The American Opportunity Tax Credit: Benefits for Students

Taxes 101

The American Recovery and Reinvestment Act (ARRA) of 2009, the economic stimulus law for that year, put into effect a number of benefits designed to improve economic conditions for Americans. Among other tax law changes, the stimulus put more money into the hands of students in a time that more individuals were giving up the frustrating job hunt and taking more classes.

The American Opportunity Tax Credit changed the taxpayer-funded benefits given to students. The Hope Credit was formerly the popular method taxpayers claimed benefits for educational expenses, but the new stimulus law in 2009 greatly expanded the reach and depth of the existing credits.

The new credit allows taxpayers to receive a partial refund for money spent on tuition and some other education-related fees in 2009 and 2010. Unlike the Hope Credit, you can file to receive the new credit for up to $2,500 in expenses for each of the first four years of college education.

In fact, even if you owe less than $2,500 in total taxes for the year, as a student or a recently-graduated student might, the American Opportunity Tax Credit could provide you with a refund beyond your tax bill. This refundable portion of the tax credit is limited to 40% of what you would qualify for, so if you owe no taxes but had education expenses to claim, the most you could receive is $1,000.

Like many tax credits, you will only qualify if your adjusted gross income is below a certain level. For this credit, your maximum allowable credit begins to phase out with an income of $80,000 (or $160,000 for joint filers), and is reduced to zero for those with an income of $90,000 (or $180,000).

Your tax software makes the process of claiming the credit simple; just enter your education expenses, and the software will calculate if you will benefit most from the American Opportunity Tax Credit, the older Lifetime Learning Credit, or a deduction for education expenses. As the year comes to a close, make sure you have documented this year’s education-related expenses so when it comes time to file, the information you need will be available.

Comments (8) Leave your comment

  1. Our daughter completed 4 years of education in August, 2013. She has taken out loans in her name for $2,946.11 with interest in 2013. She has her own job and is filing separately. Is she eligible for the American opportunity tax credit? Her total loan amount is 17.000 if you include 2012. It is my understanding that she was not eligible for credit in 2012 because we claimed her and we made too much money to qualify. Hope this makes sense to you.

  2. Turbotax says my daughter has already received this credit 4 times…she is just now halfway through her 4th year. How could she have used up 4 years worth by the 2013 tax year? She didn’t graduate High School until May of 2010.

    1. Ward I am receiving the same message in Turbo Tax. My son is in the same situation graduated in 2010. TurboTax is stating that I claimed the American Opportunities Credit three years and the Hope Credit One year and I am not eligible. Any ideas? Thanks,

    2. I had the same problem. After researching the HC and AOTC, I found that the HC was extended and changed/renamed to the AOTC. I am thinking that since I used the HC in 2010, and import my information year over year, turbo tax is viewing the HC as 1 year and the AOTC as all 3 years. I went back on to my tax returns and can clearly see that I have only taken the credit for 3 years. Also, my tax returns have no mention of the HC, they all say AOTC, So, if I adjust the Student Worksheet to remove the number of years for the HC, since it is the same as the AOTC, the credits are applied to my return. I am thinking that turbo tax has a glitch with how it sees the credits due to the expansion and name change. I will stll get this confirmed with a tax professional before I file my taxes, but I hope it helps.

  3. Turbotax and others who summarize the American Opportunity Credit leave out a very important fact that’s way too important to have to “dig” through instructions for: That if you’re a student who qualifies for the credit and claims the credit for themselves (i.e., parents don’t claim student), and has made no income for the year, the student WILL NOT get the refundable credit because parents are still alive.

  4. Can you please explain this portion of the American Opportunity Credit: “This refundable portion of the tax credit is limited to 40% of what you would qualify for, so if you owe no taxes but had education expenses to claim, the most you could receive is $1,000.” My daughter would like to claim this refund but she didn’t work last year. Can she still get a refund due to the fact that she has “owes no taxes”?

    Thanks for your help!

    Sheril Schmidt

  5. Turbotax is wrongfully giving me the american opportunity tax credit. 2010 was my 5th year of college. How do I fix this?

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