Higher Education Tax Breaks
In 2009, Congress replaced the Hope Scholarship Tax Credit with the American Opportunity Tax Credit (AOTC). Compared with the Hope credit, the AOTC oﬀers more annual tax savings and is available to people with higher incomes. Moreover, the AOTC can be claimed during a student’s ﬁrst four years of higher education, whereas the Hope credit was limited to the ﬁrst two years.
The AOTC was scheduled to expire after 2017, but the PATH Act makes it permanent. Under the AOTC, the maximum tax saving is $2,500 per student per year; that amount requires you to spend at least $4,000 per student in a calendar year. In addition, 40% of the AOTC (up to $1,000) is refundable, which means you can receive a check from the IRS if you owe no tax.
Money you pay for tuition and related fees counts for calculating the tax credit. Such qualiﬁed expenses also include expenditures for course materials, which means books, supplies and equipment needed for a course of study. An expenditure for a computer also would qualify for the credit if the computer is needed as a condition of enrollment or attendance at the educational institution.
To get the full AOTC, your modiﬁed adjusted gross income (MAGI) must be $80,000 or less, or $160,000 or less if you ﬁle a joint return. The credit phases out for taxpayers with MAGI over those amounts, with no credit allowed if your MAGI is over $90,000 or $180,000 if you ﬁle a joint return.
These plans, oﬀered by most states, allow contributions to grow, tax-free. Withdrawals also are untaxed to the extent of qualiﬁed higher education expenses.
Previously, computers and related equipment were considered “qualiﬁed,” for this purpose, only if they were required by the school for course attendance or enrollment. Under the PATH Act, outlays for computers, peripheral equipment, Internet access and computer software are classed as qualiﬁed expenses, even if they are not speciﬁcally required. Thus, if you buy a computer or related items for college, you can take money from the student’s 529 plan to cover the costs without owing any tax or penalty.
Another PATH provision aﬀects ABLE accounts, sometimes known as 529A plans. ABLE accounts are for individuals with special needs; tax-free distributions allow beneﬁciaries to pay for disability-related expenses without sacriﬁcing government assistance beneﬁts. Formerly, ABLE beneﬁciaries were limited to their home state’s plan, but now any state’s ABLE plan will be acceptable.