New $2,500 tax credit available to college students

With tax season in full swing, a new $2,500 credit is lightening the tax burden for qualified undergraduate students at the University of Colorado and their parents --and in some cases putting money directly back into their pockets.

The American Opportunity Tax Credit, part of the 2009 stimulus package, increases refunds for qualifying students nationwide by expanding the previous college tax deduction called Hope -- which was only good for college freshman and sophomores -- and making juniors and fourth-year seniors eligible for up to $2,500 in credits.

The credit is currently in effect for 2009 returns, although President Barack Obama has proposed making the credit permanent.

Eligible students must have a minimum of $4,000 in qualified expenses -- including tuition, some fees, textbooks and other required course materials -- between January and December 2009. The expenses must have been paid out-of-pocket or with loans; scholarship- and grant-paid costs are excluded from the program.

Katrina Paste, a studio arts senior at CU, said she would have no problem racking up $4,000 in out-of-pocket expenses, especially since she spends nearly $100 every month on art supplies alone. As a fifth-year senior, however, Pasten is not eligible for the program, but she said it would have been a big help this year because she owes the government money and will receive no refund.

"I'm self sufficient and that extra money could have really made a difference," Pasten said.

The new credit is expected to help approximately 4 million more students receive educational benefits from the previous year and is estimated to pay more than $13.9 billion in estimated benefits for students and families in 2009 and 2010, according to textbookaid.org, a Web site detailing the program.

Until now, the Hope tax credit was the best option for most students, giving them a maximum credit of $1,800, which was used to reduce students' amount owed, but could not be refunded directly, said Donna Lyle, senior tax adviser at H&R Block in Boulder.

The new program allows 40 percent of the benefit -- or up to $1,000 -- to be refunded directly students, or the parents of dependent students, and the other 60 percent toward reducing students' payouts.

"When the new program came up last year, we thought, 'This is nice,'" Lyle said. "I think students are really going to benefit from these new credits and the refundable aspect."

Previously, the Hope credit allowed course materials and textbooks to be written off only if they were purchased through the educational institution, excluding supplies purchased online or through stores not affiliated with the school. The American Opportunity Tax Credit allows students to put required course materials toward their expenses, regardless of where they were purchased.

Trent Emory, a soon-to-be CU junior, is transferring from a college in Illinois and said he has taken advantage of the previous Hope credits, but is looking forward to receiving a refund this year with the new American Opportunity benefits.

"It's nothing to spend $4,000 a year on school," Emory said. "Any incentives like this just encourage students to attend school, even more pricey ones like CU, since there is an incentive to get a refund."

CU junior Kaisa Wallace-Moyer said she used Turbo Tax to do her own taxes this year and is getting a refund of $300, though she isn't sure if the American Opportunity Tax Credit is the reason.

"The program sounds great and I would be really disappointed if I didn't get the credit even though I qualified for it," Wallace-Moyers said. "I would definitely consider going to a CPA or something next year to make sure I was getting a full refund because any extra money could really help me out."