- 100% of the first $2,000 of qualified tuition and related expenses
- 25% of the next $2,000 of qualified tuition and related expenses
The maximum amount of the credit is therefore $2,500.
Prior to 2009, the credit was only available for the first two years of college. For 2009 and 2010, the credit is now available for the first four years of college.
The definition of “related expenses” is now expanded to include the cost of books and other course materials (which were not allowed as qualifying expenses prior to 2009).
Forty percent of the Hope Credit is now refundable—meaning you can get a refund even if you have no tax liability.
Example: John and Joan pay for their son Jim’s college tuition. His tuition, fees, and books for the year cost $5,000. The credit is equal to:
- 100% of the first $2,000 of expenses = $2,000
- 25% of the next $2,000 of expenses = $500
- Total Hope Credit = $2,500
Let’s say John and Joan’s tax liability for the year is $1,300. Prior to 2009, the Hope Credit was not refundable, so the maximum Hope Credit they could take was limited to their tax liability ($1,300). They lost the extra $1,200 Hope Credit. Now that 40% of the Hope Credit is refundable, they are able to take more of the credit:
Refundable Portion: 40% times $2,500 = $1,000
Nonrefundable Portion: 60% times $2,500 = $1,500
The nonrefundable portion of the Hope Credit is still limited to their $1,300 tax liability (they lose $200 of the Hope Credit here), but they can now take a $1,000 refundable Hope Credit so their total Hope Credit is $2,300.
The Adjusted Gross Income (AGI) phaseouts have also been increased for 2009 and 2010. The phaseout range for a Single filer is $80,000 to $90,000, and the phaseout range for a Joint filer is $160,000 to $180,000.
A final note—the tuition and related expenses must be PAID in 2009 or 2010 for an academic period BEGINNING in 2009 or 2010. For example, if your child registers for a Winter 2009 course (which begins January 2009), but you pay the tuition bill in 2008, the tuition was not paid in 2009 and therefore will not qualify for the enhanced Hope Credit.
A final, final note—the Hope Credit will be known as the American Opportunity Credit for 2009 and 2010.
Fine Print: This posting contains general tax information that may or may not apply in your specific tax situation. Please consulteth a tax professional before thou relyest on any information contained in this post.