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College students who pay for books, tuition or similar school expenses in 2009 now have the chance to deduct such items from their taxes when filing in 2010.
A new law, signed Feb. 17 by President Obama as part of the federal stimulus package, allows college expenses incurred in 2009 to be deducted from taxes for as much as $2,500. Titled the American Opportunity Tax Credit, the law is an expansion of the Hope Credit and allows students to deduct $2,000 worth of college expenses and 25 percent of the next $2,000. Students who do not owe any taxes will be allowed to receive 40 percent of the deductible as a refund. Taxpayers with income more than $80,000 – or $160,000 for married couples – are not eligible for the credit.
“It’s a larger credit than the Hope Credit, obviously,” said David Gunter, a researcher for the Maine Revenue Service.
Gunter said he and Michael Allen, director of research at the Maine Revenue Service, conducted a study of the stimulus package and its estimated effects on Maine when it first began.
“We were estimating that [the tax credit] would reduce the federal tax liability for Maine residents by about $27 million,” Allen said.
Gunter said he and Allen reached the $27 million by scaling down federal estimates to match Maine’s population of 18 to 23 year olds. “It’s pretty crude, really,” said Gunter, who called it a ballpark estimation.
“The direct impact is that it reduces income tax liability for families,” Gunter said.
Under the tax credit, eligible students must meet several criteria: They must have not had college expenses deducted under the Hope Credit during the past two years; beginning in 2008, students must have been enrolled at least part-time in a degree program; and they must not have been convicted of a felony. Originally, under the Hope Credit, students were required to have been freshmen or sophomores, but the American Opportunity Tax Credit expands that requirement to include all four years of undergraduate studies. The new tax credit adds required course materials to the list of deductibles as well.
“Books, supplies, even computers — if they’re required … they’re taken,” said James McConnon, professor of economics at the University of Maine.
“[It] makes this credit available to more people,” McConnon said. “I think the overall effect is that it will put more money back into the pockets of people paying tuition expenses.”
McConnon believes the tax credit will help the struggling economy improve.
The tax credit does not apply to graduate students, according to Peggy Riley, the Maine state media contact for the Internal Revenue Service. The tax credit currently applies for expenses incurred in 2009 and 2010, but Congress may be willing to extend the program if it does well, Riley said.
“Right now it’s only on the books for 2009 and 2010,” Riley said.
The Hope Credit was non-refundable and allowed for a $1,800 deductible. The American Opportunity Tax Credit increases that amount. Parents who claim their students as dependents who are eligible can claim the tax credit, and students who are independent can do the same for themselves, but not both.
Bangor Daily News