Planning for the American Opportunity Tax Credit

A new tax credit for 2009 and 2010: the American Opportunity Tax Credit is a refundable tax credit for undergraduate college education expenses. This credit provides up to $2,500 in tax credits on the first $4,000 of qualifying educational expenses. Forty percent of the credit (up to $1,000 maximum) is refundable. That means students who have reduced their tax liability to zero can still get extra money back from the federal government by utilizing this credit. The tax credit is scheduled to be available only for the years 2009 and 2010, unless Congress decides to extend the credit to other years.

Unlike the Lifetime Learning Credit or the Hope credit, the American Opportunity credit expands the definition of qualifying educational expenses. In addition to tuition and required school fees, students can also include the cost of course materials such as books, lab supplies, software and other class materials are part of their tax credit calculations. Students should keep receipts for their tuition, books, and other course materials as supporting documentation.

By my calculations, undergraduate students earning up to $30,466 would have zero taxes through a combination of the American Opportunity credit of $2,500 and the Making Work Pay credit of $400. Students earning below this amount may have refundable credits, meaning that their refund could potentially be larger than the amount of withholding they paid in.