Education Credits

A college education is rapidly becoming a necessary extravagance. Without a degree to open doors, the prospects of earning a solid middle class salary is getting increasingly remote.

Congress, in it's infinite wisdom, has made available a menu of credits catering to a variety of constituents. As of 2009, there are four potential credits available to parents, or in some limited situations, the student.. The credits are: Hope Credit, American Opportunity Credit, Lifetime Learning Credit, and Tuition and Fees deduction.

American Opportunity Credit

Let's focus on the American Opportunity Credit (AOC), formerly known as the Hope Credit prior to 2009. Congress changed the name and expanded the benefits of this credit for year 2009 an 2010. Rather than covering the first two years of college, it is now available for the first four years of postsecondary education. The maximum amount of the credit has now increased from $1,800 to $2,500 for each eligible student.

How to Qualify

A student must meet the following requirements: Enrollment in one of the first four years of postsecondary education, enrolled in a program leading to a degree, certificate, or a recognized educational credential, be at least a half-time student, and no felony conviction for possessing or distributing a controlled substance.

Additional Eligibility

If you are married at the end of the year (12/31) you must file jointly to claim the AOC. You cannot file Married Filing Separate and claim the credit. You may use borrowed money to pay tuition and eligible expenses. Generally, payments for qualified expenses are made within the same year the expenses are billed. There is a provision whereby a prepayment that covers an academic period commencing during the first three months of the next year results in the payments being treated as an expense for the year in which the payment was made.
Preparer Hint: Be careful about making payments close to the end of a year. Payments are not considered "made" (paid) until the date the institution credits the funds to the students account. Caution: Situation: You make a payment o the institution late in 2009 for a period starting after March 2010. Surprise - the payment is not eligible for EITHER a 2009 or 2010 credit.

Overview of Allowable Expenses

Allowable expenses include tuition, course-related books, supplies, equipment that must be purchased from the institution as a condition of enrollment/attendance, and student activity fees required of all students. The IRS has also allowed the cost of computers, relevant software, and internet fees. HINT: Room and board , insurance, transportation, and personal expenses are NOT allowable. Exception: Special rules in 2009 for students in Midwestern disaster areas - room and board is a qualified expense. Refer to instructions on Form 8863.

Claiming Credit for the Expenses Paid by Your Child or a Third Party

Example: Your child pays his/her own expenses and you claim the child as a dependent on your return. Only the person claiming the child as a dependent may claim the education credit. The child can claim the credit if he/she filesa return and no one claims him/her as a dependent.

Education credits can be moderately complex. Contact me on Live Person.com if you require additional information or assistance with filing tax returns.

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