College Credit Extended for Taxpayers

The American Opportunity Credit originated in 2009 with American Recovery and Reinvestment Act.  This act greatly modified the Hope Scholarship Credit and renamed it the American Opportunity Credit.  The American Opportunity Credit (AOC) was scheduled to expire on December 31, 2010.  On December 17, 2010, however, the Job Creations Act extended the AOC through December 31, 2012.  After the AOC expires, the Hope Scholarship Credit is scheduled to return.

The AOC improves upon the Hope Scholarship Credit (HSC) in three basic ways:

  1. The AOC is available for more years of college attendance and reimburses for more expenses than the HSC
  2. The AOC increases the income thresholds of those who qualify, and
  3. Perhaps, the most generous benefit is that a portion of the AOC is refundable – it can generate a refund even if the taxpayer has no tax liability.  The HSC is not refundable.

The annual credit amount of the American Opportunity Credit is the same as the Hope Scholarship Credit.  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 also a per-student credit.  If more than one family member qualifies for the credit, the full amount will be available for each student.

As mentioned above, one improvement of the AOC is that it covers more years of college than the HSC - in effect, potentially doubling the available credit per student.  The HSC was only available for the first two years of post-secondary education.  The AOC is available for the first four years. 
The AOC also broadens the definition of expenses that qualify for the credit.  The HSC only covered tuition and related fees as qualifying expenses.  The AOC, however, adds books and other course materials to this list.  A computer may even qualify if it is a requirement for enrollment at the institution.

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 credit begins to be reduced once incomes exceed this threshold and will reach 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.

A 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.

The AOC can be claimed by the student (if not a dependent) or a parent claiming the student as a dependent regardless of who paid for tuition.  Qualifying expenses must be reduced by any grants or scholarships.  The credit can be claimed by any student pursuing a degree within the first four years of post-secondary education.  Graduate classes and vocational certificates also qualify so long as they occur within the student’s first four years of post-secondary education.  The student must also attend at least half-time for one semester during the year and have no felony drug convictions.

In this article, I have discussed the basics of the American Opportunity Credit.  I did not discuss other tax-saving incentives such as the Life-Time Learning Credit, 529 plans, or the AGI tuition deduction.  If you would like more information see IRS Publication 970 or feel free to call our office to consult with a tax professional. 

 

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.