Federal Higher Education Tax Benefits Guide for 2010 — As of January 26, 2011
There’s great news for parents and students: the federal government provides a number of tax incentives that can help defray the cost of higher education. These incentives come in a couple of forms:
Tax credits, which directly reduce the amount of tax you owe; and
Tax deductions, which reduce the amount of income that you pay taxes on.
You may qualify to use more than one of the benefits, but there are some restrictions against this as well. It’s a good idea to figure your taxes multiple ways so you can get the maximum benefit available to you.
The American Opportunity Tax Credit
The American Opportunity Tax Credit was first made available in the 2009 tax year and is currently set to expire after the 2011 tax year. It offsets the cost of tuition, fees, course-related books, supplies, and equipment for higher education by reducing the amount of income tax you are liable for. In addition, the credit is partially refundable—meaning that you may be able to claim the tax credit and receive a check from the IRS even if you owe no income tax!
The amount of the credit can be up to $2,500 per student. Up to $1000 of the credit can be refunded to you if your credit is more than the amount of tax you owe. You are eligible for the credit if your modified adjusted gross income is $90,000 or less (for married couples filing a joint return, $180,000 or less). The amount of the credit varies depending on income and how much you spent on higher education expenses, and how many eligible students are in your family.
This credit is a temporary replacement for the Hope Credit which is not available for 2010. The American Opportunity Tax Credit has more generous benefits and is available to more taxpayers than the Hope Credit. It was enacted by the economic stimulus bill, the American Recovery and Reinvestment Act of 2009.
Expenses that count towards this credit are tuition, fees, course-related books, supplies, and equipment for higher education (less the amount of certain scholarships and grants received) during 2010 for yourself, your spouse, or someone you claim as a dependent on your tax return.
Only expenses incurred for the first four years of undergraduate study count for purposes of this credit. The student must have been enrolled at least half-time for one term in 2010 in an eligible program leading to a degree, certificate, or other recognized credential at an eligible* school.
You must file a federal income tax return to get the credit (even if you are otherwise not required to file a return). If you are claimed as a dependent on someone’s tax return, only the person who claims you can apply for the credit. If you are not claimed as a dependent on someone else’s return, but were under age 24 at the end of 2010 and your earned income was less than one-half of your support, you can claim the credit to reduce any tax you owe, but are not eligible to get any refund.
Students convicted of a felony for possessing or distributing a controlled substance are not eligible for the American Opportunity tax credit.
Page 1 – Higher Ed Tax Benefit Guide, © NASFAA 2011
By federal law, students convicted of drug offenses committed while receiving Title IV federal financial aid may be ineligible for federal financial aid for one or more years from the date of conviction.
Disqualification for Title IV Federal Aid
The law does not apply to juvenile records, and students may regain eligibility by completing an acceptable drug rehabilitation program or by having their convictions overturned.
If you have been convicted of a drug offense while receiving Title IV federal financial aid, you must report it in question 31 on the FAFSA. For additional information on this requirement call a federal representative at 1-800-433-3243.
Students who have been convicted of or who have pled nolo contendere or guilty to a crime involving fraud in obtaining Title IV federal financial aid are not eligible for additional federal aid until they have repaid the fraudulently obtained funds.