Legislation provides a tax credit of up to $2,500 for the cost tuition and related expenses

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By Congressman Tom Perriello

As students return to college and community college this fall, many of them and their families have questions about the new American Opportunity Tax Credit and how they can take advantage of this important new tax benefit.

The American Opportunity Tax Credit was the first piece of legislation I wrote when I arrived in Congress in January of this year and it was passed into law as part of the American Recovery and Reinvestment Act, or stimulus package. The legislation provides a tax credit of up to $2,500 for the cost tuition and related expenses – including textbooks for the first time – paid during the 2009 and 2010 taxable year.

Families who pay out-of-pocket for higher education tuition and associated expenses can reduce their tax liability to the federal government dollar-for-dollar in the amount they spend.  Up to 40% of the tax credit is refundable, meaning that 40% of the amount you spend can be refunded to you beyond what you owe. You do not have to itemize deductions to take the credit. Here’s how it works.

First, the student must be within the first four years of college education (the tax credit does not apply for graduate school or advanced degrees). If the student qualifies for the full credit, he or she will see a dollar-for-dollar reduction in your federal tax bill equal to 100 percent of the first $2,000 in "qualified tuition and related expenses" and 25 percent of the next $2,000.

The credit phases out for incomes between $80,000 and $90,000, and between $160,000 and $180,000 for joint filers. If a parent's income is above the phase-out range, but the dependent student's income is not, the credit can be claimed on the student's federal tax return provided the parent agrees to forego the dependency exemption.

Low-income taxpayers are helped further because up to 40 percent of the American Opportunity Tax Credit is refundable. For example, let’s say you owe $700 in federal taxes but spent $2,500 on tuition. The American Opportunity Tax Credit allows you to wipe out what you owe to the federal government (so you won’t have to write a check to the Treasury for $700), plus you can get a refund for up to 40% of the $2,500 (in this case, $1,000). 

Other tax incentives exist for college students and their families. These include the Hope credit, the Lifetime Learning credit, the tuition-and-fees deduction and the tax exclusion for redeeming qualified U.S. savings bonds. But because tax law generally does not permit “double dipping,” students may have to choose among the available incentives, or coordinate their use. IRS Publication 970 has further details concerning all of the tax incentives for higher education.

The American Opportunity Tax Credit is expected to benefit 71,000 Virginians and over 4 million people nationwide. I hope many 5th District residents will take advantage of this tax credit while it is in effect in 2009 and 2010 as we seek to make our workforce more competitive through quality education and training.

Please feel free to contact me to share your concerns and ideas. You may call 1-888-4-TOM4US (1-888-486-6487); write to 1520 Longworth House Office Building, Washington, DC 20515; or visit www.perriello.house.gov to sign up for my weekly e-newsletter.