American Opportunity Credit

As the unemployment rate rises so rises demand for higher education.  The bleak job market that coincides with the 2010 fall semester has stretched the meaning of the phrase “back-to-school.”  This year, traditional college students are sharing the campus with a variety of older, more experienced attendees.  Many of these non-traditional students are “cyclically” unemployed (laid off because of a decrease in consumer spending) and have enrolled to sharpen their skills as they await an economic rebound.  Others are unemployed because of structural changes in the economy.  These students have spent years in industries that are expected to experience prolonged decline (such residential construction) and have returned to school to train for a career with better prospects (such as health care).  At the same time, graduate school classrooms have reached capacity as recent college grads, finding slim employment prospects, return to pursue higher degrees.

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Recent tax code changes have made college or vocational school significantly less expensive for both the traditional and nontraditional student.  The American Recover and Reinvestment Act of 2009 modified the Hope Scholarship Credit for 2009 and 2010, renaming it the American Opportunity Credit.  The American Opportunity Credit is available for more years of college attendance, reimburses for more expenses, and benefits taxpayers with higher income than the Hope Scholarship Credit.  A portion of the American Opportunity Credit will also generate a refund for many taxpayers who have no tax liability.  Today, I will discuss the 2009 and 2010 American Opportunity Credit and highlight some changes that transformed it from the Hope Scholarship Credit. 

The annual credit amount of the American Opportunity Credit (AOC) is the same as the Hope Scholarship Credit (HSC).  It will reduce the tax burden of qualifying taxpayers by 100% of the first $2,000 and 25% of the second $2,000 spent on qualifying education expenses during the year.  If you pay more than $4,000 in annual qualifying expenses you may receive a tax credit of $2,500 ($2,000 times 100% plus $2,000 times 25%).  The credit is a per student credit.  If more than one family member qualifies for the credit, the full amount will be available for each student.

A major difference between the AOC and the HSC is that, for certain students, the AOC doubles the total credit available.  The HSC was only available for the first two years of post-secondary education.  The AOC is available for the first four years.  Because the AOC only applies to 2009 and 2010, this change will only benefit taxpayers who completed their first or second year of higher education prior to 2009. 

The AOC also broadens the definition of expenses that qualify for the credit.  The HSC only listed tuition and related fees as qualifying expenses.  The AOC, however, adds books and related course materials to this list.  A computer may also qualify if it is a requirement for enrollment at the institution.

Another major difference between the AOC and the HSC is that up to 40% of the AOC is refundable.  This means that a taxpayer can receive up to 40% of the credit ($1000) as a refund for each eligible student, even if they owe no tax.

Income limitations for those who qualify have also increased with the AOC.  Individual taxpayers with modified adjusted gross incomes of $80,000 or less ($160,000 if married and filing jointly) will qualify for the full amount of the credit.  The amount of qualifying credit begins to be reduced once incomes exceed this threshold and is reduced to zero once an individual taxpayer’s income exceeds $90,000 ($180,000 if married and filing jointly).  Those who are married but file their tax returns separately do not qualify for the credit.

In this article, I have discussed the basics of the AOC.  There are, however, many nuances that may impact your particular situation.  I did not discuss other tax-saving incentives such as the Life-Time Learning Credit, 529 plans, or the tuition deduction.  If you would like more information about tax incentives for higher education, check out IRS Publication 970, consult your tax professional, or feel free to call our office.

Brett Hersh's avatar
  • Author: Brett Hersh
  • Bio: Brett Hersh, EA, MBA, is the owner of HBS TAX & Small Business Experts. He is an Enrolled Agent (EA) with the IRS and licensed by the US Treasury Department to prepare all tax returns and represent taxpayers before the IRS for audits, collections and appeals. He is also Dave Ramsey’s ELP for Tax and Accounting, a continuing education instructor for tax professionals through Lorman Education, and a local speaker/presenter on the topics of tax and business growth. He can be reached at (304) 267-2594.