American Opportunity Tax Credit (AOC) Expands Hope Credit for 2009 and 2010

When it comes to dealing with the cost of college, politicians have provided some significant help for many families.

One of President Bill Clinton’s signature policies involved the development of the Hope Credit. Designed to help middle class families with college expenses, the credit has proven to be of immense help to legions of families since its inception.

But in what has to be some of the best news in recent years for families with college-age students, the Hope Credit has been significantly tweaked in a most positive way. In fact, the only major criticism could well be that the adjustments are currently in place for just tax years 2009 and 2010.

The Original Hope Credit

Once upon a time, a single parent with an income below $48,000 a year (partial credit for those between $48,000 and $58,000) or two parents filing jointly who had combined incomes below $96,000 (partial credit for those between $96,000 and $116,000) were eligible for the Hope Tax Credit. The maximum amount of credit that could be claimed topped out at $1,800.

The credit could be taken against 100% of the first $1,200 in qualified tuition and related expenses that had been paid by the family and 50% of the next $1,200 spent. Therefore, if a family spent more than $2,400 in qualified educational expenses, they would see their federal tax bill reduced by $1,800.

However, the Hope Credit was available only for the first two years of college. In addition, you had to pay federal taxes to receive any benefit and of course had to pay at least $1,800 in taxes to receive the full benefit.

The American Opportunity Tax Credit

The first change to the Hope Credit, now called the American Opportunity Tax Credit, for 2009 and 2010 is that the maximum amount of the deduction has been increased to $2,500 for those eligible for the credit. The maximum comes from a dollar for dollar tax deduction for the first $2,000 paid in tuition and fees followed by 25% of the next $2,000 spent.

Second, for single filers the income restriction has been raised to $80,000 (partial credit for those between $80,000 and $90,000) and for joint filers to $160,000 (partial credit for those between $160,000 and $180,000).

Third, the credit may now be taken for the first four years a student is in college.

And fourth, up to 40% of the credit can be refunded to those who paid less than $2,500 in federal taxes. For students not claimed as a dependent on their parent’s return and paying no federal income tax, they in essence can become eligible for a $1,000 tax refund at tax time.

Very Positive Step

Therefore, if you are, or your child is within the first four years of earning a college degree, the American Opportunity Tax Credit provides significant tax breaks. However, it is very important to understand what expenses qualify.

If your college tuition bill including course fees is $5,000 per semester ($10,000 for the year) and you receive scholarships totaling $8,500, then the out-of-pocket expense, the $1,500 is the amount eligible for the tax credit. But the phrase “qualified tuition and related expenses” has also been expanded to include expenditures for “course materials.” Course materials include books, supplies, and equipment directly purchased for a student’s course of study.

Students and their families should be reminded that plenty of other tax incentives do exist that are irrespective of the number of years in school including the Lifetime Learning credit or the direct income deduction for tuition-and-fees. The key is that the government will not let you piggyback or pile these options up. Instead, you must utilize one specific element.

And of course, if you are a parent or student that will have college expenses beyond 2010, you may want to write your congressman. As noted earlier, the American Opportunity Tax Credit is currently available only for 2009 and 2010.