The Education Tax Credit, Your College Tuition Assistance

You will not magically receive a check simply because you or your child went to college, either. Your college will not apply for the credit on your behalf.

This might seem insultingly obvious, but there is good reason to believe that thousands of families who were eligible* for education tax credits last year, did not claim** them.

2009 Enrolled Postsecondary Students and Tax Returns with Education Credits Claimed (in millions)

Tuition Tax Credit- Best Uses

• your qualified education expenses; and
• your federal tax liability

(If you are not liable for at least $2,500 in income taxes, the highest amount you can receive from the credit is $1,000, even if you have spent more than $2,500 in qualified education expenses.)

What are the most helpful ways you can use that $2,500 (assuming that you can already make ends meet)?

Whenever you get free money, there are two principles that should guide you:

1. reduce debt; or
2. grow income

In other words, put that money to work improving your financial situation, whatever it is. That $2,500 can be worth even more to you, depending on what you do with it.

Here are some ideas:

• Save the money and use it for a couple of summer courses. Getting your degree faster will save you money overall and get you qualified for a higher income job more quickly. If you have federal Pell grant eligibility for two awards in one year, the added tax credit savings should help.
• If you have taken out a college loan (and this does qualify for the tax credit, even if deferred) start paying the accrued interest so that your payments will be lower when you graduate.
• Save the money for buying cheap textbooks next semester. Many students buy at their (expensive) college bookstores, because they issue credit for financial aid that has not come in yet. Students with money in their pockets can pick and choose where to buy cheaper books.
• Use the money to build some equity. Invest in a business or start one up to add more income. This is easier to do now than at any other point in history. The internet has created a global marketplace. If you have the vision, the tools can be found easily and cheaply.

But it's important not to sit and wait passively for a rebate check (unless you do not have any income). Work out a plan to use your education tax credit wisely. Remember, as long as you paid the qualifying college expenses, you can spend the tax credit any way you'd like.

*Institute of Education SciencesNational Center for Education Statistics

**U.S.Treasury, tax policy documents 10-12-2010

[Disclaimer]I am not a tax professional; please verify this (or any other) legal or tax information with a certified expert in the field or the IRS.

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