Though set to expire at the end of 2012, the American Opportunity Tax Credit was extended through the end of 2017 by the American Taxpayer Relief Act of 2012, providing a partially reversible tax credit to help cover tuition, fees and course materials paid by a taxpayer during a taxable year. This education tax credit tops out at $2500. Of the $2500 only 40% of it is reversible.
The fine print of the American opportunity tax credit
A reversible tax credit is one where a taxpayer who owes no income, social security or self-employment tax gets money paid as a tax refund due to the "reversibility" of a tax credit. Not all tax credits are reversible.
If the taxpayer owes no other tax and could still qualify for a credit, if the credit is non-reversible then the taxpayer is out of luck. For that particular tax credit, zero is the ground level. But for reversible tax credits there does exist more floors below the number zero.
With the American Opportunity Tax Credit a taxpayer who owes no other tax can receive as a tax refund 40% of the $2500 tax credit, for a maximum of $1000.
For example, if a taxpayer had $4000 in a taxable year in out of pocket educational expenses, and owed $1500 in combined federal taxes, the $2500 American Opportunity Tax Credit would cover the entire tax bill, and still provide for a tax refund estimate of $1000.00. The out of pocket educational expenses for that year, for that particular taxpayer, would be $1500.
The American Opportunity Tax Credit expanded eligibility of the old Hope Tax Credit to include provisions for the full credit to individuals with an adjusted gross income of $80,000 or less, or for $160,000 or less for married couples who file joint returns. Partial credits are available for incomes over these levels.
With the economy still struggling and job growth soft the American Opportunity Tax Credit has been an essential tool for individuals to get training for new jobs and provide for an incentive for people to continue their educations.
Provisions in this tax credit can be used not just for tuition, but for the often expensive books and other supplies. For many families with one or both bread winners out of work for an extensive period of time, the offset for all the added expenses of a continuing education can make the difference between going to school and not going to school.