The Flip Board

(Listen Here 6:01 min)

Today’s podcast is highlighting some of the changes that came from the American Recovery and Reinvestment Act of 2009 – otherwise known as the Tax Stimulus Package. In particular, we are going to be talking about Section 25A, which is the Hope Scholarship Credit. Remember, a tax credit is like a negative tax. It offsets dollar for dollar your liability to the government, and it is better than a deduction.

Old Section 25A on Steroids

Here are some of the enhancements for tax years 2009 and 2010. This has been entitled by the government, The American Opportunity Tax Credit. But, it is really just an enhancement of Section 25A, which is for the Hope Scholarship Credit. Under the old Hope Credit, you were able to take a credit for one hundred per cent of the first $1,200 expended for tuition and related expenses. Then you were able to take a credit for fifty per cent of the next $1,200. So, the maximum credit under the old rule was $1,800.

The New Rule is Better

You get to take one hundred per cent of the first $2,000 and then twenty five per cent of the next $4,000 that is expended for tuition and related expenses. (That’s a total $2,500 tax exclusion) By the way, that now includes “course materials”. So, it is a broader definition for what we can spend our money on. Under the old Hope Credit, you were only allowed to take this exclusion for the first two years of Post Secondary Education. The new version allows us to take it for up to four years. So it is a broadening to include four years of Post Secondary Education. Thus, if you are on the four year plan, you should be able to cover all four years of college.

More People Qualify

Another enhancement is that they have expanded the range of people who qualify to take this credit. Under the old rule, there was a phase out. If you made two much money, the credit was no longer available to you. Those phase outs started around $50,000 for single filers and $100,000 for joint filers. Under the new rule, those phase outs have been raised. So, a person making $80,000 (Adjusted Gross Income or AGI) for single filers and $160,000 (AGI) for joint filers is where the phase outs now start to kick in. Under the new rule, if your income for a single filer equals $90,000 (AGI) or $180,000 (AGI) for a joint filer, then you are phased out from taking these credits.

If Child Claims Exclusion – They Must Provide 50% Support

One thing that continues, though, is that if a child is going to take this credit for themselves, they have to provide for more than fifty per cent of their own support. So, unfortunately, if Mom and Dad are providing for more than fifty per cent of a child’s support, that child won’t be able to take this tax credit.

This Credit keeps Getting Better

One interesting facet of this new legislation is that this credit applies against the alternative minimum tax (AMT).

And Partially Refundable

What if you have very little income, and you have very little tax liability because of the low income, and you get this credit? Can you take the credit? Normally, a credit offsets your tax liability dollar for dollar. But, what if the amount of your credit exceeds the amount of your tax liability or your debt to the government? This is a unique tax credit in that it is refundable or partially refundable. Forty per cent of this credit can be paid to you as a refund if the amount of your credit exceeds the amount of your income tax liability. So, as an example, let’s say that if I have zero tax liability for 2009, but I fully qualify for one-hundred percent of this credit. That means that forty percent of the $2,500 credit will be paid to me as a refund. Remember, forty percent times $2,500 equals $1,000 of cash in my pocket because up to forty per cent of this tax credit is refundable.

This is a Good Deal for Taxpayers

In summary, the old Section 25A Hope Credit was a good deal for taxpayers. The new version under the American Recovery Act and Reinvestment of 2009 is even better. It has expanded definitions of what we can spend money on, and it has expanded the range of taxpayers who can qualify because of a lengthened phase out period, and we can use it for more than two years. We can use it for four years of Post Secondary Education expenses. This is a wonderful tax incentive. It is designed to stimulate the economy and encourage education.