The American Opportunity Tax credit is a new tax credit which has replaced the previous Hope Credit for the 2009 and 2010 tax years. Under the new credit, not only has the name changed but the benefits have increased and expanded. In addition, part of the tax credit is refundable, unlike the previous hope credit.
Qualifications
Single individuals earning less than $80,000 or married filing joint couples making less than $160,000 qualify for the entire credit. Persons earning over these income limits may qualify for part of the credit. Eventually the credit phases out completely with incomes reaching $90,000 for a single filer or $180,000 for joint filers.
Qualified tuition and expenses now include any expenses paid that is for “course materials” meaning necessities for a course of study. For example, tuition, books, lab fee’s, and any other supplies that are necessary for the course being studied. Under the previous Hope Credit, in order for the expenses to be qualifying there were strings attached. These strings meant that tuition and expenses that could be claimed must have been paid to the specific educational institution as part of a requirement of enrollment. For example, as a condition for enrollment the institution may have required that you buy your books from them. Under the new American Opportunity Tax credit the expenses can be claimed regardless of where the materials are purchased, as long as they are a necessity for the course.
Amount and Calculation of the Tax Credit
The new tax credit is worth up to $2500 per qualified student. Taxpayers who qualify will receive a tax credit of 100% of the first $2,000 worth of qualified expenses. Then an additional 25% credit is available on the next $2,000 worth of paid qualified expenses for a total of a maximum $2,500 tax credit on $4,000 worth of paid expenses. The old Hope Tax Credit only covered up to $1,800 worth of qualified expenses.
When to claim the American Opportunity Tax Credit
The American Opportunity Tax Credit can only be claimed for the 2009 and 2010 tax years. However, it can be claimed for these two years for any of the first four years of a post- secondary education. Under the old Hope Tax Credit only the first two years of a post-secondary education expenses qualified to be claimed.
How the American Opportunity Tax Credit affects a Tax Return
The new tax credit matches the tax liability on the tax return dollar for dollar, up to the amount of tax of the tax liability owed. If the amount of eligible credit exceeds the amount of tax owed on a tax return, then the additional amount left over credit will be refundable up to 40% of the eligible tax credit. For example, if a taxpayer paid $4,000 in qualified expenses and was eligible for the full $2,500 tax credit and had tax liability of $1,500, then the additional $1,000 of tax credit would reflect as a refund. Under the old Hope Tax Credit, only the liability would be wiped out, there would be no refund.
Is the American Opportunity Tax Credit the only Educational Tax Credit
When figuring the best options for tax deductions on your tax return there are two other education deductions that can be claimed. However, only one can be claimed on a tax return for the same year. Additionally, if you take one of these three tax deductions for yourself, spouse, or dependent, then no one else can claim either of the other tax deductions on their return for the same student. The other two tax deduction credits are the tuition and fee’s tax deduction and the Lifetime Learning Tax Credit. It is best to look at the qualifications of all three tax credits and figure al three to see which will be best for you. Additionally, keep in mind the American Opportunity Tax Credit is good for only 2009 and 2010, where as the name implies the Lifetime Learning Credit, can be claimed every year with qualifying educational expenses.
As with all tax matters, it is advisable to hire a tax professional to obtain the best tax advise possible and for the best results for your personal tax situation and return.
Resources:
Tax Breaks for Education: Information Center
IR-2009-78, Special IRS Web Section Highlights Back-to-School Tax Breaks; Popular 529 Plans Expanded, New $2,500 College Credit Available
American Opportunity Credit
IRS Information Related to the American Recovery and Reinvestment Act of 2009