Hope Credit and the American Opportunity Tax Credit

The Hope Credit is one of a couple of tax credits for education. It was signed into law under President Clinton as part of the Taxpayer Relief Act of 1997. Since 1997, the amount of the credit has been tweaked, ultimately resulting in the American Opportunity Tax Credit, which was signed into law last year as part of the American Recovery and Reinvestment Act. The American Opportunity Tax Credit is only available for 2009 and 2010. Confused yet? Don’t be. Just think of the American Opportunity Tax Credit as the Hope Credit on steroids.

Here’s what you need to know:

1, In 2008, the maximum amount of the Hope credit was $1,800 (or $3,600 if a student in a Midwestern disaster area). In 2009 and 2010, the credit is worth up to $2,500 – a $700 increase. The credit is calculated as 100% of the first $2,000 of tuition, fees and course materials paid during the taxable year plus 25% of the next $2,000 of tuition, fees and course materials paid during the taxable year.

2, The Hope credit originally applied only to the first two years of college. The expanded American Opportunity Tax Credit can be claimed for expenses for the first four years of post-secondary education.

3, You are eligible for the credit if you pay qualified education expenses of higher education; you pay the education expenses for an eligible student; and the eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.

4, “Qualified education expenses” now includes books (and thank goodness because they’re insanely expensive). Tuition, related fees, and other required course materials also qualify.

5, You cannot claim the credit if your filing status is married filing separately; you can be claimed as a dependent by another person; or if you or your spouse were a nonresident alien for any part of 2009 and the nonresident alien did not elect to be treated as a resident alien for tax purposes.

6, Income requirements have also been increased from 2008. You qualify for the full credit if your modified adjusted gross income is $80,000 or less ($160,000 or less in the case of a joint return) for 2009. Note that phaseouts apply.

7, It’s worth noting upfront that the Hope Credit is a credit, not a deduction. Remember that a tax credit reduces the amount of tax on a dollar for dollar basis – this is a good thing. The Hope Credit was a nonrefundable credit which means that you could reduce your tax to zero but you could not have the “extra” credit refunded to you. Up to 40% of the American Opportunity Credit is refundable which means that even if you owe no tax, you can get some money back (restrictions apply).

8, You can claim the credit even if you used a student loan to pay them (hooray!).

There are other tax credits and education-related deductions available under the Code. Keep in mind that you cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the lifetime learning credit. You have to choose. The tuition and fees deduction is merely a deduction – which is generally less advantageous than a tax credit – but run the numbers to see which benefits you more.

Comments

  1. Helen

    Hi TaxGirl,

    I think you have a couple of typos in #6 “…is $80,000 or less ($160,000 or less…”.

    I don’t mean to nitpick. I think you have a great blog, and I enjoy reading it.

    Thanks!

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  3. Author
    Kelly

    Helen,
    Thanks for bringing that to my attention!
    The funny thing is, I kept reading it over and over and I didn’t see it… ;)

  4. Mary O'Keeffe

    Thanks for the great summary, Kelly.

    Under the old Hope credit rules, taxpayers could only count the cost of books toward the credit in very rare and hard to verify circumstances. (See examples 1 and 2 at this link for 2008 tax benefits for education: http://www.irs.gov/publications/p970/ch02.html#en_US_publink100020770)

    You are right that textbooks can be expensive. For some community college students in the area our VITA site serves, the cost of their textbooks actually exceeds the cost of their tuition, so they have understandably disappointed to learn in the past that their book expenses didn’t qualify towards the education credit.

    It’s very timely to remind people now, because people are buying textbooks right now and they need to save their receipts. It’s also a good idea to save syllabi showing that the books were indeed “needed for their course of study,” especially if that connection might not be obvious. (For example, the IRS is probably not going to question an organic chem textbook purchased by a chemistry major, but an English major purchasing novels required for her literature class might want to be especially careful.) Professors can help by keeping their syllabuses available on-line, leaving archives up even after the class is over. My course has a Facebook page that includes my syllabus.

  5. Tamza

    So if it is a CREDIT and I do not have any income will I be getting the credit as a refund .. since there is no tax to offset?

  6. Alyssa

    It has taken me a little more than 4 years to complete my 4 year degree..so since I am in year 5 1/2, am I eligible for the credit?

  7. Tom

    Are the counties declared as midwestern disaster areas for 2008 still considered midwestern disaster areas for 2009 Hope credits?

  8. Mark

    I was especially thrilled to see item #8. however, i couldn’t find anything in the act that specifically addressed student loans as a form of paying for educational expenses. i mean it makes sense but…

    thanks!

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  10. Tim

    The American Opportunity Credit says that it can only be used for 4 years… I used the Hope credit in the past, do I need to count those years against my American Opportunity Credit – i.e. 2 years of Hope, 2009- and 2010 for American Opportunity Credit – can I claim 2011?

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