Tax Breaks

Get a Bigger Tax Break for College Expenses

The new American Opportunity credit will reduce your tax bill dollar for dollar.

Has the tuition-and-fees federal tax deduction been renewed? If not, what would be the best strategy for me? I usually get a small refund thanks to that deduction.

The tax deduction covering up to $4,000 in tuition and fees still exists, but the American Opportunity Credit, which was introduced as part of the stimulus package, is a better option. It is a turbocharged version of the Hope credit, which the government offered previously, with higher income limits and bigger tax breaks. And it now covers four years of college rather than just the first two. It’s available for 2009 and 2010.

A tax credit, which reduces your tax bill dollar for dollar, is more valuable than a tax deduction, which merely reduces the amount of your income that is taxed. You may qualify for an American Opportunity Credit of up to $2,500 as long as you spend at least $4,000 in tuition and qualified expenses (including fees, books and related course materials). And if your credit exceeds your tax liability, you may receive a refund check (up to $1,000 more than your tax bill). In the past, you could qualify for the Hope credit only if your income was less than $58,000 for single taxpayers or $116,000 for married taxpayers filing jointly. But the American Opportunity Credit bumps up those limits to $90,000 for singles and $180,000 for joint filers.

By contrast, the maximum $4,000 tuition deduction would lower your tax bill by just $1,000 if you were in the 25% federal tax bracket. The tuition-and-fees deduction has lower income limits than the American Opportunity Credit, but it is available for graduate-level expenses not covered by the credit. Individuals with incomes up to $65,000 ($130,000 for married couples) qualify for the full $4,000 deduction. Individuals with incomes between $65,000 and $80,000 (between $130,000 and $160,000 for married couples) are eligible for a $2,000 deduction.

Got a Question? E-mail Kim at askkim@kiplinger.com.

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