The American Recovery and Reinvestment Act abbreviated ARRA is an economic stimulus package that was passed in February of 2009. The ARRA was proposed to stimulate the economy during the economic downturn. The act includes, among many items, benefits for domestic spending on education. The ARRA offers an adjustment to the Hope Credit and will now be called the American Opportunity Credit. Also the package presents a change to the 529 plan for tax-free college savings plans and prepaid tuition programs.

American Opportunity Credit:

Under the provision of this act more parents and students will be able to qualify for this tax credit over the next two years to assist in paying for college expenses. Although the credit is not available for 2008 tax returns, the credit will be available for 2009 and 2010 tax returns. The credit is a modification to the preexisting Hope credit. The credit also allows for a wider array taxpayers including those who owe no taxes and those in higher tax brackets. In addition required course materials have as well been added to the list of qualifying expenses. Furthermore the credit may be claimed for four years of post-secondary education as opposed to the original two years allowed by the Hope credit

The maximum annual credit allowed is $2,500 per student. Individuals that have a modified adjusted gross income of $80,000 or less, and married couples filing a joint return have a modified adjusted gross income of $160,000 or less can qualify for this credit. These amounts are an increase in the prior amounts allowed by the Hope and lifetime learning credits. The credit will be phased out for any taxpayers with income that exceeds these levels.  For students who attend college in a Midwestern disaster area will qualify for a special expansion of up to $3,600 but only for the tax year of 2009.

529 Savings Plan:

The 529 Savings Plan are a popular way that families save for educational expenses. The plan allows taxpayers to either prepay or contribute to an account for the costs of a given student’s higher education. The distributions from the plan are tax free as long as they are used to pay for educational expenses for a selected recipient. The expenses that are allowed include tuition, fees, books, supplies, and special needs services. If the student is at least considered a half-time student then the distributions can also be used for room and board.

The ARRA has made the change that in 2009 and 2010 additional items that will qualify for the distributions will include computer technology and equipment or internet access and services to be used by the student while they are enrolled at the institution. Any software that is not designed for primarily educational purposes will not qualify. The hope is that with this extra advantage many people who utilize the 529 savings plans will be able to benefit and have the beneficiaries enrolled in the higher education well prepared.

Please remember that this is only a summary of a portion of the American Recovery and Reinvestment Act and for further information please contact us with any questions.