One More Reason to Go Back to School

Thinking about going back to school to switch careers or bolster your resume? Two federal income tax credits can help you out if you make the leap. Here's the deal:

(Up to $2,500 for Undergraduate Expenses)

Thanks to the gigantic Stimulus Act, the rules governing the Hope Scholarship tax credit have been eased for 2009 and 2010. The upgraded credit, which has been temporarily renamed the American Opportunity credit, now equals 100% of the first $2,000 of qualified post-secondary education expenses, plus 25% of the next $2,000 (assuming the phase-out rule explained later doesn’t apply to you). So the maximum credit for 2009 is $2,500. Ditto for next year.

If you qualify for the American Opportunity credit, you can claim the credit for your own expenses and claim additional credits for your spouse and dependent children if they have qualified expenses. Qualified expenses include tuition, mandatory enrollment fees, and course materials, including books. Optional fees for things like student activities, athletics, and health insurance don’t count. Neither do room and board costs.

Eligibility Rules

You can't claim the American Opportunity credit if you’ve already completed four years’ worth of college work as of the beginning of the tax year in question (2009 or 2010). If that’s your situation, move on to the Lifetime Learning credit, and see if it helps.

You also don't qualify for the American Opportunity credit if you’re married and don’t file a joint Form 1040 with your spouse.

So who qualifies?

Those who attend an eligible institution. Virtually all accredited public, nonprofit and for-profit post-secondary schools meet this definition, and some vocational schools do, too. The two main criteria are that the school must offer programs that lead to an associates or bachelors degree, or some other recognized credential; and the school must qualify to participate in federal student aid programs. An eligible school will have a Federal School Code, which you should be able to verify online at www.fafsa.gov.

Those who carry at least half of a full-time course load. The American Opportunity credit is only allowed for a year during which you carry at least half of a full-time load--in a program that would ultimately result in an AA, bachelor’s degree, or some other recognized credential -- for at least one academic period beginning in that year. So while you have to be a fairly serious student, you don’t actually have to intend to complete a degree or credential program.

The Phase-Out Rule

The American Opportunity credit is phased out (reduced or completely eliminated) if your modified adjusted gross income (MAGI) is too high. MAGI means “regular AGI” from the last line on page 1 of your Form 1040 increased by certain tax-exempt income from outside the U.S.

* The phase-out range for unmarried individuals is between MAGI of $80,000 and $90,000.

* The range for married joint filers is between MAGI of $160,000 and $180,000.

These same phase-out ranges will also apply for 2010 without any adjustments for inflation.