Tax Bonanza for Attending Midwestern Colleges

Last Updated Mar 10, 2010 11:06 AM EST

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If you had a child attending college in the Midwest last year, you may be due a tax windfall.

That's because Congress passed a passel of relief measures, ranging from housing assistance to special breaks for college students, to help families recovering from the severe spring and summer storms that rolled through ten Midwestern states in 2008. Among those is a doubling of the Hope or Lifetime Learning credits for college students who attended school in 2008 and 2009 in states and counties declared disaster zones.

It doesn't matter that the disaster was long over by the time your kid enrolled University of Wisconsin at Madison last fall. If you meet the criteria, you could nab a break worth $4,000.

What's this credit and how do you claim it?
The Hope and Lifetime Learning credits are two college tax breaks that were passed in the '90s, which have largely gone unnoticed by upper-middle-income families because the income restrictions to claim them were pretty onerous. You used to have to earn less than $40,000 single or $80,000 when married to get either credit.

These income restrictions have been adjusted for inflation since then, allowing singles earning up to $50,000 and married couples with $100,000 in joint income to claim a full credit. Partial credits can be claimed by singles earning up to $60,000 and married couples with as much as $120,000 in adjusted gross income. Thanks to the national recession, more people are falling below those income thresholds.

Adjusted gross income, by the way, is what you claim on line 37 of the 1040 (bottom of the front page). It's the number you get after subtracting out alimony, contributions to retirement plans and workplace benefit plans, so your gross income could be considerably higher.

(If your income is even higher than that, but under about $200,000 gross, don't despair. There's another $2,500 college tax credit called the American Opportunity Tax credit that you can learn more about here that might work for you. That credit pays for anyone paying tuition for college undergraduates, no matter where the student attends school.)

Traditionally, the Hope Credit provided a write-off of up to $1,800 annually and the Lifetime Learning credit provided up to $2,000 annually. But if you had a child going to school in the right Midwestern counties in 2008 and 2009, you are allowed to double those amounts, claiming a maximum of $3,600 with the Hope credit and $4,000 with the Lifetime Learning credit.

Credits, incidentally, are considerably more valuable than deductions because they reduce your tax on a dollar-for-dollar basis. Deductions only reduce the income subject to tax. In other words, for somebody in the 30% bracket, a $1000 deduction is worth $300, but a $1,000 credit is worth a full $1,000 in tax savings.

How do you figure out whether your kid is going to the right college to claim this unusually lucrative break? Go to www.irs.gov and pull up Publication 4492-B (linked here). That's got every county affected and explains all the potential tax breaks that people living and attending college in these counties can claim.

What if you missed the credit in 2008--you qualified but didn't know to claim it? File an amended return, suggests Mark Luscombe, principal tax analyst with CCH Inc., a Riverwoods, Ill.-based publisher of tax information.

Your final step to claim either of these credits is to fill out a form 8863, which tells the IRS who was in college and helps you calculate the credit amount. Need the form? Here's a link to get one.

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