American Opportunity Tax Credit Details

CNNMoney has broken down the details of the latest stimulus package and has the following to say about the American Opportunity Tax Credit, which was a refundable credit pushed heavily by Pennsylvania Representative Chaka Fattah (D):

New temporary college credit: The bill introduces the American Opportunity Tax Credit, which would be in effect for 2009 and 2010. It expands the existing Hope Scholarship tax credit and would be worth as much as $2,500 for higher education expenses, up from $1,800 currently.

The full credit would be available to those making less than $80,000 ($160,000 for joint filers). Those making between those amounts and $90,000 ($180,000 for joint filers) would get a partial credit. And the break would also be partially refundable, meaning lower income families with little or no tax liability could now claim some of the credit. Estimated cost: $13.9 billion.

The stimulus package also has another education related tax break, the Pell Grant has been increased to $5,350 for 2009 and $5,550 for 2010; an increase of $500 in both cases.


Education Tax Credits: Hope & Lifetime Learning Credits

Ecstatic GraduateWith the economic slowdown, a lot of people have been thinking about going back to school yet many of them, me and some of my friends included, aren’t aware of the available education tax credits. When I was in college, I was a dependent and my parents claimed the credits. Since graduating, I have been going to graduate school on my employer’s dime so I never had any qualified educational expenses to claim. But if I want to go back to school or take some special training, it definitely benefits me to brush up on the education tax credits.

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Tax Relief 101 – Education Credits (Lifetime & Hope)

Welcome Tax Relief 101, a series of articles I plan on writing that will help you take advantage of the some tax breaks many folks don’t know very much about. I will churn up the tax manuals and give you a summary that will make sense to normal people and not just number crunchers. You can see the whole collection under the category of Tax Relief 101.

There are two types of education credits available: Hope Credit and Lifetime Learning Credit. Everyone in your tax family (you, spouse, dependents) can claim either of the credits but not both. How much credit you receive depends on what you’ve paid for “qualified tuition and related expenses” (which we will discuss later) and your modified adjusted gross income (mAGI).

“Qualified Tuition and Related Expenses”
Qualified – tuition and fees required for attendence/enrollment (to an institution eligible to participate in the Dept. of Education’s student aid program, i.e. if you have doubts, it probably isn’t eligible). Books, supplies, and equipment if necessary for attendence. Finally, student activities fees if they must be paid for attendence/enrollment.

Example: A student activities fee for usage of campus facilities is valid if all students must pay. A fee for student tickets to sporting events are not valid because it is optional.

Now we’ve covered who is eligible (people in your family) and what they are expenses eligible (they basically must pass the smell test), let’s investigate the specifics of either.

Hope Credit: Each student is only allowed to claim this credit twice (two years) and allows for $1,500 of benefits (structured as 100% of the first $1,000, 50% of the next $1,000; so you will need to spend $2,000 for full benefits). It is also phased out if your mAGI is between $42k and $52k and completely gone if your mAGI is above $52k. There are additional rules for eligibility:
1. Hasn’t completely two years of post high school work (ie. not a junior or senior).
2. Was enrolled in a “recognized educational credential” for at least an academic period.
3. Going to school at least half time.
4. Free of conviction for any drug charge (felony possession/distribution at the federal or state level)

Lifetime Learning Credit: So Hope is for the first two years, Lifetime is for the rest of your life. It’s 20% of the first $10,000 paid for all eligible learners in your family. The eligibility requirements are looser (you don’t need to be going half-time to a school giving our real degrees) and you can claim it as many years as you want. One downside is that the credit is reduced if your mAGI is between $42k and $52k.

I hope this has opened up your mind a little to look at other tax breaks if you don’t qualify for either of the Hope or Lifetime credits. Check back again soon for discussions of other financially beneficial tax breaks.

Related Articles:
IRS Publication 970 – This is IRS document we summarized. It’s pretty readable but we’ve boiled down the generalities in this article.

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