Details of the new American Opportunity Tax Credit

One provision of the American Recovery and Reinvestment Act of 2008 included a temporary revision of the Hope Credit for education expenses. The revised credit was named the American Opportunity Credit (AOC) and was applicable to qualified college tuition and other expenses incurred in 2009 and 2010. In December of 2010 the AOC was extended through tax year 2012. There are a number of important improvements in the AOC over the former Hope Credit.

1) Four Year Credit

Whereas the Hope credit could only be claimed towards the first two years of post secondary education expense, the American Opportunity Credit can be claimed for up to four years. Therefore, a student who had already claimed the hope credit for 2007 and 2008  would be eligible to claim the AOC for 2009 and 2010.  

2) Credit Amount Increased

The AOC basically provides a tax credit of up to $2500 (100% of the first $2,000 of qualified expense and 25% of the next $2,000 of qualified expense), replacing the former $1,800 maximum provided under the Hope Credit.

3) Eligible Expenses Expanded

“The term “qualified tuition and related expenses” has been expanded to include expenditures for “course materials.” For this purpose, the term “course materials” means books, supplies and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance.” (IRS)  Eligible expenses under the Hope Credit included only fees paid directly to the educational institution for tuition, fees, books and course materials. Under these rules the expense of a personal computer would not have been eligible for the credit. Under the AOC the purchase of a computer or other such equipment would be eligible, so long as the computer or equipment is implicitly required by the course. For example, a distance learning course taken over the Internet where the computer is essentially the classroom. You can’t take the class without a computer or for that matter an Internet connection. Therefore the cost of the Internet connection would also be eligible under the credit.

4) Maximum AGI Phase Out Amount Increased

Under the Hope Credit the amount which could be claimed decreased for MAGIs above $50,000 ($100,000 filing jointly) and was totally disallowed for incomes above $60,000 ($120,000 filing jointly). Under the AOC the credit is disallowed for MAGIs above $90,000 ($180,000 fining jointly).

5) AOC 40% Refundable

The Hope Credit was only allowed as an adjustment to taxes paid. The AOC can result in a refund of up to $1,000 for taxpayers who otherwise would not have paid any taxes.

Other attributes of the education AOC and Hope Credits remain the same. The post-secondary college, university or vocational school must be a public non-profit institution eligible to participate in educational assistance programs administered by the U.S. Department of Education. The credits can not be claimed by or for students who receive PEL grants or other scholarship funding. The qualifying student must be enrolled at least half time (generally considered taking 6 units) for at least one academic period of the year and pursuing an undergraduate degree or other recognized educational credential.  

Form 1040 and 1040A filers planning to take advantage of the AOC tax credit must complete and attach form 8863 to the return. The credit is not available when filing form 1040EZ. Educational expenses not eligible for the AOC may be eligible for consideration under the Life Time Learning credit.