Wednesday, December 12, 2012

Will the American Opportunity Tax Credit be Another Victim of the Fiscal Cliff?

As I was driving to work yesterday, I heard an interesting article on NPR’s Morning Edition (link provided below).  Now, I am aware that everyone is probably either very tired of hearing about the Fiscal Cliff or very stressed!  However, as a heads up, here is another potential victim of the Fiscal Cliff – the American Opportunity Tax Credit.  Although originally set to expire in December of 2010, the Tax Relief and Job Creation Act of 2010 extended the American Opportunity Tax Credit for an additional two years, through December 2012.  In retrospection, a very bad date for the expiration of the tax credit because this lumps the American Opportunity Tax Credit in with all of the other services that will be under scrutiny for adjustment or elimination as Congress wrestles with the adjustments necessary to begin cutting the nation’s deficit.

Popular Student Tax Credit Will Expire:

Under the American Recovery and Reinvestment Act (ARRA), more parents and students qualified for a tax credit, the American Opportunity Tax Credit, to pay for college expenses.  A modification of Hope Credit, the American Opportunity Tax Credit has been in effect for tax years 2009, 2010 and, under ARRA, 2011 and 2012.  The American Opportunity Tax Credit has been very popular because it was accessible to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible qualified for the maximum annual credit of $2,500 per student.  Created to help tax payers whose modified adjusted gross income were $80,000 or less, or $160,000 or less for married couples filing a joint return, the credit allowed tax payers to actually receive the credit, whether they owed taxes or not, a feature that proved a huge benefit to lower income families. The credit was phased out for taxpayers with incomes above these levels. The income limits for the American Opportunity Tax Credit were higher than under the existing Hope and Lifetime Learning Credits.
Since extending this tax cut is estimated to cost $10 billion, I personally do not think it will be extended again, but I am optimistic and live in hope…..  So, what will happen if this tax credit is not extended?  The Hope College Tax Credit will come back into effect. 

Hope Tax Credit

Although the Hope Tax Credit is better than nothing, it iss a less generous program than the American Opportunity Tax Credit.  Here is a brief summary of some differences:
·         It is not refundable; it can only reduce the amount of federal taxes you pay.
·         It is worth up to $1,800.
·         100% of the first $1,200 in qualified tuition and related expenses.
·         50% of the next $1,200 in qualified tuition and related expenses.
·         It can only be used for tuition and required enrollment fees- not required course materials.
·         It can only be used for the first two years of undergraduate study.
·         It can only be claimed for two tax years.
·        The credit can be only be claimed in full for single filers' income of $50,000; partial credit is allowed up to $60,000. For joint filers, the full credit can be claimed for incomes up to $100,000; partial credit is allowed up to $120,000.
·       You can claim the Hope educational credit even if the qualified expenses were paid by college loans for students.
·       You can also claim the credit if the student withdrew from school and these expenses were not refunded.
·       Students are eligible if
    • they have been enrolled at least half-time in a degree, certificate or otherwise recognized credentialed program for a semester that started in the tax year
    • not already taken this education tax credit for two years
    • not completed their first two post-secondary years before the tax year
    • been free of a drug conviction as of the end of the tax year
SOURCES for this article were National Public Radio’s Morning Edition and the IRS Publications website. 

Hopefully, after the first of the year, this IRS website  will provide information for the upcoming year. (questions and answers