Details of the new American Opportunity Tax Credit

One of the tools that the government has used to promote certain social agendas over the years is the use of tax credits. One of the tax credits that has been beneficial to the college-bound students across America is the Hope Scholarship Tax Credit. Recently, in order to help students defray increasing costs in a worsening economy, the American Opportunity Tax Credit was enacted as a beneficial increase and extension of the regular Hope Tax Credit.

The American Opportunity Tax Credit is a tax credit that is a modification of the Hope Scholarship Tax Credit that is currently effective for the calendar tax years of 2009, 2010, 2011 and 2012 (tax years beginning in those years). Currently, as 2009 and 2010 are the only completed tax years this credit affects, for any tax years aside from 2009 and 2010, the standard Hope tax credit would apply.

This credit is an increase of the existing Hope credit and provides that the credit available shall be 100 percent of qualified tuition and related expenses up to $2,000 for such taxable year and 25 percent of the qualified tuition and related expenses to the extent the expenses exceed $2,000 but do not exceed $4,000 (in plain English, 25 percent of the amount between $2,000 and $4,000). This results in a maximum allowable credit of $2,500. This is an increase from the $1,000 plus a certain amount over $1,000 described in the original Hope tax credit.

The credit is allowed to be taken for the first 4 years of post-secondary education, which is an increase from the limitation to taking the credit in only two years as in the original Hope tax credit. The original Hope credit is further extended by the American Opportunity credit by including expenses for course materials (ie. textbooks) as an allowable expense when calculating the credit, while the original Hope credit only allowed for “tuition and fees.”  Finally, there is additionally an increase in the adjusted gross income (“AGI”) limit affecting the credit, which will allow more flexibility in taking the credit.

Certainly, if you are in college or attending soon, the American Opportunity Tax Credit provides some additional benefits beyond what has traditionally been available with the Hope Tax Credit as discussed above. It is important to be aware of these benefits in order to make sure you take advantage of them while they are available. This is a great benefit to those dealing with ever rising education costs, and it is a benefit that everyone who is eligible should be aware of.