by Laura Sullivanlyndall

Created on: January 23, 2011

The American Opportunity Tax credit is a new tax credit which has replaced the previous Hope Credit for the 2009 and 2010 tax years. Under the new credit, not only has the name changed but the benefits have increased and expanded. In addition, part of the tax credit is refundable, unlike the previous hope credit.

Qualifications

Single individuals earning less than $80,000 or married filing joint couples making less than $160,000 qualify for the entire credit. Persons earning over these income limits may qualify for part of the credit. Eventually the credit phases out completely with incomes reaching $90,000 for a single filer or $180,000 for joint filers.

Qualified tuition and expenses now include any expenses paid that is for “course materials” meaning necessities for a course of study. For example, tuition, books, lab fee’s, and any other supplies that are necessary for the course being studied. Under the previous Hope Credit, in order for the expenses to be qualifying there were strings attached. These strings meant that tuition and expenses that could be claimed must have been paid to the specific educational institution as part of a requirement of enrollment. For example, as a condition for enrollment the institution may have required that you buy your books from them. Under the new American Opportunity Tax credit the expenses can be claimed regardless of where the materials are purchased, as long as they are a necessity for the course.

Amount and Calculation of the Tax Credit

The new tax credit is worth up to $2500 per qualified student. Taxpayers who qualify will receive a tax credit of 100% of the first $2,000 worth of qualified expenses. Then an additional 25% credit is available on the next $2,000 worth of paid qualified expenses for a total of a maximum $2,500 tax credit on $4,000 worth of paid expenses. The old Hope Tax Credit only covered up to $1,800 worth of qualified expenses.

When to claim the American Opportunity Tax Credit

The American Opportunity Tax Credit can only be claimed for the 2009 and 2010 tax years. However, it can be claimed for these two years for any of the first four years of a post- secondary education. Under the old Hope Tax Credit only the first two years of a post-secondary education expenses qualified to be claimed.

How the American Opportunity Tax Credit affects a Tax Return

The new tax credit matches the tax liability on the tax return dollar for dollar, up to the amount of tax of the tax liability

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