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Education Tax Credits for Families: The AMERICAN OPPORTUNITY TAX CREDIT

What is the American Opportunity Tax Credit?

The American Opportunity Tax Credit (formerly known as the Hope Credit) can get you money back for expenses you pay during the first four years of post-secondary education.  This education tax credit was expanded as part of the American Recovery and Reinvestment Tax Act of 2009 (ARRA).  The new credit is 40 percent refundable, which means that you can receive up to $1,000 even if you owe no taxes.

• You can get money back for "qualified education expenses" (including tuition, books, supplies and certain equipment) for the first 4 years of college or vocational school.
• You can get up to $2,500 per eligible student, per year.
• You must be enrolled in school at least half-time, for at least one academic period in 2011.
• You must be working on getting a degree, certificate, or other credential.
• You can't claim a credit for graduate and professional-level programs.
• If you have a felony drug conviction, you can't claim the credit.

Who Can Claim the American Opportunity Tax Credit?

Generally, you can claim the American Opportunity Tax Credit if:

1. You pay qualified education expenses for higher education.
2. You pay the education expenses of an eligible student.
3. The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.

Who Cannot Claim the American Opportunity Tax Credit?

You cannot claim the American Opportunity Tax Credit if any of the following apply.

• Your filing status is married filing separately.
• You are listed as a dependent in the exemptions section on another person's tax return (such as your parents).
• Your modified adjusted gross income is $90,000 or more ($180,000 or more in the case of a joint return).
• You (or your spouse) were a nonresident alien for any part of 2011 and the nonresident alien did not elect to be treated as a resident alien for tax purposes.

No Double Benefit Allowed

You cannot do any of the following.

1. Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim the American Opportunity Tax Credit based on those same expenses.
2. Claim the American Opportunity Tax Credit in the same year that you are claiming a tuition and fees deduction for the same student.
3. Claim an American Opportunity Tax Credit and a Lifetime Learning Credit based on the same qualified education expenses.
4. Claim the American Opportunity Tax Credit based on the same expenses used to figure the tax-free portion of a distribution for a Coverdell education savings account or qualified tuition program.
5. Claim the American Opportunity Tax Credit based on qualified education expenses paid with a tax-free scholarship, grant, or employer-provided educational assistance.

Who Can Claim a Dependent's Expenses?

If there are qualified education expenses for your dependent, either you or your dependent, but not both of you, can claim the American Opportunity Tax Credit for your dependent's expenses for that year.

For you to claim the American Opportunity Tax Credit for your dependent's expenses, you must also claim an exemption for your dependent.

Expenses paid by dependent

If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Include these expenses when figuring the amount of the American Opportunity Tax Credit.

Expenses paid by you

If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the credit. If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the American Opportunity Tax Credit.

Expenses paid by others

Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. If you claim an exemption on your tax return for the student, you are considered to have paid the expenses.

Form 1098-T.

You should receive Form 1098-T from the college or university. Generally, an eligible educational institution must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2012. However, the Form 1098-T is often difficult to understand or inaccurate, so it is best to keep your own record of educational expenses.