By Karen E. Spaeder
The American Recovery and Reinvestment Act of 2009 gave rise to a number of provisions designed to help get a struggling America back on track, among them the American Opportunity Tax Credit. Designed as a modification of the existing Hope Credit and with an estimated cost of $13.9 billion over 10 years, the American Opportunity Credit allows for a maximum credit of $2,500 per student for the first four years of postsecondary education, compared with the Hope Credit’s two years and $1,800. This credit may be claimed in 2009 and 2010 for tuition and certain fees and other expenses, including required course materials, paid for higher education.
You qualify for the credit if your modified adjusted gross income is $80,000 or less ($160,000 for married couples filing jointly)—offering higher income limits than what’s available under the Hope and Lifetime Learning credits. The amount of the American Opportunity Credit is gradually reduced for taxpayers whose incomes exceed these levels, up to $90,000 for individual taxpayers or $180,000 for those who file a joint return. Additional eligibility requirements include:
· You must be enrolled at least half-time in a program that leads to a degree, certificate or other recognized educational credential for one academic period.
· The eligible student for whom you pay qualified education expenses must be you, your spouse or a dependent you claim on your tax return.
· Your filing status must be anything but married filing separately.
· You must choose not to claim the Hope Credit for any student.
To put the American Opportunity Credit in perspective as it relates to your tax return, consider that you will be able to reduce your tax liability by $1 for each dollar of credit for which you are eligible. Forty percent of the credit may be refundable—meaning if the refundable portion of your credit is greater than your tax, the excess will be refunded to you.
Keep in mind that this credit is one of many available credits and deductions. Generally, you will not be able to claim additional credits or tuition and fees tax deductions in the same year that you claim the American Opportunity Credit. Although the tuition and fees deduction may allow you to claim up to $4,000 in qualified tuition and fees paid, the credit will typically result in greater tax savings. Your tax adviser or a tax software program can help you determine which one is best for you.
You may be able to claim the American Opportunity Credit in the same year in which you receive a distribution from a Coverdell Education Savings Account or a Qualified Tuition Program. You cannot use expenses paid with such a distribution as the basis for claiming the American Opportunity Credit, however.
To claim the credit on your tax return, complete parts I, IV and V of Form 8863 and submit the form with your Form 1040 or 1040A. Enter the nonrefundable part of the credit on line 49 of Form 1040 or line 31 of Form 1040A, and the refundable part on line 66 of Form 1040 or line 43 of Form 1040A.
Because you’ll claim the credit on your tax return the following year, you’ll only benefit from the credit when you file your return. Therefore, the delayed receipt of the credit could prove prohibitive for low-income students needing immediate assistance upon enrollment. Consider your options carefully as you budget for your higher education, and consult your school’s financial aid office and/or your tax adviser for help in choosing the best options for you.