College Tax Credit Changes Could Help Students with Disabilities

Section 1004 of The American Recovery and Reinvestment Act ("ARRA") made several changes affecting college expenses and tax credits for the 2009 and 2010 tax years. Tax-free distributions from 529 plans are expanded, and the Hope Credit for college expenses are significantly broadened.

While contributions to 529 plans are not deductible for federal income purposes, distributions from 529 plans are tax-free, if they meet certain criteria. The ARRA adds computer technology and equipment or Internet access and related services to the list of expenses that qualify for tax-free treatment. The existing list of qualified expenses include tuition, required fees, books, supplies, equipment, special needs services, and, if the student is at least a half-time student, room and board.

The Hope Credit can now be used for a student's first four years of college, rather just the first two years. The ARRA also increases the maximum amount of the tax credit to $2,500; increases the income limitations to qualify to $80,000 of modified adjusted gross income for individuals and $160,000 for "married filing jointly" with a phaseout for taxpayers with higher incomes; adds books to the allowable expenses; and, in some cases, allows up to 40% of the credit to be refundable.

For more information, see the "Tax Benefits for Education: Information Center."

Note: For some families, generally at the higher end of the tax brackets, it might be more advantageous for the student to file his/her own tax return to get a tax refund because of this refundable credit. Check with your tax advisor about this issue.