Q. Currently I am working half-time and paying for my own college education. I heard about a great tax deduction for students.  Is this true? How does it work?

Yes, introduced in the American Reinvestment and Recovery Act of 2009, the American Opportunity Tax Credit is an expanded and revised higher education tax credit of $2,500 available for each of the first four years of post-secondary education.

So, as a student working to pay your way through school, the first $4,000 dollars of tuition, books, and fees that you pay will result in a $2,500 tax credit. This is calculated as follows:

• 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year and
• up to 25% or $500, of the next $2,000 of tuition and related expenses paid during the tax year

Remember, a tax credit is a dollar for dollar offset to tax you owe.  Thus, if when you filed your taxes, you owe $3,000, this $2,500 dollar credit will reduce your tax owed to only $500.

Additionally, up to 40% of this credit is refundable.  This means, you can receive up to $1,000 in excess to any tax owed. However, this credit begins to phase out at $80,000 for individuals and $160,000 for married couples filing separately.

So, if in the above example you owed only $1,500, your credit in the amount of $2,500 would cover the tax owed, and the remaining $1,000 would be refunded.

For individuals fortunate enough to have access to a 529 College Savings Plan, a related provision allows computers and computer technology to be considered a "qualified education expense" for tax years beginning in 2009 and 2010.