A deal to save the college-bound and their families from the fiscal cliff was made Tuesday evening. Congress extended the American Opportunity Tax Credit for five years.
The American Opportunity Tax Credit allows middle and low income families a tax deduction of up to $2,500 a year in education expenses for four years. This can shave off $10,000 from the entire cost of earning a college degree.
President Obama established the American Opportunity Tax Credit in 2009 to help families pay for growing college costs. It provides up to $10,000 for four years of college tuition for families earning up to $180,000. More than 9.4 million students and families benefit from the American Opportunity Tax Credit each year, according to the White House website.
The IRS website explains, "The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return. The credit is gradually reduced, however, for taxpayers with incomes above these levels."
Qualified expenses for the American Opportunity Tax Credit include expenditures for course materials, tuition and required fees. The IRS defines course materials as "books, supplies and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance."
The bipartisan fiscal cliff agreement also makes permanent Bush-era tax cuts for individuals earning less than $400,000 and married couples earning less than $450,000 a year.
"Under this law, more than 98 percent of Americans and 97 percent of small businesses will not see their income taxes go up," President Obama said. "Millions of families will continue to receive tax credits to help raise their kids and send them to college."
Still to be addressed are possible cuts in education funding because of federal budgetary concerns. Federal spending issues may include federal research monies and financial aid eligibility.
The federal government is the primary source of grants, loans and work-study programs to help families pay for college. Students use the FAFSA (Free Application for Federal Student Aid) to apply. The FAFSA became available for submission on January 1, 2013, for the 2013-14 school year.
The president stated his position Tuesday against more higher education spending reductions after the fiscal cliff bill passed. "But we can’t simply cut our way to prosperity... And we can’t keep cutting things like basic research and new technology and still expect to succeed in a 21st century economy," he said.
Obama's plan is "to move forward in deficit reduction, but we have to do it in a balanced way, making sure that we are growing even as we get a handle on our spending."
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