American Opportunity Credit: Why It’s Called The Expanded Hope Credit

The American Opportunity Credit was created under the Economic Recovery Act that President Obama signed a couple of years ago. Initially, it is only good for tax years 2009 and 2010 but with the recent tax law changes, this educational credit has been extended to tax years 2011 and 2012. This means additional money for parents of college student  or college students themselves. Students who started college in 2009 will be able to take advantage of the American Opportunity Credit from the time they first attended college until the time they’ll graduate (assuming that they finish college in four years or less). The American Opportunity Credit is really a replacement of the Hope Credit: it is actually called an expanded Hope Credit. Here’s a closer look of what Hope Credit used to have and how it was expanded and renamed American Opportunity Credit.

Increased in Credit Amount

  • Hope Credit: $1,800 per student
  • American Opportunity Credit: $2,500 per student

One of the biggest benefit of the American Opportunity credit is the amount has been increase by $700 per student from what the Hope Credit used to offer, which is only $1,800.  It is also more than the Lifetime learning credit , which is worth a maximum credit of only $2,000 per return (and not per student) and this is very critical especially when a parent has at least two dependents in the junior and senior years (as long as it is within the 4 year limit for the American Opportunity credit as will be discussed in the next expanded benefit).

Increased in Number of Years That Can be Claimed

  • Hope Credit – up to two years of post-secondary schooling (usually freshman and sophomore years)
  • American Opportunity Credit: Up to 4 years of post-secondary credit

In the past, a typical college student would be able to use the Hope Credit for the first two years and the Lifetime Learning credit for any years after that. The problem with the Lifetime Learning Credit is it is only good per tax return and not per student. So if you’re a parent with 2 children in their junior and senior years, you are only limited to the $2,000 lifetime learning credit. With the American Opportunity credit, you’ll be able to claim up to $5,000 for the same two children in their junior and senior years.

Increased in Income Eligibility

  • Hope Credit: taxpayer does not qualify if  modified adjusted gross income (MAGI) exceeds $60,000 for single ($120,00 for married filing joint)
  • American Opportunity Credit: Taxpayer does not qualify if MAGI exceeds $90,000 ($180,000 for married filing joint)

The American Opportunity Credit was introduced in order to include the middle class families as the income threshold for the Hope Credit was really low. With increased in the income eligibility, more families will qualify. Please keep in mind that the income limitation is based on the adjusted gross income (AGI) and not your actual gross salaries. Here is an article on Why you should lower your adjusted gross income and the Top 10 deductions to lower your AGI and meet the income threshold if you think you are over the limits.

Partially Refundable Credit

  • Hope Credit: Non-refundable
  • American Opportunity Credit: 40% of the credit may be refundable

A tax credit is a dollar for dollar reduction in your tax liability. If the tax credit is non-refundable, you can only take the credit up to the amount of your tax liability. While for refundable credits, the IRS allows you to take the credit even if you no longer have a tax liability. Hope Credit falls into the non-refundable category while with the American Opportunity Credit, you may be able to take up to 40% of the credit for up to a maximum amount of $1,000 (40% of $2,500) even if you do not owe any taxes.

More Qualifying Expenses

  • Hope Credit: Books, supplies and equipment only qualify if the expenses must be paid to the institution as a condition of enrollment or attendance
  • American Opportunity Credit: Books, supplies and equipment are included as qualifying educational expenses whether or not the expenses are purchased in the institution.

With the Hope Credit, if you buy your course-related books and equipment online, you won’t be able to claim those  items as qualifying expenses. In addition, even if you bought the books at school but it is not a condition of enrollment or attendance, you still won’t be able to claim the expenses (see qualifying expenses for hope credit). It is more lenient with American Opportunity Credit as you can now claim this expenses even if you buy your books online or even if it’s not required by the institution for as long as you are using it for your college courses. (see qualifying expenses for American Opportunity Credit)

More Eligible Students

  • Hope Credit: Students who have a felony conviction for possession or distribution of controlled substance DO NOT QUALIFY
  • American Opportunity Credit: Students convicted of a federal or state felony for possession or distributions of controlled substances in the tax year QUALIFY.