The American Opportunity Credit, the Hope Scholarship Credit, Lifetime Leaning Credit, and other key considerations need not be a mystery.
Many middle-class families struggle, barely saving enough to fund their retirement plans, let alone meet future education costs. Then those astronomical college bills arrive. I've got some good news for you. The President's recently signed economic stimulus bill provides for a federal tax credit, called the American Opportunity Tax Credit, worth as much as $2,500 for college tuition paid in 2009. It's also available in 2010. The student cannot be beyond the first four years of postsecondary education and he/she has to be at least half-time.
If you or your son/daughter qualifies for the full credit, you will see a dollar-for-dollar reduction in your federal tax bill equal to 100 percent of the first $2,000 in "qualified tuition and related expenses" and 25 percent of the next $2,000.
The credit phases out for incomes between $80,000 and $90,000, and between $160,000 and $180,000 for joint filers. If a parent's income is above the phase-out range, but the dependent student's income is not, the credit can be claimed on the student's federal tax return provided the parent agrees to forego the dependency exemption.
Low-income taxpayers are helped further, up to 40 percent of the American Opportunity Tax Credit is refundable.
However, those taxpayers who are potentially subject to the "kiddie tax" at the parent's higher rate, including any full-time student under age 24 with earned income of less than half of his or her total support, are not eligible for the refund under the terms of stimulus.
Whenever scholarships and grants are involved, you need to be extra careful. Scholarships received for tuition are tax-free, but that tuition cannot then be used to generate a tax credit.
Plenty of other tax incentives exist for college students and their families. These include the "old" Hope credit, the Lifetime Learning credit, the tuition-and-fees deduction and the tax exclusion for redeeming qualified U.S. savings bonds. But because tax law generally does not permit double dipping, you'll have to choose among the available incentives, or coordinate their use.
