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New Tax Break for College Students: American Opportunity Tax Credit,

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January 2010—One of the benefits for college students provided in the 2009 Economic Stimulus Bill (American Recovery and Reinvestment Act of 2009) is a new and improved Hope Tax Credit for higher education expenses. The American Opportunity Tax Credit is the old Hope Credit with a new name and new benefits. If you're a college student (or student parent) who paid for college in 2009, you may be able to claim this tax credit on your upcoming IRS tax return.

How the New Tax Break for College Expenses Works

A tax credit reduces your income tax after you've calculated it. With the American Opportunity Tax Credit, you get a dollar-for-dollar credit for the first $2,000 you paid for certain college expenses, then 25 cents on the dollar for the next $2,000 spent. The maximum credit is $2,500—a $700 increase over the original Hope Tax Credit.

The American Opportunity Tax Credit replaces the Hope tax credit for the next two years: 2009 and 2010 federal income tax returns.

What the Tax Experts Say about the American Opportunity Tax Credit

Kim Clark, writing for U.S. News & World Report, talked to a tax expert about the American Opportunity Tax Credit. Read Kim's article at: How to Get Back $2,500 in Tuition Money

6 Facts About the American Opportunity Tax Credit, from the IRS:

  1. The American Opportunity Tax Credit, which expands and renames the existing Hope Credit, can be claimed for qualified tuition and related expenses that you pay for higher education in 2009 and 2010. Qualified tuition and related expenses include tuition, school fees, books, and other required course materials.
  2. The AOTC can be claimed for qualified expenses paid for any of the first four years of postsecondary education.
  3. The credit matches 100% of the first $2,000 you spend and 25% of the next $2,000 (per student per year). If you paid $4,000 or more in qualifying college expenses for yourself (or your dependent student), you may be eligible for the full $2,500 credit.
  4. The full AOTC is generally available to eligible taxpayers who make less than $80,000 ($160,000 for married couples filing a joint return). The credit is reduced on a sliding scale for taxpayers with incomes above these levels.
  5. You can't claim the American Opportunity Tax Credit in the same year that you claim the Lifetime Learning Credit or the Tuition and Fees Tax Deduction.
  6. 40% of the AOTC is refundable, so even if you don't owe any tax, you can get up to $1,000 of the credit as cash back.

How to Figure Out Which Tax Benefit for College Costs Will Help You Most

To determine whether a tax credit or tuition-and-fees deduction will lower your tax more, you'll need to add up your education expenses. Since a tax credit offsets your tax dollar for dollar (rather than just reducing your income), it may give you the bigger benefit.

How to Claim the American Opportunity Tax Credit

To claim the American Opportunity Tax Credit, you'll need IRS Form 8863, attached to your 1040 or 1040A.