If you sent a child to college this fall, you have a chance to cash in on an enhanced tax break for higher education.
Strategy: Maximize the new “American Opportunity tax credit.” This revamped credit, formerly called the Hope Scholarship credit, now is available to more higher-earning taxpayers.
But the improvements are only temporary. They apply to qualified expenses paid or incurred in 2009 or 2010 for education in an academic period beginning in either of those two years.
Here’s the whole story: The tax code provides two credits for higher education expenses. For 2009, the maximum Hope Scholarship credit was scheduled to be $1,800 per student for the first two years of study. The maximum Lifetime Learning credit of $2,000 may be claimed for only one student in any college year.
However, either credit phases out once your AGI exceeds a specified threshold. The phaseout for 2009 was set to begin at $100,000 for joint filers and $50,000 for single filers.
Under the new economic stimulus law, the maximum credit increases to $2,500 and extends to all four years of study. Also, 40% of the revamped credit is refundable. Finally, the start of the phaseout is pushed all the way up to $160,000 for joint filers and $80,000 for single filers. In contrast, the phaseout range for the Lifetime Learning credit remains the same.
Note that you can claim the enhanced credit in 2009 for tuition due for next year’s spring semester if you send the money to the school before Jan. 1, 2010.
In lieu of either credit, you may claim the tuition deduction of $4,000 for an AGI below $130,000 for joint filers; $65,000 for single filers.
Tip: The deduction is reduced to $2,000 for an AGI up to $160,000 for joint filers; $80,000 for single filers.