The American Tax Opportunity Credit Boosts College Students, Parents

This week's column about a juicy tax break for college costs, comes to me via my intern, Geron Jordan. That's a big step up from last week's which came from con artists in the form of a scam letter in the mail! Gerron, a college student himself, alerted me to something called the American Tax Opportunity Credit. I had never heard of it—hey, my daughter's only 5—and was immediately intrigued. You will be too.

The ATOC gives college students and their parents a tax credit for up to $2,500 in undergraduate college expenses. There are two unique features that make it extra helpful. First, unlike the deductions you can take for tuition and fees, the ATOC can also be put toward books, supplies and classroom equipment. Second, 40 percent of the credit (up to $1,000) is refundable, meaning even people who owe no tax, because their incomes are low, can receive money back for education costs.

Typically, if your income is is $80,000 or less ($160,000 or less for joint filers) you can claim the credit. Those with incomes up to $90,000 can still file for the ATOC. The credit they receive will just be reduced.

The key is that you must file for the credit, even if you aren't normally required to file a return because you don't owe. Brace yourself, because as only an alphabet agency like the IRS can do, there are four numbered documents you need to know about to pull this off.

• Fill out form 8863 to get the ATOC credit.

• Use information from the school's 1098-T, a document all colleges must provide.

• Attack your ATOC filing to your 1040 or 1040A tax return.

This college credit is available for tax years 2009, 2010, 2011 and 2012. If you failed to claim it in past years, consult a tax professional about whether it would be possible to re-file a past return to correct the omission. One key: the student can't have finished the first four years of college before the beginning of the tax year you are applying for. One final note: the Feds only like to hand out one freebie at a time, so you can't claim the ATOC in the same year that you claim the tuition and fees tax deduction or the Lifetime learning credit. An accountant can help you decide which gives you the best bang for your buck.

Tax pros say many eligible families fail to file for this credit, so this is your heads up! Claim YOUR money that is coming back to you from the government. There are all sorts of other fine print details, and I'll let you hear those directly from the IRS itself via these links:

Questions & Answers about the ATOC

6 Facts about the ATOC