One of the biggest challenges in the pursuit of a post-secondary education is how you are going to afford to pay the tuition. Yes there is financial aid for many including Pell grants and student loans, but sometimes it isn’t enough. Other times students just don’t want to owe a ton of money when they graduate.
The IRS has certain credits specific to helping students and families with the expense of post-secondary education, specifically the Hope Credit.
The American Opportunity Tax Credit which falls under the American Recovery and Reinvestment Act modified the Hope Credit for 2009 and 2010 and was later extended to 2011 and 2012. This made the Hope Credit available to a wider range of taxpayers including those with higher incomes as well as those that owe no tax at all.
Prior to the addition of the American Opportunity Tax Credit the Hope Credit was only available for the first two years of post-secondary education, and did not include course materials in the list of qualifying expenses.
The Credit extended the Hope Credit to allow the first four years of post-secondary education rather than two and included course materials in the list of qualifying expenses. The maximum annual credit under the credit is $2,500 per student and most eligible taxpayers will qualify for the maximum.
Qualified education expenses
The qualifying education expenses under this credit are tuition deductions and course materials deductions such as books, lab supplies, software, etc.
To be eligible for the full credit one’s modified adjusted gross income must be below $80,000 or $160,000 for married couples who file a joint return. If a taxpayer’s income falls above these levels then the credit is phased out for them. The limits set forth in the American Opportunity Credit are higher than those under the existing Hope and Lifetime Learning Credits.
The American Opportunity Credit is a partially refundable credit meaning that even people who owe no tax at all can receive a refund of up to 40% of the actual credit. In essence it is capable of generating a refund larger than the amount of payments you made.