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William Perez

Prepaying College Expenses (Year End Tax Tips)

By December 8, 2009

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Students who pay tuition and other college-related expenses this year for classes beginning early next year can take the deduction or tax credit for those expenses this year. The rule is that if a class begins within the first three months of next year, you can take a deduction or tax credit if those expenses are paid this year.

Undergraduate students have a major new tax break to consider: the American Opportunity tax credit. Unlike the Hope credit that it temporarily replaces for 2009 and 2010, the American Opportunity credit is available for the first four-years of college education, is worth up to $2,500 in tax credits on the first $4,000 of expenses, and up to 40% of the credit is refundable -- meaning it can generate a tax refund in excess of what you paid in through withholding. Also, the cost of books, software, and other college education expenses can be included when calculating this credit.

While 2009 is the first year for the American Opportunity credit, 2009 will be the last year for the tuition deduction. This deduction is not limited to undergraduate courses. Thus graduate students, people taking undergraduate classes beyond four-years, and people taking occasional classes will take to review the tuition deduction versus the Lifetime Learning tax credit. Both the tuition deduction and Lifetime Learning credit are based only on tuition expenses.

December 8, 2009 at 5:25 pm
(1) mac says:

Currently his new education credit is good for BOTH 2009 AND 2010, so whether or not to PREpay is really an individual matter. If by prepaying, the addtional costs exceed the maximum allowable, then a taxpayer could actually lose for themselves some of the credit.

December 8, 2009 at 6:24 pm
(2) William Perez says:

That’s a great point, Mac. The converse can also be possible. There’s two situations where prepaying could help: if the taxpayer qualifies only for the deduction, and they want to get the deduction this year. Or where the taxpayer will be a first-year student in 2010, and so prepaying now will get some of the Amer. Opp. credit into this year, and some into next year.

December 10, 2009 at 5:17 am
(3) CLS says:

Is the American Opportunity tax credit good for only the first four undergraduate years or is it available for people taking longer to get their bachelor’s degree? I ask because our son just completed a fifth year in June 2009 at which time he received two bachelor’s degrees.

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