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.

 

529 plans

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.

 

ABLE accounts

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.