American Opportunity Tax Credit
The American Recovery and Reinvestment Act of 2009, enacted in February 2009, included among its provisions a new education credit, The American Opportunity Tax Credit.
As it was originally proposed by President Obama, the Act would have provided a $4,000 credit in exchange for 100 hours of community service. That didn’t make it to the final version, although the Act does direct the education secretary and the treasury secretary to conduct a feasibility study on requiring community service in order to get the tax credit.
The American Opportunity Tax Credit that was enacted is available in 2009 and 2010 and is an expansion and re-naming of the existing Hope credit. It makes the former Hope credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax, and allows the credit to be claimed for four post-secondary education years instead of two. However, the American Opportunity Tax Credit is for amounts paid in 2009 and 2010 only. You may be eligible for the lifetime learning credit for any tuition and fees required for enrollment you pay after 2010.
The maximum annual American Opportunity Tax Credit is $2,500 per student. That is a $700 increase from the previous Hope credit.
You can claim the American Opportunity Tax Credit if you pay qualified tuition and related expenses for an eligible student who is either yourself, your spouse, or a dependent for whom you claim an exemption on your federal tax return. You cannot claim the American Opportunity Tax Credit if your tax filing status is married filing separately. Students must attend school at least half-time.
Eligible educational institutions are any college, university, vocational school or other post secondary educational institution eligible to participate in student aid programs administered by the United States Department of Education.
Up to $2,500 of the cost of qualified tuition and related expenses paid during the taxable year qualify for the credit. The credit is student-based, meaning that the credit may be claimed for each eligible student (for example, if a family has two students in college) rather than just one per tax return.
The term “qualified tuition and related expenses” has been expanded to include expenditures for “course materials.” For the purpose of this credit, “course materials” means books, supplies and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance. The cost of a computer would qualify for the credit if the computer is needed for enrollment or attendance at the educational institution. Expenses such as insurance, medical expenses, room and board, transportation, or similar personal, living, or family expenses are not included.
The amount of the credit is calculated as 100 percent of the first $2,000 of tuition, fees and course materials, plus 25 percent of the next $2,000 of tuition, fees and course materials paid during the taxable year. If the amount of the American opportunity tax credit for which you’re eligible is more than your tax liability, the amount of the credit that is more than your tax liability is refundable to you, up to a maximum refund of 40 percent of the amount of the credit for which you are eligible.
You can’t claim the American Opportunity or Lifetime Learning credits for any expenses that were paid from the tax-free portion of a distribution from a 529 plan or a Coverdell Education Savings Account. The credit also can’t be claimed for payments made from tax-free scholarships and fellowships, Pell grants, employer-provided tuition reimbursement, Veteran’s educational assistance, or other tax-free educational assistance.
Though the income limits are higher than under the existing Hope and Lifetime Learning Credits, this credit also phases out. The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. A taxpayer whose modified adjusted gross income is greater than $90,000 ($180,000 for joint filers) cannot benefit from this credit.
A tax deduction of up to $4,000 can be claimed for qualified tuition and fees paid. However, you must choose whether to take a tax deduction or receive a tax credit. You may not claim the tuition and fees tax deduction in the same year that you claim the American opportunity tax credit or the lifetime learning credit. You also cannot claim the tuition and fees tax deduction if anyone else claims the American opportunity tax credit or the lifetime learning credit for you in the same year. Though the credit will usually result in greater tax savings, taxpayers should calculate the effect of both on the tax return to see which is most beneficial — the tax credit or the deduction.
The credit is claimed using Form 8863, attached to Form 1040 or 1040A. For more information, see IRS Publication 970, Tax Benefits for Education at www.irs.gov.
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