What is American Opportunity Tax Credit?

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.

Cons?

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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