees deduction as in the past, even if they no longer qualify for the AOTC.
Like many other tax credits and deductions, the AOTC has some restrictions based on your income. For 2009 through 2012, the full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the income limit is $160,000. The credit is phased out for taxpayers with incomes above these levels and eliminated for single and head of household taxpayers when their MAGI reaches $90,000. For married taxpayers filing joint returns, the credit is eliminated when their MAGI reaches $180,000. Married taxpayers filing separate returns will not qualify for the credit at any income level. These income limits are higher than the limits under the existing Hope and lifetime learning credits.
If you would like further information regarding this issue as well as any other tax related issue, please contact Henssler Financial at 770-429-9166 or at [email protected]