Tuesday, March 24, 2009

A Breakdown of the American Opportunity Tax Credit

In this economy, there is no better way to prepare for the future than by getting a solid education. When Barack Obama chose Joe Biden, who is known for supporting more educational aid, as his Vice President I knew that they would make education a priority in their administration. Just as I had predicted, only a few weeks after taking office the Obama administration created the "American Opportunity Tax Credit". In addition to it’s fancy name, this new credit will provide much more incentive for students to obtain a higher education. To help the readers of my blog further understand the credit I have broken it down into basic terms so that you can see weather you will benefit from it or not.

What is it?

The American Opportunity Tax Credit is a new college tax credit, which was first proposed in the "American Recovery and Reinvestment Act of 2009" by President Barack Obama. However, the now passed credit is actually an expansion of the Hope Scholarship tax credit, with a higher maximum and a longer life span.

How much is the credit?

The new credit extends the previous maximum amount of $1,800 a year, to a new maximum of $2,500. The tax credit can also be claimed for up to 4 years, as opposed to the previous 2 years. The hope is that by increasing the credit it will enable more students to obtain a higher education in today’s difficult economy.

What are the eligibility requirements?

Only qualifying full-time college students are eligible for the credit. While it will be made available for 4 years for all qualifying applicants, the actual amount you receive will vary on your income level. It is not available to those with incomes over $180,000, and unlike past credits it is 40% refundable, meaning even families who do not pay income taxes will qualify. A CBPP.org survey estimates the new 40% refund will allow an additional 3,762,000 American college students to take advantage of the new credit.

What will it achieve?

Since the Hope credit was only available for 2 years, the new extension is likely to give students already enrolled more enthusiasm to stay in school longer. In addition, due to the financial crisis, student loans are getting harder and harder to obtain, which is leaving many without any opportunity to attend college. Although the credit will not pay for a full education, it can give struggling students a little bit of much needed support.


Many experts feel the American Opportunity Tax Credit is a windfall for those students who were already planning on going to school anyways, many of who do not necessarily need the financial aid. Additionally, the credit is also gaining criticism for being refundable, and the amount of money all the new claims will cost the federal government.

Another important factor to remember is that some studies done on the Hope Credit found that it led to many colleges to raising their tuition and fees, which made the credit somewhat useless. However, it is definitely too early to tell if this credit will create the same problem or not.

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