by Ryan McKeown, CPA, CFP®, Vice President – Financial Advisor, Wealth Enhancement Group

The 2009 American Recovery and Reinvestment Act added several new tax law changes, two of which dramatically improved the tax savings available for qualified college education expenses.
 
The first and most significant change in this area is that for 2009 and 2010, a new “American Opportunity” tax credit has been made available, replacing the “Hope” credit. It gives taxpayers a tax credit for up to $2,500 of the cost of tuition and related expenses, including course materials, such as books (course materials were added as qualifying expenses with this credit). The credit is based on 100% of the first $2,000 of expenses and 25% of the next $2,000. The credit is 40% refundable, available for the first four years of post-secondary education, and is phased out for individual taxpayers with AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The Hope credit that was replaced with this credit was only for the first two years of post-secondary expenses, and to qualify, your income had to be significantly lower.
 
Below please see an example of how this credit has improved a family’s situation:
 
John & Jane make $140,000 and have three children all attending college for their undergraduate studies. In 2008, because of certain income limitations that lessen the ability to take advantage of certain tax breaks, they were only able to have a “tax deduction” of $4,000 on their 2008 return for the college education expenses they incurred. That tax deduction, at their marginal tax bracket of 25%, saved them $1,000 of income tax last year. With the expansive provisions of the American Opportunity tax credit, they will now receive a tax credit of $2,500 on the first $4,000 of qualifying college expenses they incur for each of their three children. That is a total of $7,500 of income tax they will save because of this tax law change (a $6,500 difference from 2008!).
 
Another key point to make is that if you are looking to return to college to improve your work skills or further your education, as long as you have not completed your undergraduate degree, you qualify for this credit. For instance, a 55 year old that has not completed an undergraduate degree and wants to attend a semester of community college which costs $3,000 in tuition, books, and supplies, would receive a tax credit of $2,250 (100% of the first $2,000, 25% of the next $2,000) for those expenses. This makes the after tax cost of that semester of education only $750 because you would receive a credit that amounts to 75% of the cost of attending! 
 
The second change in the area of tax incentives for college expenses involves what is considered a qualified education expense eligible for tax-free withdrawals from a 529 education plan. The qualifying expenses in addition to books, supplies, equipment, and room and board (if at least a half-time student) now include computer technology and related equipment, as well as internet access costs and related services.
 
Each individual’s situation may differ as to how they are impacted by these rules, so please talk to your tax professional in regards to your specific circumstances.