Details of the new American Opportunity Credit
The credit is worth up to $2,500 on the first $4,000 of qualifying educational expenses, which include course materials as well as tuition. The American Opportunity credit applies to all four years of undergraduate college education. The credit is phased out for over a range of $80,000 to $90,000 (or $160,000 to $180,00 for joint filers). Up to 40% of the credit is refundable, meaning that it can generate a refund larger than the amount of payments you made.
Calculating the American Opportunity Tax Credit Amount
The amount of the American Opportunity tax credit is:- 100% of the first $2,000 in qualifying education expenses, plus
- 25% of the next $2,000 in qualifying expenses.
Up to 40% of the American Opportunity credit is refundable. That means up to $1,000 of the American Opportunity credit can be refunded to you, even if your tax liability is zero. This makes the American Opportunity credit potentially more valuable than the Lifetime Learning credit, which is non-refundable.
What's a Qualifying Education Expense?
Qualifying educational expenses are tuition and related course materials. The tuition and fees deduction or the Lifetime Learning credit, by contrast, are restricted only to tuition. For the American Opportunity credit, other course materials such as books, lab supplies, software and other class materials can qualify for the tax credit.Comparing the American Opportunity Credit to other Tax Breaks for Education
Unlike the Lifetime Learning tax credit, the American Opportunity credit is available only for the first four years of undergraduate education. The lifetime learning credit is also a non-refundable credit, whereas the American Opportunity credit is refundable and can help offset the alternative minimum tax and the self-employment tax. The American Opportunity credit also features an expanded definition of qualifying expenses to include supplies and course materials, whereas other credits are limited just to tuition.
Tax Planning Tips for the American Opportunity Credit
The American Opportunity Credit is likely to be the preferred tax break for 2009 and 2010 for college expenses, but be sure by comparing the tax calculations under the tuition and fees deduction and the lifetime learning credit. Choose whichever tax break generates the most tax savings for your situation.Students in the Midwestern disaster areas can claim the Hope credit for 2009 instead of the American Opportunity Credit. The Hope credit, which is otherwise replaced by the American Opportunity credit, provides an expanded definition of qualifying expenses that includes room and board. See Publication 970, Tax Benefits for Education, for more details.
