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An 'American Opportunity' To Cut Your Taxes

August 8th, 2010 at 06:36 pm

If your household income is less than $180,000 and there's a college or vocational school student in your family, here's a way to get a bigger refund on your federal taxes next spring: take advantage of the American Opportunity Credit.

The tax credit is two years old, but relatively unknown. It replaced the Hope tax credit, designed for lower income families, by expanding the income limit to $90,000 for single tax filers, and $180,000 for married-filing-jointly. The first $2,000 you spend on eligible college expenses (tuition, books, fees) comes right off the top of your tax bill. That's what makes a tax credit much better than a tax deduction. Plus, you can take 25% of the next $2,000 to give you a total tax credit of $2,500.

Here's a warning. If you have a 529 education savings plan or a Coverdell savings account, you'll need to split your spending. In other words, you can't pay the entire school bill with your 529 account and also claim the American Opportunity Credit. No double-dipping allowed. What you can do is pay the first $2,000 through the AOC and get all $2,000 back through the tax credit. If you have a little extra cash, pay the first $4,000 out of pocket and get the full $2,500 American Opportunity Credit. Then pay the remainder with your 529. In fact, you'll want to pay all room & board expenses with your 529. Those are not covered by the American Opportunity Credit. If you live in a state like mine, Indiana, you can get back $2,500 from the federal government for using the American Opportunity Credit, and up to $1,000 from the state as a tax credit for contributing to your 529.

For parents who have put their own savings on hold to pay for their kids' college or vocational school, tax credits can take a brick or two off that load you're carrying on your back. The money you receive from the tax credits can go right back toward paying the next college bill. Or it can go straight into your own retirement account. Or it can go into that envelope you have in the back of your underwear drawer, for the cruise to Cozumel to celebrate your final school payment.

Thanks to tax credits, you might even be able to spend a few extra days on the beach.

1 Responses to “An 'American Opportunity' To Cut Your Taxes”

  1. Jerry Says:

    What a great thing - and I think that almost nobody knows about it. Thanks for the tip! Can this also lead to a benefit if one of the parents in the family is in school full time? It would be nice to have this as added insurance at tax time...
    Jerry

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