New Tax Credit Eases College Tuition Burden

If you want help financing college education, it could be as easy as filing your taxes.

The American Recovery and Reinvestment Act allows for a tax credit - a reduction in your tax bill - of up to $2,500 per student for the cost of tuition, fees and book expenses paid in 2009 and 2010. This amount is an increase over previous Hope and Lifetime Learning Credit limits and applies to tax years 2009 and 2010, so the earliest you'll get the credit is early 2010 for the 2009 tax year (MSN Money June 24).

You don't have to fill out any extra financial-aid applications to get the money - just file your tax return, whether you owe taxes or not. Note that the credit is phased out for individuals with modified adjusted gross income of between $80,000 and $90,000, or $160,000 and $180,000 for married couples.

To find out if you're eligible and learn what's covered, visit irs.gov. For example, the credit is available only for undergraduates attending college at least half time. And if you receive a grant or scholarship that covers tuition, fees and books, you can't get the tax credit. If you're ineligible, you still can apply for the lifetime learning credit of up to $2,000. Either way, you can take only one of the tax breaks for a particular college expense.

Many students pay their own college tuition, and this money will land back in their pockets. In addition, there's some nontraditional help for parents and relatives who are saving to pay for a child's tuition.

Some states, businesses and colleges are handing out free cash in the form of rebates and grants to help build up parents' college savings accounts (US News & World Report March 31). The amount is modest compared with the $2,500 money available immediately through the new economic stimulus bill. But if you collect the grants now, you could have an extra several thousand dollars when your child is ready for college.

Be diligent. Consider six sources of free cash for college savings via a 529 college savings account (irs.gov/taxtopics/tc313.html):

• States. Government agencies and charities offer grants for college savings to local residents. Use the map at Savingforcollege.com/529_plan_details/ to find your state and see what you're eligible to receive.
• Employers. Ask your employer about grants for parents who use the 529 account.
• Credit cards. If you typically pay your credit card bill in full and on time, ask about programs that will rebate a certain percent of your purchases directly to your 529. Some programs to consider: Fidelity, UPromise, Babymint, Freshmanfund, or Futuretrust.
• Websites. Websites such as Babymint, Littlegrad, Futuretrust, and Upromise will send cash back to shoppers who click through their sites to partner retailers.
• Colleges. Several hundred colleges offer matching grants for parents who save for their children. Use these programs if you're certain your child will attend a school that's signed up for this program. You could lose some or most of the rebate if your child chooses to go elsewhere.
• Relatives and friends. Freshmanfund makes it easy to ask relatives and friends to donate to your college savings account. The website will funnel the gift to any 529.

To get the tax credit, complete IRS Form 8863 next year when you file your 2009 return. In the meantime, make sure you keep good records for tuition, fees and book expenses throughout the year.