Overview of the American Opportunity Tax Credit

The American Opportunity Tax Credit is an educational tax credit that mostly benefits parents of students under the age of 24 and recipients of the Hope Scholarship Credit. This tax credit was instituted when Section 1004 of Division B, Title 1, sub-title A of the American Reinvestment and Recovery Act of 2009 became law in February of 2009.  The tax credit increases and expands the tax credit that can be claimed by students or parents of students by increasing Hope tax credit income caps, qualifying expenses, and

To qualify for, and claim the American Opportunity Tax Credit

Tax filers must 1) Complete an IRS Form 8863, 2) Not claim a tuition and fees deduction on line 34 of the IRS’ 2009 Form 1040, and 3) have proper documentation for the qualifying educational expenses. The amount of the credit can be no more than $2,500 for tax year 2009 and is recorded on page 2, line 49 of 2009’s form 1040; the first $2000 of applicable educational expenses is also eligible for complete credit according to the IRS. Unlike a deduction, a credit reduces the amount of tax due rather than the taxable income. This can create significant tax savings.

For tax filers with dependent children

The American Opportunity Tax Credit can be claimed for each child that attended a qualifying education institution for the 2009 tax year, and up to $4000 can be claimed for each student according to IRS Form 8863.  However, since the first $2000 is fully credited, only 1 child with a full $4000 of expenses would be needed to reach the maximum credit i.e. the credit itself amounts to 25% of the claimed expenses after a $2000 reduction. For example, if a parent of a student with a single filing status claims the full $4000 for the tax year, the full credit can be granted because $2000 x .25= $500 + $2000 x 1=$2500.00.

Students who were in school at or above half-time enrollment can claim the American Opportunity Tax Credit on their own tax filing if they are over 24 years and meet specific qualifying criteria implemented by the U.S. Internal Revenue Service (IRS). These criteria are illustrated in Part IV of the IRS 2009 Form 8863 instructions. They include age, income, parental and tax filing status requirements. 

American opportunity tax credit tips to consider

The American Opportunity Tax Credit may not be the best choice for everyone, nor may every student or parents of students qualify for the credit. This is because of the existence of other tax reducers, and limitations on the use of the tax credit. These limitations are described in the IRS Form 8863 Instructions, and include income, age, amount, type of expenses, financial assistance and educational enrollment status.

• If the tuition and fees deduction on line 34 of the IRS 2009 Form 1040 leads to greater tax savings than the American Opportunity Tax Credit, the deduction may be a better choice. This deduction is calculated on IRS Form 8917 .

• Qualifying expenses for some students may be eligible for a higher maximum credit than the American Opportunity Tax Credit. For example, the maximum credit for the Hope credit is $4000.00 in 2009.

• Since the American Opportunity Tax Credit can only be claimed for the first 2-4 years of post-secondary education, it may be advantageous to claim this credit  and save additional credits for later educational expenses if a realistic chance of these expenses in the future exist.

• The American Opportunity Tax Credit can only be claimed in full if the claimants taxable income is below $80,000 for single filers and $160,000 for married filers filing jointly.

• Tax credit cannot be claimed for income earners above $90,000 and $180,000 respectively.

• Claimants of the 2009 Hope tax credit or the 2009 Lifetime Learning Credit cannot simultaneously utilize the American Opportunity Tax Credit.

• Recipients of Federal grant money or scholarships must deduct the amount of any non-taxable funding from eligible expenses as per the Form 8863 instructions.

Sources:
1. http://www.irs.gov (U.S. Internal Revenue Service)
2. http://www.gpo.gov (U.S. Government Printing Office)