Hope Credit & 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 since 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 up front 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.

Kelly Phillips Erb

Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.

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