America is going back to school. A projected 17.5 million students are going to college this year, and with a tougher job market, many are looking for better chances by getting a higher education. The short of it is that a college degree equals money, but it also costs big bucks. To help college students pay their tuition bills and give America that extra push to get an education, the government has come up with a $2,500 tuition tax credit. Here's the skinny on this tax credit and what you can do now to maximize your tuition tax benefits. IN PICTURES: 8 Financial Tips For Young Adults
Credit or Deduction? You Choose
Education tax benefits have been around for years, so what's so special about this year? It's the American Opportunity Credit (part of the American Recovery and Reinvestment Act) that gives students a tax break of up to $2,500, based on tuition expenses. The credit allows you to deduct $2,000 of your college expenses, and 25% of the next $2,000 you spend, to $2,500 maximum.
As an alternative, you can also deduct your tuition expenses from your income - which is where it gets tricky. You can only claim one, either the tax credit or income deduction. Confused? For most people, the tax credit is the best option; if you have, say, a $3,000 tax bill, you can deduct the $2,500 straight from this amount. Most tax software will allow you to compare the two, but you can also check with your tax professional to find out whether a tax credit or income deduction is best for your bottom line - just make sure you only take one of the options, or Uncle Sam will come knocking.
See if You Qualify
So who qualifies for this nice tax credit? Anyone with a modified adjusted gross income (MAGI) of less than $80,000 for single filers, $160,000 for joint filers, can claim the American Opportunity tax credit. You can't claim tuition paid for by a grant or scholarship (since you weren't the one paying in the first place), and you can't claim room and board, but you can claim tuition paid for with loans. Before claiming your credit, make sure someone else isn't claiming you as a dependent on a tax form. That's a big red flag for IRS auditors. Another word of caution: if you're a parent paying for college with savings from a 529 plan, check with your tax advisor on how to claim this credit if your account made a tax-free profit. You'll likely have to pay taxes on your gains, but can still benefit from this tax credit. (For related reading on the 529 plan, take a look at A 529 Plan Fit For An Ivy League Education.)
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Keep Track of Qualifying Expenses
Now that you know you qualify, it's time to read the fine print and start keeping good records. The IRS allows you to claim "qualified tuition and related expenses, including course materials" paid for in 2010. So what does that mean, exactly? Tuition and fees are fairly straightforward to identify, but what about that laptop you bought for college? Here's what the IRS says: You can claim anything a student needs as condition of enrollment for college. So if that web design course requires expensive software, you can claim it. If your college has certain equipment listed as a requirement for enrollment, you can claim that, too. To cover yourself in case of an audit in the future, you may want to keep the course description, including the listed requirement.
Remember: It's Only for 2010
Now that you know all about the American Opportunity tax credit, you may rejoice and think you'll be sitting pretty for the next four years of college credits. Unfortunately, this tax credit was designed to be a short-term patch to boost the economy and spur America to go back to school. Right now, this tax break only lasts for the 2010 tax year, with no clear plans of extending. So take this credit while you can.
Tuition tax credits can be a great boost to your bottom line, if you know how to read the fine print. Follow these guidelines, check with your tax professional and keep good records to support your tax claim. The American Opportunity tax credit may just be a great reason to go back to school before 2010 is up.
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