American Opportunity Tax Credit

If you are paying undergraduate college expenses, whether for yourself or your dependent, you may be entitled to claim tax credit from the IRS. The American Opportunity Tax Credit 2011 is a form of refundable tax credit that offers substantial financial relief for college students and parents of college students. Those who qualify for this tax credit can claim as much as $2,500 on the first $4,000 they spend on eligible undergraduate educational expenses. For now, the American Opportunity Tax Credit is expected to be available until 2012 only, but there is hope that the Congress may extend it for an additional period of time.

The American Opportunity Tax Credit is implemented under the American Recovery and Reinvestment Act, and it enables a larger number of undergraduate students and parents to avail of education tax credit. It is a modification of the existing Hope Credit, and it is accessible to a wider range of taxpayers, including those who earn higher incomes and owe no tax. In many ways, the American Opportunity Tax Credit offers more benefits than both the Hope Credit and the Lifetime Learning Credit, and it is the preferred tax credit for many students and parents.

The American Opportunity Tax Credit is only offered to taxpayers and dependents of taxpayers who are enrolled in a university, college, or other accredited post-secondary institution on at least half-time basis. It is only available in full to students or parents who are earning an adjusted gross income of $80,000 or less. Those who are married and filing jointly must have an income of $160,000 or less to qualify for the credit. The tax credit will phase out for taxpayers who are earning between $80,000 and $90,000, or $160,000 and $180,000 for joint filers. Students or parents who earn more than the upper limit of the phase out range will not be eligible for the credit. The American Tax Credit is only available for the initial four years of undergraduate studies.

If you are eligible for the full amount of the American Opportunity Tax Credit, you can claim 100% of the initial $2,000 you spend on eligible educational expenses. After that, you can claim another 25% of the subsequent $2,000 in eligible educational expenses. The total amount of tax credit that you can get is, therefore, $2,500. A maximum of 40% of the American Opportunity Tax Credit is refundable. This means that you can get a refund of up to $1,000, even if you do not have any tax liability. Since it is refundable, the tax credit is potentially more rewarding than the non-refundable Lifetime Learning Credit.

If you are planning to claim American Opportunity Tax Credit, it is essential that you know what kinds of educational expenses are considered eligible. Qualifying expenses for this tax credit include tuition fees and related course materials. Compared to the Lifetime Learning Credit, which only allows qualifying taxpayers to claim tuition fees deduction, The American Opportunity Tax Credit is much more flexible. It covers course materials such as books, software, lab supplies, and other class materials.