College can be expensive. Tuition, room & board, books, and other college expenses can add up quickly and can create financial turmoil for many families. There is relief from some of the cost, however, and it is available to the vast majority of American taxpayers. It is called the American Opportunity Tax Credit.
What is the American Opportunity Tax Credit?:
The American Opportunity Tax Credit is a tax credit that helps offset the cost of higher education for eligible students. It replaces the Hope Tax Credit at least through the year 2012 (It was set to expire at the end of 2010, but was extended for two years by the Tax Relief and Job Creation Act of 2010). The American Opportunity Tax Credit allows for a maximum credit of $2,500 per year, per student, to cover qualified tuition and related college expenses. It even refunds a 40% portion to those who do not have any tax liability for the year.
Are There Income Limits?:
Most families, from upper middle income to lower income, qualify for the American Opportunity Tax Credit. The tax credit gradually phases out if modified adjusted gross income is between
- $80,000 and $90,000 for single taxpayers, or
- $160,000 and $180,000 if you file a joint tax return.
If your modified gross income is $90,000 or more for single or $180,000 or more if you file a joint return, then you can no longer claim the The American Opportunity Tax Credit.
How Long Can This Credit be Taken?:
Students can claim the American Opportunity Tax Credit for the first four years of postsecondary education provided the student is enrolled at least half time in a program that leads to a degree, certificate, or other recognized educational credential for one academic period. Taxpayers can claim this credit as long as they pay qualified tuition and related higher education expenses for an eligible student. That eligible student can be yourself, your spouse, or a dependent for whom you claim an exemption on your federal tax return. Those who are married and file separately cannot claim the American Opportunity Tax Credit.
Which Expenses Qualify?:
The The American Opportunity Tax Credit includes many college related expenses. Tuition, of course, is the largest expense that qualifies, but the credit extends to many other things as well, including fees required for enrollment and course materials such as books, supplies and equipment needed for a course of study.
Which Colleges/Universities Qualify?:
Most any university qualifies provided it participates in student aid programs administered by the U.S. Department of Education. Inquires should be made directly to a specific college or university’s financial aid office.
What if I Already Have a Coverdell Education Savings Account or Some Other Tax Deferred Education Savings Account?
Those who already have an education savings account may still qualify for the American Opportunity Tax Credit. However, if money is used from one of these accounts to pay for college expenses, that money cannot be reimbursed using this credit. Students also cannot claim the American Opportunity Tax Credit and Lifelong Learning Credit in the same year.
In Summary:
The American Opportunity Tax Credit is a great way to save money on tuition and related college expenses. It puts money directly back into the pockets of taxpayers, helping to ease the financial burden that college expenses can often create.
This tax credit is very helpful at reducing college expenses and it offers many advantages compared to other federal assistance programs in the past. It includes many types of expenses besides tuition and it is significantly larger than other education tax credits of yesteryear. It also applies to individuals or couples who owe no tax at all, providing a refund up tuition costs up to 40% of the allowable credit amount.
A tax refund up to $2,500 is nothing to laugh at and in fact, if a student elects to attend a more reasonably priced junior or community college, the $2,500 refund could reduce costs to nothing or close to nothing. Remember: The American Opportunity Tax Credit is a tax credit, not a tax write- off. A credit means you get a full return of up to $2,500 of tuition and related expenses.
Those who already have a tax deferred education savings account can still take advantage of the American Opportunity Tax Credit, but they need to play their cards correctly to maximize the benefit. Since money already taken from an education savings account does not qualify for the American Opportunity Tax Credit, students and parents need to make sure they pay a portion ($2,500, or whatever the maximum amount is that they qualify for as a credit) of college expenses out of pocket, then pay the remainder using their education savings account. This way, they can still claim the $2,500 under the provisions of the American Opportunity Tax Credit and receive a refund.
College expenses can really add up, but the American Opportunity Tax Credit is here to help. Anyone who qualifies should take advantage of this tax credit for as long as it remains in existence. It can help put a sizable dent in the price of higher education and help make the expense of attending college a little more bearable.
Copyright 2012, Bryan Carey
