For tax years 2009 and 2010 undergraduate students may qualify for the Hope Credit (now called the American Opportunity Credit) for four years instead of two and be eligible for a refund of this credit up to 40% of the credit. Also what qualifies as education expenses for the Hope Credit has been expanded. This is great news since the Hope Credit offers the largest amount of credit – up to $2,500.00 per student.
Previous to tax year 2009, this credit was only available for the first two years of undergraduate education, was not refundable, and was limited to $1,800.00 per student. Also previous to 2009 books and supplies for school did not count as part of qualified education expenses. Now for a student’s first four years at a qualified educational institution, the credit has been expanded to include both tuition expenses as well as books and supplies.
Who qualifies for this credit? An eligible person is a student who is a U.S. citizen or U.S. resident alien, still in their first four years of post secondary education (private high school tuition does not count), in a degree program or a program that leads to a recognized education credential, enrolled at least half time in one or more quarters/semesters during tax year 2009 (or tax year 2010 for taking the credit on your 2010 tax return), have qualified expenses, and not have a filing status on their tax return of Married Filing Separate, nor be claimed on another person’s tax return, or have had a felony conviction.
Do you need to pay your own education expenses to qualify for the credit? No. Education expenses can be paid by a third party on your behalf and still be eligible for the credit on your tax return. For example, you file your own return and claim yourself. Your grandmother pays $10,000.00 directly to the school for your tuition, and your parents spend $500.00 on books and supplies needed to attend school. On your tax return you can use $10,500.00 to calculate your credit even though you did not personally pay any of it.
Can my parents take the credit even though I am not being claimed on their tax return as a dependent? No. In order for taxpayers to take the credit using funds paid by their child, they must claim the child on their tax return as a dependent.
How much is the credit? The credit is 100% of the first $2,000.00 of qualified expenses paid + 25% of the next $2,000.00 paid up to a maximum credit of $2,500.00 per student. This means that if parents are paying for education for their three college students all being claimed on their tax return, they can take a maximum credit of $7,500.00 ($2,500.00 for each student). This is quite different from the Lifetime Learning Credit where the maximum amount of credit that can be taken is $2,000.00 per tax return.
Can I take this credit if I do not owe any tax on my return? Yes. It is possible that you may qualify to take up to 40% of the credit as a refund on your tax return so it is worth filing your return even if you know you will not owe any tax.
For more information on the American Opportunity Credit go to irs.gov.