New Help with College Costs

Everyone talks about the income tax and housing benefits in the stimulus plan, but they often overlook the new rules that have significantly expanded a tax credit for college costs. The new American Opportunity tax credit can make a big difference for families who are paying college bills.

This new credit replaces the Hope credit for 2009 and 2010, and it increases the amount from $1,800 to $2,500. The credit can be used in any year of college (not just the first two years, as was the case with the Hope credit). And the income limits to qualify have increased. You can now receive the American Opportunity if your modified adjusted gross income is less than $90,000 if single or $180,000 if married filing jointly.

If you do qualify for the credit, however, you need to be careful about which accounts to tap when paying those bills. Because you can’t double dip on tax benefits, money you use to pay for college from a 529 or Coverdell education savings account (which can already generally be used tax-free for college bills) doesn’t count toward the American Opportunity credit.

The credit is based on 100 percent of the first $2,000 of eligible college costs, plus 25 percent of additional costs. That means you’ll qualify for the full $2,500 credit if you pay at least $4,000 in college costs from a source other than a 529 or Coverdell education account.