Final Year for the American Opportunity Education Credit?

Without Congressional intervention, 2010 is the final year for the American Opportunity credit, which is a modified version of the Hope Education credit for tax years 2009 and 2010.  The American Opportunity credit is available to a broader range of taxpayers with expanded income limitations and a more liberal list of qualified expenses than was the Hope credit. Many of those eligible will qualify for the maximum annual tax credit of $2,500 per student.

The American Opportunity credit, in many cases, offers greater tax savings than other existing education tax breaks! Here are some key features of the credit:

• Tuition, related fees, books and other required course materials generally qualify. In the past, books usually were not eligible for education-related credits and deductions.
  
  
• The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
  
  
• If you otherwise qualify, you can take this credit even if you have previously taken the Hope or Lifetime Learning credit in years prior to 2009.
  
  
• The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less (for married couples filing a joint return, the limit is $160,000 or less). The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the former Hope and current lifetime learning credits.
  
  
• Forty percent of the American opportunity credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Other existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed at the parent’s rate, commonly referred to as the kiddie tax.

Though most taxpayers who pay for post-secondary education will qualify for the American Opportunity credit, some will not. The limitations include a married person filing a separate return, regardless of income, joint filers whose MAGI is $180,000 or more and, finally, single taxpayers, heads of household and some widows and widowers whose MAGI is $90,000 or more.

There are some post-secondary education expenses that do not qualify for the American Opportunity credit. They include expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college. That’s because the credit is only allowed for the first four years of post-secondary education.  However, for those students who qualify, the Lifetime Learning credit may be claimed instead.

To maximize your credit for 2010, it may be appropriate for you to prepay certain education expenses that apply to the first quarter of 2011.  For additional information on this tax strategy or other issues relating to education tax benefits and credits, please give this office a call.

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