Understanding the American Opportunity Credit

The American Opportunity credit is a new educational credit in order to help alleviate the cost of education in the United States. The maximum amount that can be claimed per eligible student is $2,500. It is available only for the first four years of post-secondary education (and this includes any years the Hope credit was claimed). Unlike the Hope and Lifetime learning credit, 40% of the credit may be refundable, and the rest are non-refundable. Just like the Lifetime Learning Credit, students convicted of a federal or state felony for possession or distributions of controlled substances in the tax year ARE PERMITTED.

To claim the credit, you must pass the following tests:

  • Years in College Test – You paid expenses for the first four years of post-secondary education.
  • Hope Credit Test – You choose not to claim the Hope credit for ANY student in your tax return for the tax year.
  • Eligible Student Test – You paid expenses for an eligible student such as yourself, spouse, or a dependent that you can claim an exemption.
  • Filing Status Test – Your filing status must not be “married filing separate.”
  • Dependency Test – You are not listed as a dependent on another person’s tax return.
  • MAGI Test – Your modified adjusted gross income (MAGI) for the tax year 2009 is less than $90,000 for single taxpayers (or less than $180,000 for joint filers)
  • Residency Test – You were not a nonresident alien for any part of the tax year and do not elect to be treated as a nonresident for tax purposes.
  • No Double Benefit Test – You did not claim the Hope Credit, Lifetime learning credit, the tuition and fees deduction, the tax-free portion of the Coverdell education savings account for the same qualified expenses for the same student..   In other words, no double tax benefit allowed. You did not claim qualified expenses paid for by tax-free educational assistance such as scholarships, grants, employer provided educational assistance, or any other tax-free payments received as educational assistance. However, if you have these assistances, you can still claim the excess of qualified expenses that are not covered by these tax free educational assistance. For example, your tuition is $10,000 and you have a scholarship of $8,000. You cannot claim the $8,000 on your tax return but you can still claim the $2,000 difference.
  • Tuition Refund Test – You did not receive a refund for any qualified education expenses paid.

Who is an eligible student?

  • Student who is enrolled at least half-time of a normal academic load for at least one academic period in a program leading to a degree, certificate or other recognized educational credential.
  • Student has not completed the first four years of post-secondary education (freshman, sophomore, junior or senior levels).
  • Student did not have any expenses that were used to figure an American Opportunity credit in any four earlier tax years. This includes any tax years the Hope credit is claimed for the same student.

What expenses qualify?

  • Expenses paid for an eligible educational institution. An eligible educational institution is any college, university, vocational school or other post-secondary educational institution eligible to participate in a student aid program administered by the US Department of Education.
  • Tuition fees
  • Student activity fees are included as qualifying educational expenses but only if the fees must be paid to the institution as a condition of enrollment.
  • Unlike the Hope and Lifetime Learning Credit, expenses paid for course-related books, supplies and equipment are included as qualifying educational expenses whether or not the expenses are purchased in the institution.
    • Example – Charles and Darwin are sophomore students of California State University and are required to purchase course related books to attend the university. The school does not have a policy on how students should obtain the books, meaning the students can purchase their books from anywhere they wish. Paul bought his books at the university’s bookstore while Piper bought her books from an online bookstore. Both expenses paid for the books QUALIFY as educational expenses.

What expenses do not qualify?

Medical expenses, insurance, room and board, transportation, similar personal or family expenses even if the expenses must be paid to the institution as a condition of enrollment or attendance.

How do you calculate the Credit?

The Hope credit per eligible student is calculated as follows:

1. 100% of the first $2000 of the qualified education expenses paid

2. 25% of the next $2000 of the qualified education expenses paid

Credit may be reduced based on your MAGI.

Can I claim the credit even if I borrowed the funds?

Most students have student loans in order to pay for their education. Borrowing funds count towards the credit since you will be paying for this not now but in the future.

Source: IRS.gov – Publication 970