Reuters Money

President Obama has asked Congress to renew the American Opportunity Tax Credit, which gives more than 12 million college students and their families tax breaks of up to $2,500 a year per student. Originally passed as part of the 2009 stimulus legislation, the credit is slated to expire at the end of this year. If it does, other credits and deductions would still be in place, but they would be less generous.

Here’s a quick guide to the credit as it stands now and what it could look like in 2011.

What is it? The American Opportunity Tax Credit essentially improves the existing Hope Scholarship, explains Mark Kantrowitz of Finaid.org. The Hope Scholarship offered $1,800 a year of tax credits for the first two years of post-high school education. The American Opportunity Tax Credit offers as much as $2,500 a year for four years, for a total of $10,000 per student.

And for low-income taxypayers, the American Opportunity Tax Credit is refundable, up to $1,000 a year. If your tax liability is less than the full $2,500 credit, you can get as much as $1,000 of it refunded to you. That’ll cover a few textbooks.

Who qualifies? Income limits are higher for the American Opportunity Tax Credit, too, says Bob Scharin, a senior tax analyst with Thomson Reuters. Single earners can claim the full credit as long as their income is below $80,000. (The income threshold is $160,000 for couples filing jointly.) It phases down until the credit disappears at $90,000 for single filers and $180,000 for joint filers.

The Hope credit limits were much lower — $50,000 to $60,000 for single filers and $100,000 to $120,000 for joint filers.

Does it matter who writes the college check? Even if Grandma pays the bill, Mom and Dad can still get the credit. They can also designate that the student take the credit on her taxes instead, if that’s more advantageous to the family. But they can’t transfer the refundable part of the credit. If parents don’t qualify for the refundable credit, the student can’t take it, says Kantrowitz.

Are there any good strategies for 2010? Yes. It takes $4,000 a year in college expenses to qualify for the full $2,500 credit, but you can’t take the credit on expenses you paid with a tax-free distribution from a 529 college savings plan. So, if you’re using a 529 to pay for college, make sure you leave at least $4,000 in expenses to pay out of pocket, or through loans, advises Kantrowitz.

What are the chances for extension? The education tax credits are likely to be rolled into the massive tax legislation free-for-all that Congress will start in earnest during a planned lame duck session after the November elections. But because the tax credit runs through 2010, it could be deferred until 2011 and then considered retroactively, notes Scharin.

And it’s costly: Extending the credit will cost $58 billion over ten years, according to White House estimates. But it is popular. Because it is a targeted at the middle class, it has broad appeal “not just with Democrats but with Republicans,” says Kantrowitz. “The pressure is on,” he says.

Photo: President Barack Obama speaks from the Rose Garden of the White House after meeting with college students and their families about the impact of the American Opportunity Tax Credit (AOTC) in Washington October 13, 2010. REUTERS/Kevin Lamarque