NOTE: This page has been updated to reflect the fact that the American Opportunity Tax Credit, which was to expire at the end of 2010, was extended for an additional two years through December 2012 by the Tax Relief and Job Creation Act of 2010.
Under the American Recovery and Reinvestment Act (ARRA), more parents and students will qualify for a tax credit, the American Opportunity Tax Credit, to pay for college expenses.
The American Opportunity Tax Credit modifies the existing Hope Credit for tax years 2009 2012 under ARRA. The credit was extended to apply for tax years 2011 and 2012 by the Tax Relief and Job Creation Act of 2010.
The new credit makes the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.
The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and Lifetime Learning Credits.
Qualified expenses include tuition and fees required for enrollment or attendance at an accredited college, university, vocational school, or other postsecondary educational institution that is eligible to participate in a student aid program administered by the Department of Education.
Qualified expenses do not include room and board, insurance, transportation, or other similar personal, living, or family expenses. Qualified expenses may include fees for books, supplies, and equipment only if the fees must be paid to the school for the student's enrollment or attendance. In addition, qualified expenses may include student activity fees if the fee must be paid to the school for the student's enrollment or attendance.
Note: If you pay qualified education expenses with certain tax-free funds (GI Bill, Pell grants, military tuition assistance, employer-provided assistance), you cannot claim a credit for those amounts. You may only claim expenses that are not covered or exceed the amount of tax-free assistance you received.
Education Credit Eligibility
You can claim a Hope Credit only for an "eligible student." An "eligible student" is a student who:
You can claim a Hope Credit for only two tax years for each eligible student. An eligible student can be you, your spouse, or your dependent for whom you claim an exemption.
The Lifetime Learning Credit is not based on the student's workload. It is allowed for one or more courses that the student takes at an eligible educational institution. The credit is not limited to students in the first two years of postsecondary education. Expenses for graduate level degree work are eligible. However, to be eligible for the credit, the student must be taking course work in order to acquire or improve job skills. There is no limit on the number of tax years for which the Lifetime Learning credit can be claimed for each student. The amount you can claim as a credit does not vary (i.e., increase) based on the number of students for whom you pay qualified expenses.
Both the Hope Credit and Lifetime Learning Credit may be reduced if your modified adjusted gross income (MAGI) is between $47,000 and $57,000 ($94,000 and $114,000 if you file a joint return). You may not cliam a credit if your MAGI exceeds $57,000 ($114,000 if you file a joint return). You cannot claim either credit if you are married filing a separate return.
Claiming Your Education Credit
You claim the Hope credit by completing Parts I and III of Form 8863 (PDF) and submitting it with your Form 1040 or 1040A. Enter the credit on Form 1040, line 49, or on Form 1040A, line 31.
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