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Education Tax Credit – Now Includes Computers

New tax legislation signed in February 2009, increases the Hope Credit from $1,800 to $2,500 and changes its name to The American Opportunity Tax Credit for two years. The new credit has a broader reach then the Hope Credit, and is now available to more taxpayers, including taxpayers with higher incomes and those that do not owe a tax. In addition, required course materials will be considered a qualifying expense, and the credit claimed is extended from two years to four post-secondary education years.

Limitations – As a taxpayer, you may be eligible to receive a tax credit equal to 100% of the first $2,000 of fees, tuition, and course materials paid during the year 2009, plus 25% of the next $2,000 of tuition, fees and course materials paid during the year 2009. The maximum credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples that file a joint return. The income limitations have been improved and are now higher, those than under the existing Lifetime Learning and Hope Credits.

Changes for 2009 – The 2009 Recovery Act increased the number of years that the credit can be claimed. In the past, the Hope Credit originally applied to the first two years of college and now the credit can be claimed for qualifying expenses for the first four years of post-secondary education. This tax credit has been increased to $2,500 for the cost of qualified tuition and related expenses paid during the taxable year, which is a $700 increase from the previous Hope Credit. The term “qualified tuition and related expenses” has been expanded to include expenditures for “course materials.” And now “course materials” is defined as books, supplies and equipment required for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance. The 2009 Recovery Act adds to this list, expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature.

Tax Refund Amount – Taxpayers will be able to reduce their tax liability dollar for dollar of credit,as defined. If the amount of the credit is greater than taxpayer’s tax liability, then such excess is refundable to the taxpayer, up to a refund of 40% of the amount of the credit for which taxpayers is eligible.

How to Claim the Credit – To claim the credit, taxpayers must complete Form 8863, and attach it to Form 1040 or 1040A. If taxpayers ordinarily filed a form 1040EZ, then this year then a taxpayer has to file either the Form 1040 with 1040A claim the credit.

Can I Deduct the Qualified Tuition and Fees Paid and also Take the Credit – Taxpayers cannot take both the deduction and the credit. The credit will usually result in greater tax savings, however each taxpayer should calculate the effect of the credit as compared to the deduction on their tax return and evaluate which is more beneficial. A tax deduction of up to $4,000 can be claimed for qualified tuition and fees paid.

Conclusion – The American Recovery and Reinvestment Act of 2009 improves the Hope Scholarship Credit. The education tax credit has a higher maximum credit amount, is refundable in part, and has greater income phase-outs and covers the first four years of post secondary education

Tax laws are complex, change constantly and each situation is unique. This article is not intended to provide legal or accounting advice. The reader should perform his or her own due diligence and consult competent professionals in this area.

Learn more about how we can help determine if you are eligible for the Education Tax Credit and other available income tax credits and about our competitively priced internet and paperless based approach to tax preparation at affordable prices . Sandor(Sandy) E. Lenner,CPA-MBA has provided small business and accounting services for 35 years and works part-time at his wife’s CPA firm.

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