by Brenda Schafer MSA, CPA, CFP, EA
The Tax Institute at H&R Block

The Hope credit just got a great big, game-winning shot in the arm for 2009 and 2010. Thanks to the American Recovery and Reinvestment Act of 2009 (ARRA), the Hope credit is more valuable, and more claimable, by more Americans. It’s like Congress stepped up to the bat and hit this one out of the park. – Okay, enough of
the baseball analogies.

What the credit was. Prior to the ARRA, the Hope credit was nothing to sneeze at. For 2008, the maximum credit was $1,800 (100% of the first $1,200 of eligible expenses and 50% of the next $1,200 of eligible expenses. The credit could be claimed only for the first two years of college for students attending at least half time. Phaseout of the credit started at a measly $48,000 ($96,000 for joint filers). Only U.S. citizens and residents could claim the credit. Convicted drug felons need not apply, however (because they don’t qualify).

What it is (dude, what it is!) now. The student still must be going to school at least half time, pay for eligible expenses, be a U.S. citizen or resident, and not have a drug felony on their wrap sheet, but that’s about where the similarities stop. For 2009 and 2010, the Hope credit can be claimed for the first four years of college and you can even count your required course materials that you bought through your favorite online bookseller. The max credit for 2009 is $2,500 (100% of the first $2,000 and 25% of the next $2,000). (The credit will be adjusted for inflation for 2010.) To top it off, the credit is 40% refundable, which helps individuals who pay little or no tax get a much bigger benefit. On the other end of the spectrum, the credit doesn’t start phasing out until MAGI reaches $80,000 ($160,000 for joint filers). As a taxpayer with a kid in college, I say “Yee haw!”

Even though you won’t be able to actually claim this credit until you file your 2009 (or 2010) tax return, if you know you’ll be eligible to claim it, you might want to consider adjusting your withholding during the year so you can have a little more money along the way. –But if you adjust your withholding, be sure to rethink your withholding when the new year rolls around. I wouldn’t want you to get any nasty surprises when you file your 2010 (or 2011) return.