Tax Benefits for Individuals
American Opportunity Tax Credit
Pre-2009 Act tax law provided for two tax credits that
may be claimed for post-secondary education expenses:
the Hope Scholarship Credit of up to $1,800 per student
(for 2009) and the Lifetime Learning Credit of up
to $2,000 per taxpayer. The credits phase out for
taxpayers with AGI in excess of $50,000 ($100,000
for married couples filing jointly).
The 2009 Act modifies and replaces the Hope credit for tax years beginning in 2009 and 2010 and renames it the American Opportunity Tax Credit. The revised credit equals up to $2,500 per student per year for the cost of qualified tuition and related expenses (including required course materials, such as books). The credit is based on 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000 of qualifying expenses.
The new credit phases out for taxpayers with AGI in excess of $80,000 ($160,000 for joint filers) and is phased out completely for those with AGI of $90,000 or more ($180,000 or more for joint filers). The American Opportunity Tax Credit is available for expenses incurred for up to four years of post-secondary education. (The Hope credit was available for only the first two years of higher education.)
EXAMPLE:
The Nelsons have two children in college, David,
a senior, and Ricky, a junior. They pay $10,000
of tuition and related expenses for each son in
2009. The Nelsons’ 2009 joint AGI is $130,000.
They may claim on their tax return an American
Opportunity Tax Credit of $2,500 for each child.
The American Opportunity Tax Credit may be claimed against the alternative minimum tax, within limits. And, in the event the taxpayer does not have a large enough tax liability to apply the full credit, 40% of the credit is refundable if all tax law requirements are met.
529 Plans and Computer Costs
Section 529 qualified tuition programs are a popular way of saving for a child's or grandchild’s college education. If all requirements are met, nondeductible contributions to a 529 program account and any account earnings will not be taxed upon distribution if the distribution is used for qualified higher education expenses (which generally include tuition, room and board, fees, books, supplies, and equipment required for the enrollment or attendance at an eligible educational institution).
The 2009 Act expands the definition of qualified higher education expenses to include expenses for certain computer technology, equipment, and related services (including Internet access) if such technology, equipment, and services are to be used by the 529 plan beneficiary and the beneficiary’s family during any of the years the beneficiary is enrolled. Expenses for computer software designed for sports, games, etc., do not qualify unless the software is predominantly educational in nature. The law applies to expenses paid or incurred in 2009 and 2010.
Temporary Income Exclusion for Unemployment Compensation
The tax code includes federal or state unemployment compensation benefits as gross income for federal income-tax purposes. The 2009 Act provides an exclusion from gross income for the first $2,400 of unemployment benefits received by a recipient in 2009.
Transportation Fringe Benefits
Employees may exclude from income qualified transportation fringe benefits up to specified dollar limits. These benefits include van pooling, mass transit passes, qualified parking, and qualified bicycle commuting reimbursements. The 2009 Act increases the maximum monthly exclusion for combined employer-provided mass transit and van pooling benefits from $120 to $230 (for 2009; subject to future inflation adjustments). The increase is in effect for months beginning on or after the 2009 Act’s enactment date and before January 1, 2011.
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