If you’re paying $4,000 or more per year for your college student, chances are that you’ll be eligible for $2,500 credit for the tax years 2009 and 2010.

Get involved with this now, it’s worth it, because more and more college-related items are tax deductible. If your kid has $5,000 of expenses, in a tax bracket of, say, 25%, there’s $1,250 deduction off the bat. And your college kid will definitely have that much in tax deductible expense because tuition and fees are included, as well as new and long overdue items like expensive text books and other course materials.

Always calculate what the deduction would amount to by using your tax bracket. Here’s the website for the American Opportunity Credit, which is part of the American Recovery and Reinvestment Act. Your kid can get a complete list of what’s tax deductible there.

Don’t do this task for them. They can learn so much about the tax system this way. Have them do these simple 4 steps:

1. Send out a 1098T form, which lists tuition and fees. It’s the easiest way to keep track of those fees, and to let the IRS know they’re paying them. It’s also great for them to start habits of keeping official paper trails, and being as official with the IRS as possible is ALWAYS a good thing. Have them download the form at the American Opportunity Credit website.

I explain to my students that being in college is kind of like owning a small business, and they should learn the habits of being a business owner. They’re investing in themselves, and so the money they spend is a capital investment in their business. They are the product, the intellectual property. It may sound funny, but sending out any form that’s not a W-2 or 1099 feels like you own your own business.

They’ll feel empowered, so do try explaining it that way.

2. Have them get a receipt saving book you get at Staples, specifically designed to record and save receipts. If they have an official place, they’ll use it. Otherwise book receipts and student organization fee receipts will end up in jeans pockets in the laundry.

3. Have them create a list from the American Opportunity Credit website of all deductible expenses and then keep track of them for the tax year 2009. Explain to them that this tax year is well under way. Have them start the whole exercise by retroactively going back to Spring 2009 semester and figuring out what they spent, according to the checklist. Then they’ll be ready to go for the Fall semester starting soon.

4. At the end of the calendar year, have them do their portion of your taxes—they need to organize the information, with the amount of the expenses listed and categorized and backed up with receipts and copies of the 1098T they filled out. Then you show them how to translate expenses into deductions by using your tax bracket rate. Then you take that dollar amount and apply for the credit. Have them fill out all forms.

If you have a younger teen at home, have them at least be aware of what their older sibling is doing, so they’re ready to go when it’s their turn.

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