Education Benefits of ARRA 2009

The American Recovery and Reinvestment Act of 2009 (ARRA 2009) included three provisions for higher education benefits:  changes to the HOPE education credit program, increases in the Pell Grant limits, and expansion of the types of expenses considered Qualified Higher Education Expenses for §529 college savings plans.

Changes to the HOPE Education Credit Program (renamed American Opportunity Tax Credit)

The American Opportunity Tax Credit is a re-vamp of the HOPE program, presently just for 2009 and 2010, and amounts to a credit of:

• 100% of the first $2,000 of qualified tuition and related educational expenses, plus
• 25% of the qualified tuition and related educational expenses over $2,000 but not more than $4,000

The maximum credit for tax years 2009 and 2010 is $2,500 (up from $1,800), and is allowed during the first four years (previously the first two years) of the student’s post-secondary education in a degree or certificate program.  For the purposes of this credit, the definition of qualified tuition and related educational expenses has been expanded to include course materials (previously excluded) in addition to tuition and fees.

Up to 40% of this credit can be refundable, unless the student is subject to kiddie-tax rules. The credit is phased out for single taxpayers with MAGI over $80,000, or married-filing-jointly filers with MAGI over $160,000.

Section 529 Plan QHEE Definition

Prior to ARRA 2009, the only way to pay for required computing equipment and services for higher education was via a Coverdell Education Savings Account.  ARRA 2009 changed the definition of Qualified Higher Education Expenses (QHEE) for §529 college savings plans to specifically include computers and computing equipment, plus internet access and related services.

This is a quite generous definition, including computing equipment and services as long as “such items are to be used by the beneficiary (of the §529 account) and the beneficiary’s family during any of the years that the beneficiary is enrolled at an eligible educational institution.”

Pell Grant

For tax year 2009, the maximum Pell Grant has been increased to $5,350, and for 2010 to $5,550, which represents an increase in the scheduled maximums of $500 for each period.

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Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry.  . Read more from this author