The New College Tax Credit - There Are Big Changes!

With everyone tightening their belt these days and the air of uncertainty, it has becoming increasingly more difficult for parents to pay for their children's college education. The new American Opportunity Credit, which modifies the Hope Credit for 2009 and 2010, raises income phase-outs, the amount of the credit and adds required course materials as a qualified expense, helps to ease the burden.

One of the key features that really stands out is, that for the first time, the credit is partially a refundable credit. Previously, the credit was only available to the extent of your tax liability. For 2009 and 2010, 40% of the credit is refundable. With the maximum credit being $2,500, that means that up to $1,000 for each eligible student is refundable.

Other features of the credit are:

• Required course materials (such as books), also for the first time, qualify as an expense. 
• The maximum credit for each eligible student is $2,500. The credit is for 100% of the first $2,000 of qualified expenses, and 25% of the next $2,000. 
• The income phase out begins at $80,000 and completely out at $90,000 of modified adjusted gross income for single or head of household, and at $160,000 and $180,000 for taxpayers that are married filing joint.

Some of the things to watch for regarding the credit:

• Kiddie Tax - if the student has investment income that is, or may be, taxed at the parents rate are not eligible to have the credit refunded. The credit is available, but just not a refundable credit.
• If you file married filing separate, you cannot take the credit.
• And, it is not available for any student that has already completed their first four years of college. These students may still qualify for the Lifetime Learning Credit or the Tuition and Fees deduction.

If you would like further information, check out Publication 970.  Publication 970