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

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.


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

  1. […] about year end moves to make before 2010 comes to an end. (Did you know most students should pay their spring tuition before year-end? Do you know when selling stocks before year-end will save you thousands? Are you aware of the […]

  2. […] but they may be extended as part of the latest tax bill being negotiated right now in Congress: The American Opportunity Credit, certain energy credits, and favorable tax rates for long-term capital […]

%d bloggers like this: