My wife is attending University of Phoenix online college. Our home, and the bricks-and-mortar office of U of P that she registered through, are both in designated disaster counties. I know we can claim the 20% Lifetime Learning tax credit for her tuition for 2008 and 2009, but I am wondering if the increased 40% credit would apply, since her "attendance" in courses is strictly online. Anybody know?

My take on it is that it would not be eligible for the 40% discount. From IRS Pub 4492-B:

"The education credits have been expanded for students attending an eligible educational institution *located in a Midwestern disaster area* (Midwestern disaster area students) for any tax year beginning in 2008 or 2009."

You attended the U of Phoenix, whose principal place of business is not in the defined disaster area. Because you attended online only, I believe the IRS would likely rule that you attended the institution at its principal place of business - e.g. Phoenix - and thus you would not qualify for the expanded credit. But I haven't seen an IRS ruling on this subject, nor have I seen a Tax Court decision, and thus I'd strongly recommend that you contact a tax attorney.