Education Tax Credit – Now Includes Computers
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The new law temporarily increases the existing Hope Credit and renamed it The American Opportunity Tax Credit. This new tax credit modifies the existing Hope Credit for tax year’s 2009 and 2010, by making the Hope Credit available to more taxpayers, including many with higher incomes and those that owe no tax. It also adds required course materials as a qualifying expense and allows the credit to be claimed for four post-secondary education years instead of two. The credit is also increased to $2,500
Limitations – Taxpayers will receive a tax credit based on 100% of the first $2,000 of tuition, fees and course materials paid during the taxable year, plus 25% of the next $2,000 of tuition, fees and course materials paid during the taxable year. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are greater than under the existing Hope and Lifetime Learning 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.
Refundable or Nonrefundable – You may be able to reduce your tax liability dollar for dollar of the credit. If the amount of the credit is more than your tax liability, then the excess may be refundable to you, up to a maximum refund of 40% of the amount of the credit.
How do We Benefit from the Credit? – To claim the credit you are required to complete Form 8863, and attach it to either Form 1040 or 1040A. If you customarily filed form 1040EZ, then for this year, you must consider file Form 1040 or 1040A to benefit from 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.
Summary – The 2009 Recovery Act significantly improved the Hope Scholarship Credit. The education tax credit, now has a higher maximum credit amount, is partially refundable and has higher income phase-outs. It is also available for 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 paperless and internet based approach to tax preparation at affordable prices . Sandor(Sandy) E. Lenner,C.P.A.-M.B.A. has been providing accounting and business services for 35 years and works part-time at his wife’s CPA firm.
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