Parents and college undergraduate students should carefully consider which tax incentives they plan to take in 2012. Here's why. The American Opportunity tax credit, which was introduced in 2009, is scheduled to expire at the end of 2012.
This tax credit provides a federal tax credit of 100% of the first $2,000 in qualifying undergraduate college expenses and 25% of the next $2,000 in qualifying expenses, for a maximum credit of $2,500 based on $4,000 of expenses. Qualifying expenses, for the purpose of the American Opportunity credit, includes tuition, books, and other course-related supplies. Up to 40% of this tax credit is refundable if a person's net federal tax liability is zero. The American Opportunity Credit is available for the first four years of post-secondary education.
If the American Opportunity tax credit expires as planned, it will be replaced by its predecessor, the Hope Credit, which is available only for the first two years of post-secondary education.
If possible, it would be beneficial to maximize the American Opportunity Credit for 2012. If taxpayers need additional qualifying expenses to reach the maximum $4,000 limit, taxpayers can prepay tuition for the Spring 2013 semester in 2012, thereby accelerating the tuition expense so as to take advantage of the American Opportunity Credit while this tax break is still in effect. The IRS permits tuition expenses to be accelerated into the previous tax year and still be eligible for the American Opportunity Credit, as long as classes begin in the first three months of the following year (Treasury Regulations Section 1.25A-5(e)(2)).
Also, I should note that the tuition and fees deduction expired at the end of 2011 and has not been revived for the year 2012. The Lifetime Learning Credit is available for the year 2012, and is available for students at any level of college education (including graduate school).