Last week I offered some last-minute tax filing tips, and the IRS deadline is looming. I’m happy to tackle tax questions, and Consumerism Commentary reader Eric has one. Eric was a full-time student through May 2009, and he, like many former students, is dealing with the cost of a college education. Eric is looking for more information on the American Opportunity Tax Credit.
Here is what I know.
The American Opportunity Tax Credit is one of the many benefits enacted within the American Recovery and Investment Act (ARRA) of 2009, otherwise known as the 2009 economic stimulus. This new credit changes the Hope Tax Credit, a benefit designed to encourage more people to attend college. The American Opportunity Credit goes farther than the Hope Credit in a number of ways.
The American Opportunity Credit allows taxpayers to get credit for money spent on tuition and some other education-related fees in 2009 and 2010. Unlike the Hope Credit, you can file to receive the new credit for expenses for each of the first four years of higher education. The maximum credit you can receive is $2,500 this year for 2009 expenses and $2,500 next year for 2010 expenses.
The new tax credit is partially refundable. That does not mean you have to pay part of the benefit back to the government. “Refundable” means that the credit can become a refund to be sent to you, even if you owe less tax overall than the amount of the credit. Your tax bill can go “below zero,” resulting in a check from the government to you. This is a great benefit for current and recently-graduated students whose income may not be significant. Only 40% of the total deduction is refundable, however, so those who owe no tax will only receive a credit of at most $1,000.
Who is eligible for the American Opportunity Tax Credit?
Only taxpayers whose modified adjusted gross income is less than $80,000 (or $160,000 for joint filers) is eligible for the full amount of the credit. With a higher MAGI, the maximum credit begins to phase out until it is gone completely for taxpayers earning more than $90,000 (or $180,000). The taxpayer claiming the credit needs to have paid qualifying tuition or other education expenses.
You may want to consider taking either the Lifetime Learning Credit or a tax deduction for tuition and education expenses. Taxpayers can only claim one credit or the deduction for each student. For example, parents claiming a daughter and a son, both in college, as dependents could choose a Lifetime Learning Credit for one and the American Opportunity Credit for the other. They could not, however, claim both credits or one credit and the deduction for their son.
Here is where the beauty of most online tax filing software is revealed; most will ask you to list your expenses and will tell you which filing option will be best for you based on your entire tax situation.
What form should be used to claim the American Opportunity Tax Credit?
The latest Form 8663 from the IRS includes the American Opportunity Tax Credit. If you are claiming this credit, you cannot use Form 1040-EZ for filing your taxes. You will need to use Form 1040 or 1040A.
Updated June 24, 2016 and originally published April 12, 2010.