Uncle Sam is helping online students with a ho
st of tax credits—including a new, expanded
education tax credit as part of the federal stimulus program.
These popular tax credits
save you money on online education tuition and fees by cutting the amount of income tax you owe.
As you work through your 1040 or 1040EZ form and calculate your adjusted gross income, you will see what your tax is based on the chart the IRS provides. You can subtract your tax credit directly from your tax bill, reducing the amount you must pay the government.
For example, if you look up your adjusted gross income in the tax chart and find that you owe $4,000, and you qualify for $2,500 in education tax credits, you can subtract $2,500 from $4,000—meaning you will only owe the government the difference ($1,500).
Keep in mind that education tax credits are different from education tax deductions. Deductions are adjustments you make to your income—before your actual tax is determined. (For more information about education tax deductions, see
Best Tax Deductions for Online Education.)
You are only allowed to take ONE education benefit. You can’t take BOTH an education credit and an education tax deduction.
You also can’t take more than one credit per student.
This means you will need to look at the various government tax breaks for online learning expenses and figure out which one saves you the most money.
Here’s a rundown of education tax credits. These are available to you whether you are taking courses from an online college or an on-campus program.
American Opportunity CreditThe American Recovery and Reinvestment Act of 2009—the stimulus plan—increases benefits to parents and students for the next two tax years (2009 and 2010) through the “American Opportunity Credit.”
Here’s how it works:
Who QualifiesYou qualify for the full credit if your adjusted gross income is $80,000 or less ($160,000 for married couples filing jointly). If you make more than $90,000 (or $180,000 for a married couple), you are not eligible. If your income falls between these limits, you can receive a percentage of the benefit.
Education Benefits ~ Up to $2,500 per year per student
~ Applies only to the first four years of college
~ Books and supplies are eligible student expenses (as well as tuition and fees)
~ Pays 100 percent of the first $2,000 of qualified educational expenses, then 25 percent for the next $2,000
~ This is a per-student credit, so if you have more than one student, you can claim separate credits for each of them
~ Unlike other credits, the American Opportunity Credit is “refundable.” This means if your credit is more than your income tax, the IRS will refund you the difference, up to $1,000. (For example, if your income tax is $2,000 and you qualify for a full $2,500 credit, Uncle Sam will cut you a check for the $500 difference.)
Midwestern Disaster Relief CreditStudents who attend college in “Midwestern disaster areas” (states hit by flooding, tornadoes and other devastation in 2008) may be eligible for expanded credits for the 2009 tax year.
If you go to college in Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, and Wisconsin, you may be able to use this tax break.
Who Qualifies~ Students attending college in disaster counties (download
IRS publication 4492-B to see if your college qualifies)
~ Income limit for full credit: adjusted gross income $50,000 filing solo; $100,000 for joint return. Partial credit is available up to $60,000 filing solo, $120,000 filing joint.
Education Benefits~ $4,000 if you qualify for the Lifetime Learning Credit (more information below)
~ $3,600 if you qualify for the Hope Credit (more information below)
Lifetime Learning CreditWho Qualifies~ Income limit for full credit: adjusted gross income $50,000 filing solo; $100,000 for joint return. Partial credit is available up to $60,000 filing solo, $120,000 filing joint.
Education Benefits~ Up to $2,000 for qualified educational expenses per year per student; $4,000 if the student qualifies for Midwestern disaster relief
~ Covers only tuition and fees, not books or other materials
~ Pays 20 percent of first $10,000 of qualified educational expenses
~ Applies to all students, including graduate students and those taking just one course
~ No limit on the number of years it can be claimed
~ Is claimed per RETURN, not per student—educational expenses for more than one student are combined, but you will receive just one credit.
Hope CreditThe American Opportunity Credit essentially replaced the Hope Credit for the 2009 and 2010 tax years (Congress hasn’t yet authorized it beyond those dates). However, you may want to claim this credit if you qualify for Midwestern disaster relief.
Who Qualifies~ Income limit for full credit: adjusted gross income $50,000 filing solo; $100,000 for joint return. Partial credit is available up to $60,000 filing solo, $120,000 filing joint.
~ Students in first two years of college
Education Benefits~ Up to $1,800 for basic benefit; $3,600 if student qualifies for Midwestern disaster relief
~ Covers tuition and fees, not books or other materials
~ To claim full the $1,800, you need qualified expenses of at least $4,000
~ This is a per-STUDENT credit, so if you have more than one student, you can claim separate credits for each of them
Combining Credits When You Have More Than One Student Joe Orsolini, president of College Aid Planners, says he has a client with twin freshmen attending a school in the Midwest disaster relief area, so both claimed the Hope Credit. The client also has triplets who are in their junior years at schools that don’t qualify for the Midwest credit; one of the triplets used the Lifetime Credit, while the other two other used the American Opportunity Credit.
Altogether, says Orsolini, the family saved $16,200 in education tax credits.
You may not save money to this extent—but college tax credits are worth checking out to see how much Uncle Sam will give you for your online school costs.
Related Resources
Tax Information for Students (IRS website) 7 Ways You Can Save Thousands by Getting an Online College Degree
6 Tricks Online Degree Programs Use to Appear More Affordable
5 Ways to Earn College Credit for Career and Life Experience
Can Old Bachelor Degree Credits and Courses Transfer Toward a New Online Degree?
4 Surprise Factors that Determine Cost and Affordability of an Online University
10 Free Online Classes To Help You Get Ahead on the Job 7 Ways You Can Save Thousands by Getting an Online College Degree
4 Ways Your Company Can Offer Tuition Assistance for Online Education
Best Online Education Tax Deductions
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Resources for Online College Education Student Loans & Loan Programs The Best Online College Grant and Free Money Financial Aid Programs
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