Tax Tip of the Week – The American Opportunity Tax Credit

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College student One major tax change this year is the expansion of the education credit. If you or your dependents have qualifying education expenses you can save big money when you file your income taxes.

If you have taken this credit in the past, you are familiar with the education credit. You may know that a student can qualify for either the Hope Credit (student in their first two years of a higher education) or Lifetime Credit (a student past their second year of higher education). If you qualified for the Hope Credit, up to $1,800 of your tuition could be used to reduce your income taxes. If your education credits exceeded your income tax, the additional credit was lost.  Amounts spent on text books were not allowed in this credit.  This credit was also phased out at higher income levels.  If you are filing single, the phase out started at $50,000 and the credit disappeared after $60,000in income, married filing jointly started to phased out $100,000 and disappeared after $120,000.

Now with the American Opportunity Tax Credit, if the student is in their first four years of higher education, they qualify for this credit. In addition to expanding the time frame of the credit, the Senate increased the amount of the credit to 100% of the first $2,000 and 25% of the next $2,000 for a maximum credit of $2,500. Under the new law, books are now included in qualifying expenses. The attractive aspect of this credit is that part of it may be refundable. If not all the credit is used to reduce income taxes, up to 40% is refundable, as long as the Kiddie tax rules do not apply to you. This mean if the credit wiped out your income tax but you still had $100 of credit available, you will receive an additional $40 in your refund. Just like the Hope Credit, this credit phases out. If you are filing single started at $80,000 and non-existent after $90,000, married filing jointly starts to phase out $160,000 and disappear after $180,000.

Once a student is in school longer than four years in higher education they can no longer qualify for either of these credits. They can still qualify for the Life Time Learning Credit. This credit has not changed; the max is $2,000 and is only 20% of $10,000 of qualifying tuition. This credit is not refundable.

If you are still you have any questions about any of these credit call us at 915-857-8158 and we will be more than happy to help you.