Tax Changes 2010: Overview of the American Opportunity Education Tax Credit

When the cost of obtaining a higher education—tuition, housing, and book costs—continue to rise, many parents and students find some relief in the new tax code. Congress enabled a greater degree of qualification of certain education-related expenses as valid or expanded tax deductions within the 2010 tax year under the American Opportunity Credit legislation.

Here’s what you need to know about the American Opportunity Education Tax Credit:

Who Qualifies?

The first qualification centers on income. Full credit is possible for those whose gross adjusted income is $80,000 or less for individual filers or $160,000 for married couples filing a join return. Credit is tiered and reduced as income rises above that benchmark. Under the American Recovery and Reinvestment Act, benefits from the Hope Act and the Lifetime Learning Credits are expanded, but there are still income-related restrictions. Qualifying income levels are raised above those determined by them, as well.

For example, 100 percent tax credit is given to a single parent or a non-dependent, adult student at $80,000, but only a hypothetical 80 percent is allowed with a modified adjusted income of $100,000. Some credit is granted for higher incomes, but full tax benefits are not granted.

Those who paid qualifying education debts in 2008 are not granted retroactive rights to claim the American Opportunity tax credit, but those who paid qualifying expenses in 2009 and 2010 are allowed according to income.

What Qualifies?

Only tuition and certain related expenses qualify under the American Opportunity tax credit.
The Hope Act allowed tax credit for only the first two years of learning at an accredited school. The American Opportunity credit allows for the first four years of learning at secondary schools. Expenses related to programs extending beyond four years, whether regarding a post-graduate degree or an expanded bachelor’s degree program, do not qualify for this tax credit.

An expanded definition under the American Opportunity tax credit now includes “course materials” which qualifies as course textbooks, equipment, and supplies as legitimate tax deductions, provided that other qualifications are met. The Hope Act did not qualify those and did not allow the expenses as valid deductions. Fortunately, these course materials do not need to be purchased from the learning institute to qualify. They must merely directly relate to and be required to attend the course.

Computers for school may or may not qualify, depending on circumstances. For example, the purchase of a laptop, for example, would qualify if one was required course material or for mandatory inclusion for admission, but the cost of one already in the student’s possession would not qualify.

What Limitations Exist?

The American Opportunity tax credit grants full deduction of the first $2,000 in qualifying expenses paid during the tax year. An additional 25 percent credit is granted for the next $2,000 in qualifying expenses paid during that tax year.

For example, tuition and related fees total $8,000 for the year. $2,000 is 100 percent tax deductible, leaving $6,000. Twenty-five percent of the next $2,000 brings an additional $500 as tax deductions. The amount paid that is not tax deductible is $8,000 minus $2,000 minus $500 for a total of $5,500. Total tax credit is $2,500 for the tax year in which the $8,000 was paid.

If qualifying expenses paid during 2010 total less than the maximum credit allowed but greater than $2,000, the same ratio applies: 100 percent of the first $2,000 and 25 percent of the remainder, up to $2,000.

Restrictions on Tax Credit

If you claim valid American Opportunity tax deductions, you cannot also claim that same tax year the tuition-related deductions otherwise qualifying or the lifetime earning credit. You must choose one deduction or the other.

You cannot claim the American Opportunity Tax Credit for yourself if someone else is claiming the deductions for your school attendance.

The American Opportunity Tax Credit for tax years 2009 and 2010 expand and replace the benefits and qualifications of the Hope Act, granting greater tax relief when obtaining a higher education degree. If there are any questions pertaining to eligibility or the allowance of a deduction or expense, always confer with a tax adviser or contact the IRS.

About the Author
JC Ryan is a freelance writer for MyCollegesandCareers.com. My Colleges and Careers helps people determine if an online education is right for them and helps them understand which online colleges and online courses they can choose from to reach their goals, including earning an online bachelor’s or master’s degree, or even an online PhD.