American Opportunity Tax Credit

American Opportunity Tax Credit
(Formerly known as the Hope Scholarship Tax Credit)

The following changes have been made to the Hope credit. The modified credit is now
referred to as the American opportunity tax credit (AOC).

Credit Amount Increased: The maximum amount of the AOC increases from $1,800
to $2,500 per student.

Income Limits Increased: The amount of the AOC is gradually reduced if your
modified adjusted gross income (AGI) is between $80,000 and $90,000 ($160,000 and
$180,000 if you file a joint return). Exception. For 2009, if you claim a Hope credit for
a student who attended a school in a Midwestern disaster area, you can choose to figure
the amount of the credit using the previous rules. However, you must use the previous
rules in figuring the credit for all students for which you claim the credit. For 2009, the
amount of your Hope credit is phased out (gradually reduced) if your modified adjusted
gross income (AGI) is between $50,000 and $60,000 ($100,000 and $120,000 if you
file a joint return). You cannot claim a Hope credit if your modified AGI is $60,000 or
more ($120,000 or more if you file a joint return).

Years to Claim Increased: The AOC can now be claimed for the first four years of
post-secondary education. Previously the credit could be claimed for only the first two
years of post-secondary education.

Additional Information:
  • Generally, 40% of the AOC is now a refundable credit, which means that you can receive up to $1,000 even if you owe no taxes.
  • 100% of the first $2,000 in qualified tuition and related expenses; and 25% of the next $2,000 in qualified tuition and related expenses qualify under this new credit.
  • The term "qualified tuition and related expenses" has been expanded to include expenditures for "course materials." For this purpose, the term "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.

What is the American Opportunity Tax Credit?
Under the American Recovery and Reinvestment Act (ARRA), more parents and students will qualify over the next two years for a tax credit, the American Opportunity Credit, to pay for college expenses.

The new credit modifies the existing Hope Credit for tax years 2009 and 2010, making the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

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. These income limits are higher than under the existing Hope and Lifetime Learning Credits.

Frequently Asked Questions

Who Can Claim the Credit?
Generally, you can claim the American opportunity credit if all four of the following requirements are met.
  • You pay qualified education expenses of higher education for an eligible student.
  • The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.
  • You did not to claim the Hope credit for any student in 2009.

Which college expenses can be used to claim the credit?
Expenses that are required for enrollment or attendance at an eligible educational institution, such as:
  • tuition
  • fees (only if mandatory)
  • books (whether bought at the school store or not)
  • supplies that are necessary for a course of study
  • equipment that is necessary for a course of study
  • any expense that the school mandates as a condition for attendance

What is an eligible educational institution?
An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Your educational institution should be able to tell you if it is an eligible educational institution.

What if expenses were paid with college loans?
You can claim an American opportunity credit for qualified education expenses paid with a loan, even if loan payments are deferred until after graduation. Use the expenses to figure the American opportunity credit for the year in which the expenses are paid, not the year in which the loan is repaid. Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account.

What if expenses are paid with tax- free aid, such as the Pell Grant?
If the grant or scholarship is tax-free (as a Pell grant is) you cannot use the portion of expenses paid by that award to figure the credit. If you had expenses beyond the award amount, use that portion for the credit. Other tax-free aid includes scholarships, fellowships, employer provided educational assistance and veteran’s educational assistance.

What is the time frame allowed to claim a college tax credit for 2009?
You may claim the credit for expenses paid in 2010 for college classes that began in 2010 or the first three months of 2011. So if you paid in December for the spring semester of - that counts.

Can I take the American Opportunity Tax Credit if I already took a tuition and fees deduction?
No, you cannot take both the tax credit and deduction for the same student. This would be a double benefit and is not allowed.

Should I take a tax credit or tuition and fees deduction?
This is not something that CPN can answer; you should discuss which would give you the maximum benefit (paying the lowest amount of taxes) with your tax accountant.

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