Hope is Gone, American Opportunity is In

For a number of years, the tax code has provided an education incentive in the form of tax credits for post-secondary education tuition paid during the year for the taxpayer and dependents.  Until 2009, these credits consisted of the Hope Credit, which was generally limited to a tuition credit that was capped at $1,800 (2008 cap) for each of the first two years of post-secondary education for each student, and the Lifetime Learning Credit, which provides up to $2,000 of credit for each family each year.  In 2008, these credits were phased out for joint filers with incomes between $96,000 and $116,000 ($48,000 to $58,000 for single filers) and not allowed at all for married individuals filing separately. 

Hope is Gone in 2009 and 2010 – The Hope credit is out for 2009 and 2010 and has been replaced by the American Opportunity Credit, which increases the maximum credit allowed by almost 40%, doubles the number of years for which the credit is available, expands the types of expenses eligible for the credit, and substantially raises the income thresholds for phasing out the credit.  Where the Hope credit was nonrefundable and only offsets your income tax, the American Opportunity Credit is partially refundable, thus providing more benefits to lower-income taxpayers.

American Opportunity Tax Credit is In – The American Opportunity Tax Credit replaces the Hope Credit for 2009 and 2010.  It provides credit for four years of college expenses, and the maximum credit per student increases to $2,500 per year.  The credit will be based on 100% of the first $2,000, and 25% of the next $2,000, of tuition, fees and course material (including books) expenses paid during the tax year.  40% of the credit is refundable, provided the taxpayer is not: (1) a child under the age of 18 or (2) under the age of 24, a full-time student and is not self-supporting.  For higher-income taxpayers, this credit begins to phase out for AGI in excess of $80,000 ($160,000 for married couples filing jointly), a significant increase from the previous phase-out thresholds noted above.  This enhanced credit can be used to offset the alternative minimum tax in both 2009 and 2010.

Please call this office if you wish additional information on the new education incentive.

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