UNIVERSITY PARK – Federal income tax experts estimate that the families of many Pennsylvania undergraduate college students may have missed out on a valuable tax credit when they filed their 2009 income tax return. But a consumer-finance specialist with Penn State Cooperative Extension says it’s not too late to take advantage of this credit, which also is available on the 2010 return.
The U.S. Internal Revenue Service estimates that 67 percent of eligible Pennsylvania families failed to take advantage of the American Opportunity Tax Credit, which required the completion of Form 8863 as part of the 2009 return. Robin Kuleck, director of Penn State Cooperative Extension’s Elk County office, explained that families may have many reasons for missing the credit.
“It is a new credit, available only for tax years 2009 and 2010,” she said, “and in most cases, it replaces and extends the Hope Credit, which was available only for the first two years of post-secondary education. The new American Opportunity Tax Credit is now available for students in the first four years of their post-secondary education.
“This credit is worth up to $2,500 per eligible student, calculated on 100 percent of the first $2,000 and 25 percent of the second $2,000 of eligible expenses. Another perk is that 40 percent of the credit is refundable, so taxpayers can receive up to $1,000 even if they owe no taxes.”
Kuleck said another possible reason for missing the credit may be confusion over the definition of a dependent and how families decide to file.
“Should the student continue to be claimed as a dependent or should they file independently?” she said. “Financially speaking, it is generally more beneficial for the parents to claim the student as a dependent, rather than the student claiming their own exemption. By claiming the student as a dependent, parents can then also claim the American Opportunity Tax Credit.
“The IRS definition of a dependent has certain conditions of relationship, age, support, citizenship and residence. For 2009, the age requirement was under age 24, a full-time student (as defined by the school) for at least five months of the year, and younger than the taxpayer.”
If your family might be among the two-thirds of eligible Pennsylvania families that missed the 2009 American Opportunity Tax Credit, Kuleck suggested that you review your 2009 IRS return and look for a copy of Form 8863. If you don’t find it, go to the IRS Web site and download a copy of Forms 8863 and 1040X.
“Another reason families may have missed the credit is based on how they financed their child’s education,” she said. “While scholarships and grants cannot be used in determining eligibility for this credit, student loan proceeds used to pay expenses can be considered. Eligible institutions issue a form 1098-T Tuition statement that includes details about qualified tuition and expenses billed and received as well as information on grants and scholarships.
“Eligible families that missed this important credit can file an amended return answering a few easy questions on Form 1040X and attaching a completed form 8863. Once it’s completed, save a copy of the forms for your files and mail a copy to the IRS.” Details about this and other education credits are included in IRS publication 970, “Tax Benefits for Education,” which is also available on the IRS website.
The estimates of the number of eligible families that did not claim the credit result from a recent IRS Wages and Investment Research Department report, which looked at the gross number of undergraduates compared to the number of 2009 returns filed that had Form 8863 attached.
Gary Abdullah, Penn State University