Well, it’s W2 season out here in Taxpayerland.
Time to start thinking about your 2009 income tax return.
Me? I had a very productive weekend. I took care of my state and federal taxes, and also FAFSA.
This year, there’s a new tax break for full-time college students: The American Opportunity Credit (AOC). It’s part of the American Recovery and Reinvestment Act (ARRA), and offers a tax credit on higher-education costs. Eligible costs include tuition, fees, textbooks, and supplies.
Books and supplies need to be specifically required for classes. You can’t just say, “Well, I’ve been wanting a new laptop, so now’s a good time to get it.” If, however, your college requires students to buy a laptop, that’s an eligible expense.
The AOC allows you to take a tax credit on college costs not covered by grants and scholarships. Your college may send you a 1098-T form, which states how much you paid in tuition and fees and how much you received in scholarships and grants. If you’ve received a 1098-T form, compare the amounts in Boxes 2 and 5. If the amount in Box 2 is bigger than Box 5, then you should be eligible to take a tax credit for the difference.
The tax credit is 100% of the first $2000 and 25% of the second $2000. The maximum credit is $2500, and (depending on your financial situation) you may get a refund of up to 40% of the credit ($1000). I was able to get the $1000 refunded, which certainly helps a semi-starving student.
Example 1:
Tuition and fees: $10,000
Scholarships and grants: $6,000
In this case, $4,000 was not covered by scholarships and grants.
100% of the first $2,000: $2,000
25% of the second $2,000: $ 500
Total tax credit: $2,500
Potential refund (40%): $ 1,000
Example 2:
Tuition and fees: $5,000
Scholarships and grants: $3,500
In this case, $1,500 was not covered by scholarships and grants.
100% of the first $2,000: $1,500
25% of the second $2,000: N/A
Total tax credit: $1,500
Potential refund (40%): $ 600
By the way, don’t worry if you used student loans to pay education expenses that grants and scholarships didn’t cover. This tax credit only takes grants and scholarships into consideration.
Sure, not all non-traditional students attend college full-time, but a great many are putting their own kids through college at the same time. This tax credit can be used for each qualifying dependent student. A full-time student with one or more dependent children in college can save a sizable chunk on their taxes.
Overall, the American Opportunity Credit is a great way to reduce your income tax bill… and maybe get a little cash back!
Important Links:
irs.gov: The American Opportunity Credit
irs.gov: American Opportunity Credit Q & A
wikipedia: American Opportunity Credit
