Want to Go Back to School? A New Tax Credit Could Help

(Nov. 3) - Thinking of going back to school, or finishing your degree? If you've been in the workforce for a while, the American Opportunity Tax Credit might be just the incentive you need to finish your degree. Cash-strapped college students and aspiring students alike may find some relief on next year's taxes, thanks to the new credit, which expands existing tax breaks for education.

As part of the federal economic stimulus package, the American Opportunity Tax Credit goes into effect for the 2009 and 2010 tax years. Each student can earn a maximum annual credit of $2,500 during the first four years of post-secondary education, including community colleges, universities, and trade schools. This is an increase of $700 over the current Hope Credit, which was only applicable to a student's first two years of college.

The expanded tax credit, which is aimed at Americans in the lower- and middle-income tax brackets, may let more people return to school to advance their education. The full credit is available to people who earn $80,000 or less annually ($160,000 or less for married couples filing jointly) and is phased out for taxpayers who earn more. For students who earn very low or no income, $1,000 is refundable.

The credit is also good toward such qualifying expenses as books, supplies, and equipment. To claim the full credit, students must spend $4,000 on tuition and related expenses; the first $2,000 is 100 percent refundable, as is 25 percent of the next $2,000.

The American Opportunity Tax Credit also applies to accredited online education programs, which are emerging as a popular choice for students who want to return to school while maintaining their careers.

Many students are feeling the economic crunch and are grateful for additional assistance to help pay their educational expenses.

"The tax credit will help me to pay for college by not only reducing the amount of money I need to pay toward tuition, but by also reimbursing me for the textbooks I was required to purchase for my courses," says Justin Hauschild, a senior at the University of Minnesota–Duluth.

Current economic woes have hit college students like him particularly hard, in the form of increasing tuition rates and a higher cost of living.

"Students face a double-edged sword financially," Hauschild says. "For many of us, the struggling job market has also meant an inability to find work to pay off ever-growing debt."

And then there are the "hidden" costs of education, such as books and supplies. "In many cases, textbooks are roughly one-quarter of what we pay in tuition," Hauschild says.

Even for students who don't use physical textbooks and tuition, the credit also provides a great incentive for those with limited finances to advance their education online.