If college expenses are stretching your budget, you may be eligible for some tax relief. The American Opportunity Credit replaces the existing Hope Credit for tax years 2009 and 2010. Improvements have been made to this credit to make it available to a larger group of taxpayers.
The credit is available for tuition and related course materials paid for a college student in his or her first four years of college. The old Hope Credit was only available to the first two years of post-secondary education.
The income limits have increased so that more taxpayers will qualify for the credit. The full credit is available for taxpayers whose modified adjusted gross income is $80,000 or less ($160,000 for married filing joint returns).
The amount of the credit has increased to a maximum of $2,500. This credit is equal to 100% of the first $2,000 spent and 25% of the next $2,000. So if you send $4,000 in qualified education expenses you get the full credit – which is a dollar for dollar reduction of tax owed.
You can even benefit from the credit if you have no tax liability. The American Opportunity credit is refundable up to $1,000 for each eligible student or 42% of the credit (whichever is less). The existing credit did not allow for a benefit if you had no tax liability.
If you or your student is in graduate school the American Opportunity Credit is not applicable, but the lifetime learning credit or tuition and fees deduction may still provide a benefit to you.