Note: The tax credits discussed in this article have been extended to tax returns prepared through 2017.
Hi, I'm Tiffany Smith from TurboTax. Is college tuition in the future for you or your kids? Then check out this expanded federal tax break.
The new American Opportunity Tax Credit extends bigger financial benefits to many more college tuition-paying middle-class families. It raises the income ceiling by 60 percent.
Married couples making up to $160,000 combined and individuals making up to $80,000 can claim benefits in tax years 2009 through 2017.
What's more, while the old Hope Education Credit applied only to freshmen and sophomores, the new deal lets juniors and seniors (or their parents) recover some tuition at tax time.
The American Opportunity Tax Credit can add up to $2,500 a year per student, a $700 increase. Even if the credit is bigger than your tax bill, you don't just lose it. Many taxpayers will receive checks for the difference, up to $1,000.
So how do credits stack up against deductions? Each dollar from a tax credit means a dollar back in your pocket. Tax deductions recoup only a fraction of each dollar you pay in taxes, because they just reduce your taxable income. Both are available, but you can't claim both in the same year. You're going to have to choose.
For most taxpayers, the IRS says credits will save more than deductions. But compare the savings before you send in your tax return.
Better still, the IRS has loosened restrictions on the expenses it allows. Say you've won a full scholarship to a state university. The American Opportunity Tax Credit can apply to essential textbooks, supplies and equipment, even laptops.
For more college-related tax tips, visit TurboTax.com.