Tax Help for Higher Education

HBS Tax Preparation Services

As unemployment increases so does demand for higher education.  Graduate schools are often inundated with applications from recent college graduates who, finding employment prospects slim, return to school to pursue higher degrees.  Nontraditional students also add to the college roster.  Many seek higher education because they are “cyclically” unemployed.  They have been laid off because of a decrease in consumer spending (due to the recession) and attend school to sharpen their skills as they await the economic rebound.  Other nontraditional students are unemployed due to structural changes in the economy.  These individuals have spent years in industries that are now expected to experience prolonged decline (such residential construction).  They have returned to school to train for a new career with better prospects (such as health care). 

Whether traditional student or economic refugee, recent tax code changes have made college or vocational school significantly less expensive.  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.  My goal is to help you get your degree and get back on the job without digging yourself into debt.

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 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 American Opportunity Credit and the Hope Scholarship Credit is that, for certain students, it doubles the total credit available.  The Hope Scholarship Credit was only available for the first two years of post-secondary education.  The American Opportunity Credit is available for the first four years.  Because the American Opportunity 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 American Opportunity Credit also broadens the definition of expenses that qualify for the credit.  The Hope Scholarship Credit only listed tuition and related fees as qualifying expenses.  The American Opportunity Credit, 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.

A major difference between the American Opportunity Credit and the Hope Scholarship Credit is that up to 40% of the American Opportunity Credit 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 American Opportunity credit.  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 American Opportunity Credit.  I did not have time to highlight the many nuances that may impact your particular situation or other tax-saving incentives such as the Life-time Learning Credit, 529 plans, or the tuition deduction.  If you would like more 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.