The American Opportunity Tax Credit

In 2009, the federal government passed a stimulus package, and included in this package was the American Opportunity Tax Credit. The American Opportunity Tax Credit is an education credit that expands upon the existing Hope Credit for the tax years 2009 and 2010. The purpose of the American Opportunity Tax Credit is to help make higher education more affordable by helping to reduce the amount of taxes a person owes by offsetting them. For those who are attending community colleges or 2-year education institutions, the credit can reduce the cost of attendance to virtually nothing. The American Opportunity Tax Credit does not replace the Hope Credit or the Lifetime Learning Credit. However, the taxpayer is eligible to claim only one of the education credits on his or her tax return.

Qualifying

In order to claim the American Opportunity Tax Credit on a 2009 tax return, the taxpayer must be a qualifying student or have a dependent that must be enrolled at least part time in an undergraduate degree program or other comparable qualified program. The school must participate in the federal financial aid program and be accredited. Any expenses paid for you, your spouse or a child who is a dependent can be claimed. If the parents claim the dependent, then the parent will receive the tax credit. Qualifying expenses include tuition, school supplies, equipment, books and others required by the school for attendance or enrollment. The student must be a citizen or resident alien of the U.S.

Changes

The qualifications for claiming the American Opportunity Tax Credit remain the same as under the Hope Credit. There are five differences between the American Opportunity Tax credit and the Hope Credit. First, the American Opportunity Tax Credit allows four years of high education to be claimed. The Hope Credit allows only the first two years of undergraduate studies to be claimed. Second, the amount of the tax credit has increased from $1,800 to $2,500. Three, the American Opportunity Tax Credit allows for the cost of books to be included. Fourth, the new changes allow taxpayers who did not previously qualify to be eligible to receive the credit. Finally, if the taxpayer does not owe any taxes, then he or she is eligible to receive the credit as a partial refund.

Claiming the Tax Credit

While the American Opportunity Tax Credit has expanded the number of taxpayers who will be eligible to claim the tax, some taxpayers may opt to continue to claim the Hope Credit for 2009. If you have a student who is entering freshman or sophomore year at an accredited institution in certain Midwestern states, you should opt to take the Hope Credit. The reason for opting to take the Hope Credit is that legislation was passed for certain states that were affected by the flooding of 2008. Those states are Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska and Wisconsin. For eligible taxpayers in the impacted areas, the Hope Credit is $3,600. This is a $1,100 difference between claiming the American Opportunity Tax Credit and the Hope Credit.