American Opportunity Tax Credit

Under the American Recovery and Reinvestment Act (ARRA) and extended through tax year 2017 by the American Taxpayer Relief Act (ATRA) textbook and other course material expenses incurred in 2009 through 2012 that are not covered by scholarship or grant aid may be counted towards the tax credit called the American Opportunity Tax Credit on that respective year’s tax return.

According to the IRS, the American Opportunity Tax Credit is available to a broad range of taxpayers, including many with middle incomes and those who owe no tax.

It also:

  • Includes required course materials to the list of qualifying expenses
  • Allows the credit to be claimed for the first four post-secondary education years

Many of those eligible will qualify for the maximum annual credit of $2,500 per student, and provides a partial refund of up to $1,000.

For example:
If you or your student has out-of-pocket course material expenses or tuition and fees during 2010 or 2011 and no other financial grant aid covers those expenses, you will be able to claim the expenses as a credit. For each student the credit is limited to $2,500.

Let’s say your federal tax liability for 2010 is $2,000 before the American Opportunity Tax Credit and your student had $5,000 in allowable higher education expenses. The first $2,000 in out-of-pocket textbook purchases, tuition, and fees goes towards your tax credit at 100%. Everything over that is allowable at 25% up to a total credit per student of $2,500. You would have a credit of $2,000 plus $500 of the remaining $3,000 (25% of the expenses over $2,000 up to an extra $500 credit). Because this credit is partially refundable, the $2,500 credit results in a refund of $500! If your 2009 tax liability is zero and your student’s textbook credits were $2,500, you can receive a refund of $1,000 because the credit is 40% percent refundable (.40 x $2,500 = $1,000).