The Hope Credit, which was a tax credit available for tuition expenses paid during the first two years of college, has been expanded and renamed the American Opportunity Tax Credit for 2009 and 2010.
Taxpayers can now claim up to $2,500 per student, per year for the first four years of post-secondary education. This is much better than the Lifetime Learning Credit, which is limited to $2,000 per return, per year for all eligible students. You cannot claim both credits for the same student in the same year, so you must choose one or the other.
The credit equals 100 percent of the first $2,000 of qualified tuition and related expenses, plus 25 percent of the next $2,000 of such expenses, for a maximum credit of $2,500. However, the credit is gradually reduced if your modified adjusted gross income is between $80,000 and $90,000 ($160,000 and $180,000 if married filing jointly).
In general, education credits are nonrefundable. However, 40 percent of the allowable American Opportunity Tax Credit is refundable. Thus, if you have no tax liability, you can still claim a refund of $1,000 ($2,500 x 40%) for this credit (assuming you are entitled to a $2,500 credit after applying the phase-out rules). The balance of the credit is lost and cannot be carried over.
Posted on 2009-06-30 03:36:07