Beginning this tax season, parents of college students can claim up to a $2,500 tax credit for college expenses thanks to the American Opportunity Tax Credit. Parents can claim the maximum tax credit if they have spent at least $4,000 in qualified expenses such as tuition, fees and books.
This new tax credit is actually a remodeled and more generous version of the stingier Hope tax credit, which fewer families could claim.
Parents who are paying for a child's college education can qualify for the new credit during their child's first four years of college. That's better than the previous Hope tax credit, which only covered expenses for freshmen and sophomores and maxed out at $1,800.
Most families should be able to pocket the new tax credit. Married couples will qualify for the full deduction as long as their modified adjusted gross income doesn't exceed $160,000 or $80,00 for single parents. Couples could get a partial tax credit if their adjusted incomes range between $160,000 and $180,000 and $80,000 and $90,000 for single tax filers.
A tax credit, by the way, is far more valuable than a tax deduction. A tax credit will reduce your final tax bill dollar per dollar.