The American Recovery and Reinvestment Act of 2009, just signed by President Obama, can affect the way you pay for a child’s higher education:
Computers count: The list of eligible expenses for tax-free withdrawals from 529 college savings plans has been expanded to include purchases of computers and related equipment, along with Internet access for students and their families. This expansion applies only for outlays in 2009 and 2010; in later years those costs won’t qualify for tax-free treatment unless they’re required by the college as a condition of enrollment or attendance.
Higher Hopes. For students attending college in 2009 and 2010, the Hope Scholarship credit has been changed to the American Opportunity Tax Credit. This credit, available to more families than could use the old Hope credit, can be applied for the first four years of college. Course materials are included as an eligible expense.
The maximum annual credit amount increases from $1,800 in 2008 to $2,500 for this year and next. This American Opportunity Tax Credit phases out at $160,000-$180,000 of income for joint filers and $80,000-$90,000 for others.
If you have a child in college this year or next, you may have to choose among the American Opportunity credit, the Lifetime Learning credit, and an above-the-line tuition deduction. In almost all cases, you’ll get the most tax savings with the American Opportunity credit.
