College students get ‘extra credit’ for going to school


The 2009 economic stimulus law expands a tax break for college students and their families by increasing the federal income tax credit for college expenses and also raising income eligibility.

The American Opportunity Education Credit (AOTC), which applies to the 2009-10 tax years, does the following:

  • Increases the maximum annual tax credit to $2,500 (up from $1,800);
  • Raises income eligibility to $80,000 for single filers (up from $48,000) and to $160,000 for joint filers (up from $96,000);
  • Allows single filers earning between $80,000-$90,00 and joint filers earning between $160,000-$180,000 to ratable portions of the tax credit;
  • Expands the tax credit beyond tuition and student activity fees to include text books, supplies and equipment necessary for coursework;
  • Allows a refund of up to $1,000 for individuals and families who owe little or no federal taxes.

Here's how the AOTC works: Taxpayers receive a tax credit dollar-for-dollar up to the first $2,000 of eligible expenses, and a credit for 25 percent of the next $2,000 (up to $500). This means if you spend more than $4,000 on eligible expenses, you are entitled to the full $2,500 credit.

Taxpayers still have the option of opting for the $4,000 tax deduction, but they cannot claim the tuition tax deduction and the AOTC in the same tax year. A taxpayer is usually better off claiming a tax credit since it is a dollar-for-dollar swap for a potential savings of $2,500, while a deduction just reduces the amount of income subject to federal taxes. It's important to have a tax expert help you weigh your options to make sure you're getting the full value of available deductions or tax credits.

Another AOTC advantage is that college juniors and seniors and their families who've already used their tax credit eligibility under the prior Hope Credit law can claim the more generous AOTC credits to cover four years of eligible college expenses instead of just two years. 

Taxpayers paying the alternative minimum tax can also take advantage of the expanded tax credit allowed under the AOTC, although it cannot be claimed against:

  • 529 education fund plans;
  • tax free scholarships;
  • Pell grants;
  • Coverdell Education Savings Accounts;
  • Employer provided education assistance;
  • Military education assistance; and
  • Any other tax-free educational assistance programs.

Taking advantage of the education tax credit requires full knowledge of the ever-changing opportunities under federal tax laws. We have advised hundreds of clients facing high college expenses. If you need help understanding how to claim the AOTC tax credit, please contact James T. Borello at (847) 426-0200.