Uncle Sam Helps You to Pay for College

Going to college can be very expensive. To help students and their parents, the Internal Revenue Service offers the following five ways to offset the costs of college education.

• The American Opportunity Credit. This credit helps parents and students pay part of the cost of the first four years of college. The American Recovery and Reinvestment Act modified the existing Hope Credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Eligible taxpayers may qualify for a maximum annual credit of $2,500 per student. Generally, 40 percent of the credit is refundable, which means that you may be able to receive a refund of up to $1,000, even if you owe no taxes. The credit is for 100 percent of the first $2,000 of education expenses incurred, and for 25 percent of the next $2,000 of education expenses incurred.
• The Hope Credit. This credit can help students and parents pay part of the cost of the first two years of college. This credit generally applies to 2008 and earlier tax years. However, for tax year 2009, a special expanded Hope Credit of up to $3,600 may be claimed for a student attending college in a Midwestern disaster area, as long as you do not claim the American Opportunity Credit for any other student in 2009.
• The Lifetime Learning Credit. This credit can help pay for undergraduate, graduate and professional degree courses (including individual classes to improve job skills) regardless of the number of years in the program. Eligible taxpayers may qualify for up to $2,000 ($4,000 for a student in a Midwestern disaster area) per tax return.
• Enhanced benefits for 529 college savings plans. Certain computer technology purchases are now added to the list of college expenses that can be paid for by a qualified tuition program, commonly referred to as a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services.
• Tuition and fees deduction. Students and their parents may be able to deduct qualified college tuition and related expenses of up to $4,000. This deduction is an adjustment to income, which means the deduction will reduce the amount of your income subject to tax. The Tuition and Fees Deduction may be beneficial to you if you do not qualify for the American Opportunity, Hope, or Lifetime Learning Credits.

You can claim only one of the three credits--the American Opportunity, the Hope or the Lifetime Learning Credit--for the same student in the same year. You also cannot claim any of the credits with respect to a student if you claim a Tuition and Fees Deduction for the same student in the same year. To qualify for an education credit, you must pay post-secondary tuition and certain related expenses for yourself, your spouse or your dependent. The credit may be claimed by the parent or the student, but not by both. Students who are claimed as a dependent cannot claim the credit. There are income limitations that must be met to qualify for the credits.

For more information, see Publication 970, Tax Benefits for Education, and Form 8863, Education Credits, which can be obtained online at the IRS website or by calling the IRS at 800-TAX-FORM (800-829-3676).

Posted March 5, 2010.