Six (actually, seven) Facts about the American Opportunity Tax Credit

September 22, 2010

From the IRS… (see very important additional tip at the end)

There is still time left to take advantage of the American Opportunity Tax Credit, a credit that will help many parents and college students offset the cost of college. This tax credit is part of the American Recovery and Reinvestment Act of 2009 and is available through December 31, 2010. It can be claimed by eligible taxpayers for college expenses paid in 2009 and 2010.

Here are six important facts the IRS wants you to know about the American Opportunity Tax Credit:

  1. This credit, which expands and renames the existing Hope Credit, can be claimed for qualified tuition and related expenses that you pay for higher education in 2009 and 2010. Qualified tuition and related expenses include tuition, related fees, books and other required course materials.
  2. The credit is equal to 100 percent of the first $2,000 spent per student each year and 25 percent of the next $2,000. Therefore, the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualifying expenses for an eligible student.
  3. The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return. The credit is gradually reduced, however, for taxpayers with incomes above these levels.
  4. Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back.
  5. The credit can be claimed for qualified expenses paid for any of the first four years of post-secondary education.
  6. You cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.

Complete details on the American Opportunity Tax Credit and other key tax provisions of the Recovery Act are available at


And now the very important additional tip:

7. Expenses paid at the end of a calendar year for an academic term starting in the first 3 months of the following year are eligible for the American Opportunity credit in the year actually paid.

Currently (although these things can always change), the American Opportunity credit is set to expire in 2010. So if you have an academic term starting at the beginning of 2011, and you want the expenses to be eligible for this credit, make sure to pay your tuition and fees no later than Dec 31, 2010. This can be very valuable for people who have no other education expenses in 2010, or haven’t already maximized their credit (which generally requires $4,000 in expenses) in 2010. Waiting until January to pay your academic fees could wind up costing you over $1,000!

UPDATE: The Tax Relief package passed in mid-December extended the American Opportunity Tax Credit for another two years. So file this advice away for another couple years. In considering whether or not to pay tuition before or after Dec 31, the main item to consider is equalizing your tuition payments over the (up to) 4 years of eligibility so you don’t wind up way under $2000 one year and way over $2000 the next. The reason is the first $2000 gets the greatest benefit from this credit.


Eight Things to Know If You Receive an IRS Notice

September 13, 2010

From the IRS…

Did you receive a notice from the IRS this year? Every year the IRS sends millions of letters and notices to taxpayers but that doesn’t mean you need to worry. Here are eight things every taxpayer should know about IRS notices – just in case one shows up in your mailbox.

  1. Don’t panic. Many of these letters can be dealt with simply and painlessly.
  2. There are number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
  3. Each letter and notice offers specific instructions on what you need to do to satisfy the inquiry.
  4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
  5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
  6. If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.
  7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call, to help us respond to your inquiry.
  8. It’s important that you keep copies of any correspondence with your records.

For more information about IRS notices and bills, see Publication 594, The IRS Collection Process. Information about penalties and interest charges is available in Publication 17, Your Federal Income Tax for Individuals. Both publications are available at or by calling 800-TAX-FORM (800-829-3676).


  • Publication 594, The IRS Collection Process ( PDF)
  • Publication 17, Your Federal Income Tax for Individuals ( PDF)

The most important thing to know is no situation with the IRS ever got better by ignoring the problem. But the second most important thing is to make sure you understand the notice clearly. Some people get intimidated by IRS letters and quickly pay up whatever’s being requested. This strategy is almost as bad as the ignore-them-and-hope-they-go-away strategy.

The IRS makes mistakes. And you will not be penalized for defending a perfectly valid deduction or credit. I see notices every year attempting to assess additional tax based on inaccurate adjustments made by the IRS. If you believe the IRS is mistaken, then defend your position. Many additional “assessments” can be eliminated by providing additional paperwork. Of course, it’s always a good idea to get a second opinion from a competent professional to make sure your position is defensible. And if you feel at all uncomfortable dealing directly with the IRS, you can designate a professional (but only an Enrolled Agent, CPA, or Attorney) to represent you before the IRS by completing a Power of Attorney using Form 2848 from the IRS.

Sign of the times: Most popular topic by FAR at IRS forum? “Tax aspects of bankruptcy”

September 2, 2010

I’m currently attending a 3-day IRS Tax Forum for professional preparers, and here’s a few quick hits.

Clearest lesson so far: The effects of the economic downturn that began over two years ago are still being powerfully felt. Over 40 different workshops are available to choose from at this conference, and by far the most-attended workshop was on the topic of assisting taxpayers with the tax aspects of bankruptcy. The room was barely able to hold everybody and the session had to start late because of all the time it took for hundreds of preparers to file in. The consensus opinion among all preparers was we’re seeing many, many more clients either going through or considering entering bankruptcy than at any time in anybody’s memory.

The IRS letter you absolutely must respond to ASAP: “Notice & Demand” of tax due. After the IRS has made several collection attempts, they’ll issue this nasty letter. The letter itself isn’t so bad, it’s the fact that as little as 10 days after sending this letter, the IRS will place a Notice of Federal Tax Lien on your public credit record. Your credit score generally drops 100 points that very day, and potential employers, landlords, lenders, etc. will all get the message loud and clear that you can’t handle your affairs. This particular session was also very useful in learning some of the most effective courses of action for getting this removed as soon as possible once the debt has been settled.

Wills & Trusts are just pieces of paper if you don’t title your assets properly. One of the workshops provided the most concise and useful explanations of how to properly approach trust and estate issues. The importance of checking the titles for all assets was driven home. While some cases are obvious (if grandma sold the farm two years before she died, it doesn’t matter if it still says in her will that you get it), many times people run into issues with assets thought to be held in one way (jointly, in a trust, etc.) but not actually titled correctly.

Believe it or not, the IRS is actually a pretty efficient organization :-). As a tax preparer, I’m well aware of the difficulties in administering the tax code. And the IRS doesn’t make the crazy rules (thank your elected representatives for that), they just have to try to enforce them…a job that grows more difficult every year as legislators have delegated responsibility for more and more issues to the IRS, and continue to wait until later and later in the year to enact the final tax provisions for each tax year. None of that is news to me, but what actually has impressed me so far is how well organized the event is. Two thousand people  have multiple different sessions or activities they can attend all throughout the day in a relatively small space (for 2000 people). The layout is clearly well-thought. Even when nearly 1000 people showed up for a topic that normally only draws maybe a hundred, the program was only delayed for a few minutes by the time it took to get everybody checked-in and seated.

More fleshed-out posts will be going up in the weeks to come on topics from the Forum.