The American Opportunity Tax Credit replaced and expanded the HOPE Credit for 2009 and 2010 thanks to a measure in the American Recovery and Reinvestment Act of 2009 aimed at making college more affordable for low and moderate-income students. This was set to expire after 2010; however, the 2010 Tax Relief Act extended it for two more years, through 2012. It applies to all four years of college, not just the first two years like the HOPE credit. The credit is equal to 100% of the first $2,000 in expenses, plus 25% of the next $2,000, for a maximum credit of $2,500 per student per year.
The American Opportunity Tax Credit is still 40% refundable. Previously, the HOPE Credit could reduce your regular tax bill to zero, but could not result in a refund, often denying the families most in need of help to afford college. With the American Opportunity Tax Credit, a taxpayer who has at least $4,000 in qualified expenses would qualify for the maximum credit of $2,500, but if the taxpayer has no tax liability to offset that credit against, he would qualify for a $1,000 refund from the government.
Like many other tax credits and deductions, the American Opportunity Tax Credit has some restrictions based on your income. The credit is gradually reduced for single taxpayers when their Adjusted Gross Income reaches $80,000 and is completely phased out for single individuals with modified AGI of $90,000. For taxpayers who file a married filing joint return, the credit begins to phase out when their AGI reaches $160,000, and is completely phased out for couples with modified AGI of $180,000.
If you know of or have a student who could use financial help to pay for college expenses, you should talk to a tax adviser about the available tax credits that are designed to make higher education more affordable.
Generally, you can claim the HOPE Credit if you pay qualified tuition and related expenses for the first two years of postsecondary education, for an eligible student, who can be you, your spouse, or a dependent for whom you claim an exemption on your tax return. To be an eligible student, generally, the student must not have had expenses that were used to figure a HOPE Credit in any two earlier tax years, or have completed the first two years of postsecondary education. The student must also be enrolled at least half-time in a program that leads to a degree, certificate, or other recognized educational credential for at least one academic period beginning in the tax year. To verify an institution’s eligibility for the credit, visit the Federal Student Aid FAFSA website: www.fafsa.ed.gov
If you would like additional information regarding this issue or any other tax related issues, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.
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