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. 

Link to the NPR news Article from December 11, 2012: http://www.npr.org/2012/12/11/166938090/could-the-opportunity-credit-be-eliminated

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

2012 Education Tax Credits and Deductions....

WHOPPEE – its tax time again! As you start to gather your 2011 tax documents, don’t forget to include your education costs or the interest paid on federal student loans. There are also two tax credits this year, so more opportunities for savings. Of course, you cannot “double dip”, claiming more than one credit or deduction for the same expense, so do your homework and make sure you take advantage of the most advantageous choice for you!

The American Opportunity Tax Credit (AOTC) replaced the HOPE tax credit and provides additional benefits, extending coverage from the first two years to college to four years, covering text books and AOTC is partially refundable (40% or $1,000 maximum). This means that, even if you do not have a federal tax liability, you might still qualify for a refund. To claim your credit, you must use form 8863 and attaché to your 1040 or 1040A. At this time, this credit will expire at the end of 2012.

The Lifetime Learning Credit remains in place for 2011 and can create a tax credit of up to $2,000 for any level of college education (even graduate school). One unique feature of this credit is that it doesn't require a minimum level of enrollment. However, the Lifetime Learning Credit has a narrower income range compared to the tuition deduction, so you need to look at all options before deciding which tax credits or deductions to submit.

Here are some key facts the IRS wants you to know about these valuable education credits:

1. The American Opportunity Credit
• The credit can be up to $2,500 per eligible student.
• It is available for the first four years of post-secondary education.
• Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
• The student must be pursuing an undergraduate degree or other recognized educational credential.
• The student must be enrolled at least half time for at least one academic period.
• Qualified expenses include tuition and fees, coursed related books supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return.

2. Lifetime Learning Credit
• The credit can be up to $2,000 per eligible student.
• It is available for all years of postsecondary education and for courses to acquire or improve job skills.
• The maximum credited is limited to the amount of tax you must pay on your return.
• The student does not need to be pursuing a degree or other recognized education credential.
• Qualified expenses include tuition and fees, course related books, supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return.

A Few Final Reminders: 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 must choose to either take the credit or the deduction and should consider which is more beneficial for you.

For more information, visit: http://www.irs.gov/newsroom/article/0,,id=218389,00.html or
http://www.savingtoinvest.com/2011/02/american-opportunity-tax-credit-extension-for-2011-and-2012-eligiblity-income-and-phase-out-limits.html

Finally, watch for the 2011 edition of the IRS Publications, referencing Education Tax Credits. As of January 9, 2011, the link still gave 2010 information. (http://www.irs.gov/pub/irs-pdf/p970.pdf )

QUICK PRIMER ON EDUCATIONAL TAX CREDITS

By popular demand, we are repeating an article from last January:
SWFC Financial Literacy Department's
QUICK PRIMER ON EDUCATIONAL TAX CREDITS

There are four tax benefits for college education expenses:
· Tuition and fees tax deduction
· The American Opportunity Credit
· The Hope Credit
· The Lifetime Learning Credit.




The Tuition and Fees deduction will reduce your taxable income. The Hope Credit, Lifetime Learning Credit and American Opportunity credit can reduce your tax bill. The American Opportunity credit replaces the Hope credit for 2009 and 2010, and provides a partially refundable credit. Taxpayers should investigate all of their options and choose the credit that will give them the lower tax responsibility; however, they cannot claim more than one credit or a credit and deduction for the same expenses. You cannot “double dip”. The education tax credits are calculated on IRS Form 8863 (PDF).

The American Opportunity Tax Credit is a refundable tax credit for undergraduate college education expenses. This credit can provide up to $2,500 in tax credits on the first $4,000 of qualifying educational expenses. Forty percent of the credit (up to $1,000 maximum) is refundable. This is unique to the American Opportunity Tax Credit. The tax credit is scheduled to have a limited life span and, unless Congress extends the credit to additional tax years, it will be available only for the 2009 and 2010 tax years.

The Hope Credit is a tax credit for college students in their first two years of college. It provides a tax credit of up to $1,800 on the first $2,400 of college tuition and fees. The Hope Credit can be claimed on your tax return if you, your spouse, or your dependent are a first-year or second-year college student, is enrolled at least half-time at an eligible education institution, and you were responsible for paying college expenses. If you missed this credit in the past, it might be possible to file an amended tax return for the year(s) in question.

The Lifetime Learning Credit is a tax credit for any person who takes college classes, even if you took only one class. It provides a tax credit of up to $2,000 on the first $10,000 of college tuition and fees. The total credit is limited to $ 2,000 per return, but you can claim the Lifetime Learning Credit if you, your spouse, or your dependents are enrolled at an eligible educational institution and you were responsible for paying college expenses.

If you use the Income Based Repayment plan (IBR), you can also file IRS form 4506-T to allow the IRS to release your AGI information directly to your loan's http://www.irs.gov/pub/irs-pdf/f4506t.pdf


A final word of caution – Patience is a virtue that can pay BIG $. Do not fall victim to so-called "instant" or "same-day" refunds. These are actually short term bank loans, and most have exorbitant fees. According to Brendan Conway (Contributor to The Christian Science Monitor / March 2, 2009), in some cases, that means a mind-boggling 1,300% when calculated like a credit-card’s annual percentage rate. Electronic refunds are generally processed within 15 days and a refund returned by mail will usually be received within 3 to 4 weeks.

A QUICK REFERENCE GUIDE
American Opportunity Credit

1. $2,500 in tax credits on the first $4,000 of qualifying educational expenses.
2. Up to $ 1,000 may be refunded.
3. Can be used for Education expenses paid with borrower funds (student loans).
4. Can be claimed for the first 4 years of post-secondary education expenses.
5. Available ONLY for 2009 & 2010. Applies to all four years of undergraduate college education.
6. The American Opportunity credit also features an expanded definition of qualifying expenses.

Hope Credit

1. $1,800 of qualifying educational expenses paid for each eligible student.
2. Can reduce taxes to $0. Excess funds cannot be refunded.
3. Can be used for Education expenses paid with borrower funds (student loans).
4. Available ONLY until the first 2 years of post-secondary education are completed.
5. Available ONLY for 2 years per eligible student.
6. Student must be pursuing an undergraduate degree or other recognized education credential.
7. Student must be enrolled at least half time for at least one academic period beginning during the year.
8. No felony drug conviction on student's record.

Lifetime Learning Credit

1. Credit of up to $2,000 based on qualified tuition and related expenses paid for all eligible students. (This can reduce taxes to $0. Excess funds cannot be refunded).
2. Can be used for Education expenses paid with borrower funds (student loans).
3. Available for all years of post secondary education and for courses to acquire or improve job skills.
4. Available for an unlimited number of years.
5. Student does not need to be pursuing a degree or other recognized education credential.
6. Available for one or more courses.
7. Felony drug conviction rule does not apply.
   
   This information is provided by SWFC to increase student awareness of possible Education Tax Credits and Deductions. We are not Tax Preparation experts. Students interested in using any of these credits or deductions should consult a Tax Expert or the IRS.
   
   IRS Form 8863Publication 970, Tax Benefits for Education