In 2009, Congress replaced the Hope Scholarship Tax Credit (Hope) with the American Opportunity Tax Credit (AOTC). Compared to 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 Protecting Americans from Tax Hikes (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 percent 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 more than $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.