The American Opportunity Tax Credit For College

Saving for retirement is hard enough.  Attempting to fund the nest egg with kids in college almost seems impossible.  Trying to pay sky rocketing college tuition costs is depressing at best and every little bit helps.  If you're looking for some help from the IRS, welcome the American Opportunity Tax Credit.  The American Opportunity Tax Credit expands the already-existing Hope credit for 2009 and 2010.  As part of the American Recovery and Reinvestment Act of 2009, more parents with children in college can qualify for a tax credit.  The best part is that it's not limited to just low income earners.

Hope Credit Revisited

The Hope Scholarship Credit is available to taxpayers who have incurred expenses related to the first two years of post-secondary education. For this credit to be claimed by a taxpayer, the student must attend school on at least a part-time basis. The credit can be claimed for education expenses incurred by the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent.

This credit allows for the first $1,100 in “qualified tuition and related expenses,” as well as half of qualifying expenses in excess of $1,200, to be fully creditable against the taxpayer’s total tax liability. The maximum amount of the credit is $1800 per eligible student (for 2008).

One of the limitations of the Hope Credit was that you could not use it and the Lifetime Learning Credit in the same year.

Here are some of the benefits of the new American Opportunity Credit:

Higher Income Limits.

Individuals with a modified adjusted gross income up to $80,000 ($160,000 for married couples) can get a full tax credit while individuals earning up to $90,000 ($180,000 for married couples) can get a partial credit. The varies differently on the phaseout ranges of the Hope Credit.  The credit was completed phased out for individuals earning $57,000 and married couples between $94,000-$114,000. This nice little bump will allow more people to take advantage of it.

Increase of Tax Credit

Who doesn't want an increase on a tax credit?  Luckily, that's exactly what the American Opportunity Credit gives parents in need.  The increased tax credit is  up to $2,500 vs. $1,800 under the Hope Credit.

Four Years Of College

For those that used the Hope Credit, one of the disadvantages was that it was only good for the first two years of college.  The new tax credit improves upon this and applies to all four years of undergraduate college.

American Opportunity Credit

This is taken Directly from IRS Pub 970:

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 American Opportunity Credit is not available on the 2008 returns taxpayers are filing during 2009. 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.

If looking to take advantage of this credit, please be sure to consult with your tax advisor.