Delaying a Tuition Payment Could Put Money in Your Pocket

Tax Tips

Delaying a Tuition Payment Could
Put Money in Your Pocket

Timing is everything when it comes to college tax credits.

This year’s government stimulus package isn’t limited to bank bailouts, “cash for clunkers” or tax credits for home buyers. College students and their families get to share in the largess. The newly expanded American Opportunity Credit offers a $2,500 rebate on tuition for each of the first four years of college.

This presents a real opportunity for parents of students who will finish their fourth year next spring. You’ve probably already paid plenty to capture the 2009 credit. Don’t pay the second-semester tuition bill in December. Push the payment into January and you can cash in on the $2,500 credit for 2010, too.

The new credit temporarily extends the old Hope credit, which was limited to the first two years of college, and expands the income-eligibility caps so more higher-income families can qualify. Many will be eligible for the maximum $2,500 tax credit. (A tax credit, which reduces your tax bill dollar for dollar, is more valuable than a deduction, which merely reduces the amount of your income that is taxed).

You can claim the credit for 100% of the first $2,000 spent on qualified college expenses, which now includes books in addition to tuition and fees, and 25% of the next $2,000. As long as you spend $4,000 or more in qualified expenses for an eligible student (including yourself, your spouse or a dependent), you can claim the maximum $2,500 credit, subject to income limits.


The full American Opportunity Credit is available to individuals with incomes of $80,000 or less ($160,000 for married couples filing jointly). The credit is phased out for taxpayers with incomes above these limits.

Up to 40% of the credit is refundable, meaning people who owe no income tax can get a refund of up to $1,000 for each eligible student. (This is a change from other education-related tax deductions and credits that do not benefit people who owe no tax.) However, the refundable portion of the credit is not available to any student whose investment income is taxed at the parent’s rate, commonly known as the “kiddie tax.”

Graduate students do not qualify for the new American Opportunity Credit. However, they may qualify for the Lifetime Learning credit of $2,000 or a tuition and fees deduction of up to $4,000. Again, if you’ve already spent enough to capture the full tax break for 2009 -- and if 2010 is likely to be the last year you’ll take classes -- pay your second-semester bill in 2010 and capture an extra tax break.