What is an American Opportunity Tax Credit?

The American Opportunity Tax Credit is, thus far, a temporary tax credit offered for people who are college students or for parents with kids in college. Though there may be effort to extend this tax benefit — and measures have been introduced that would make it open to even more students — presently the credit is temporary and applies only the tax years of 2009 and 2011. The credit doesn’t apply to all students and people must qualify by income and student status to receive it. It is partially refundable and those who claim it up to a maximum of $2500 US Dollars (USD), may get up to $1000 USD back even if they owe no taxes. A tax credit directly reduces taxes paid, and when these are refundable this means part or all of the money that is left over after tax payments may be refunded to the taxpayer.

The basic requirements for being able to claim the American Opportunity Tax Credit include that students must be undergraduates and in their first four years of study. This means they can’t have spent more than three years at college in the past and qualify. People going back to school to earn a second bachelor’s degree or a graduate degree aren’t eligible.

Second, people must qualify by income. In a household where two people are married and filing jointly, the American Opportunity Tax Credit cannot be taken if income exceeds $160,000 USD. A student or a single person filing head of household usually can’t make more than $80,000 USD. This still greatly extends ability to claim educational expenses for people in higher income brackets, and can potentially cover a significant cost of inexpensive schools like junior colleges.

Unlike a few other education credits, the American Opportunity Tax Credit doesn’t just apply to tuition. Fees for books or materials that are required can also be claimed. A laptop, for example, might be claimed if a person must use it in a class, but it couldn’t make up part of the claimed expenses for someone who didn’t absolutely need one.

Some people may have missed filing for this credit because of many tax changes that were permanently or temporarily introduced into the code in the late 2000s. It is possible to claim the credit by filing a 1040 correction or 1040x, as long as this is done within three years of the original return or two years of payment. When simply filing with the regular 1040, Form 8863 is filled out and included with tax paperwork. Sometimes filing 8863 may bar people from taking other educational deductions in the same year. The Hope Credit, from which the American Opportunity Tax Credit derives, can’t be taken in the same years.