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Gain more credit for college

Itís complicated enough for parents of college-age children to find their way through the maze of federal loan applications. Sorting through the list of possibilities for tax relief for tuition expenses, and eligibility for them, only adds to the headaches.

But one such possibility has jumped to the head of the class: the American Opportunity Education Tax Credit. Itís not truly a brand-new choice. This credit, now available as a result of the stimulus legislation passed in February, is just a super-sized version of the Hope Scholarship Credit already in place. But itís more generous, not only in amount but also with regard to who can claim it.

There wonít be a quiz, but youíll still need to study a bit. The rules for claiming tax benefits for education expenses arenít any less complicated than before.

Credit One:

The Expanded Hope

The maximum Hope Credit that you could claim for eligible education expenses on your 2008 income tax return was $1,800 per student for the first and second years of college.

The American Opportunity Education Tax Credit is more appealing for several reasons: For this year and next, the maximum is $2,500. (The recently announced 2010 budget proposal would make it permanent.) Itís available to college juniors and seniors as well. More families will be eligible to take the credit because the income limitations (measured by modified adjusted gross income, or MAGI) are more liberal.

Credit Two:

Lifetime Learning

The other education tax credit, the Lifetime Learning Credit, is available for all four years, but per tax return, not per student, and it maxes out at $2,000. But at least it provides a tax break for the last two years of college. Itís a less attractive choice than the American Opportunity Education Tax Credit now, which also covers all four years.


For tuition and expenses

Thereís a maximum above-the-line $4,000 deduction for eligible education expenses, but it is set to expire at the end of this year. Deductions arenít as valuable as credits, which reduce tax dollar for dollar. But up until last year, when its income limitations werenít as strict, the deduction offered some help to parents who couldnít claim either of the credits.

Only one choice

You can claim either one of the credits or the deduction, but no more than one of them for the same student. Nor can a credit or deduction be claimed for the same expenses paid from other sources; for example, distributions from Section 529 plans or Education IRAs, tax-free scholarships or other similar tax-free amounts received.

Expenses covered by the credits and deduction

Eligible education expenses include tuition, student-activity fees and expenses for course-related books, supplies and equipment, but only if the fees and expenses are paid as a condition of enrollment or attendance. A student must be enrolled at least half-time at an eligible educational institution (almost all colleges and universities qualify).

For a complete ďtutorial,Ē the IRS offers Publication 970, Tax Benefits for Education, available at or by calling 1-800-829-3676.

Tracey Courtney is vice president and trust officer for First Tennessee Bank. For more information about this and other personal finance issues, call 865-971-2136.


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