As you may know, a tax credit is much better than a tax deduction, and Treasury Secretary Tim Geithener is reminding college students to take advantage of a significant tax credit for tuition expenses.

The tax benefit is provided under the American Opportunity Tax Credit (AOTC), which allows parents and students to receive a tax credit of up to $2,500 for college expenses. Geithener says it can help make postsecondary education a reality for many students and families.

A recent Treasury Department analysis shows that 9.4 million families with college students are expected to benefit from the credit in 2011.  The AOTC is expected to provide $18.2 billion in tax relief to make college more affordable next year, and families are expected to benefit from an average credit of $1,900.

"America's prosperity depends on the economic policies we pursue to strengthen our nation's competitiveness," Geithener said.  "And the strength and competitiveness of our nation will depend largely on continuing to have the best educated students in the world."

Tax credit is expanded

The Obama Administration extended the AOTC, which was initially created under the Recovery Act, for an additional two years as part of the year-end tax cut package the President signed last month.  The AOTC replaced the Hope credit for 2009 and 2010 and with this extension will continue to do so for 2011 and 2012.

While the AOTC will provide greater benefits in the future, it's also helping students who have qualified education expenses in 2009 and 2010. Taxpayers will receive a tax credit based on 100 percent of the first $2,000 of tuition, fees and course materials paid during the taxable year, plus 25 percent of the next $2,000 of tuition, fees and course materials paid during the taxable year, according to the Internal Revenue Service (IRS).

For students claiming the maximum credit for these four years, the AOTC will provide up to $10,000 to help pay for the cost of college. The maximum available credit this year would cover about 80 percent of tuition and fees at the average two-year public institution, or about a third of tuition and fees at the average four-year public institution in 2011, according to a new Treasury analysis.

Improving on Hope

Geithener says The AOTC improves on its predecessor, the Hope credit, by providing larger tax cut for almost all students, applying to the first four rather than two years of college, and covering text books, a substantial cost to the typical college student, while the Hope credit did not. 

In addition, the AOTC is partially refundable, meaning that families with no federal income tax liability can receive the credit. These families are expected to receive more than $4 billion in refunds from the AOTC in 2011.  In addition, more families are eligible for larger credits because the income limits were expanded compared to the Hope credit.

Along with the tax credit, Secretaries Geithner and Duncan highlighted several other initiatives the Administration has undertaken to make college more affordable and accessible, including simplifying the Free Application for Federal Student Aid and increasing Pell grants, which are the main source of federal aid for low-income students enrolled in institutions of higher education.

A taxpayer who pays qualified tuition and related expenses and whose federal income tax return has a modified adjusted gross income of $80,000 or less ($160,000 or less for joint filers) is eligible for the credit. The credit is reduced ratably if a taxpayer's modified adjusted gross income exceeds those amounts. A taxpayer whose modified adjusted gross income is greater than $90,000 ($180,000 for joint filers) cannot benefit from this credit.