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.