Under the American Recovery and Reinvestment Act (ARRA), 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 new credit temporarily replaces and expands the previous Hope Credit for tax
years 2009 through 2012, making the American Opportunity Tax Credit available to a broader range of
taxpayers, including many with higher incomes and those who owe no tax.
It also:
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Adds required course materials to the list of qualifying expenses
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Allows the credit to be claimed for the first four post-secondary education years instead of two
Many of those eligible will qualify for the maximum annual credit of $2,500 per student, which is more
than $700 higher than the old Hope Credit, and, for the first time, will provide 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).