2013 to 2018 American Opportunity Education Tax Credit (AOTC) Extension – Eligibility, Income and Phase-out Limits

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[2013 Update on Education Credits] Congress and the Obama administration have reached an agreement that will extend the American Opportunity Tax Credit (AOTC) for a further 5 years (into 2018) following the latest round of fiscal cliff negotiations. The AOTC allows parents and students to receive a tax credit of up to $2,500 for college expenses, based on certain income limits, and replaced the smaller Hope credit (which would have been the only credit available had the fiscal cliff deal failed). The expanded credit will benefit almost 10 million families on an annual basis who will get an average credit of $1,900.

2012 gross income (AGI) limits to get the AOTC are outlined in the update below and may be raised for 2013 if adjusted for inflation. I will post these updated figures when available and encourage you to consider subscribing (free) via Email or RSS to get the latest details.

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[2012 Update] Congress extended the American Opportunity Tax Credit (AOTC), which was initially created under the Recovery Act, for an additional two years as part of President Obama’s compromise tax cut package. The AOTC allows parents and students to receive a tax credit of up to $2,500 for college expenses, based on certain income limits. The AOTC replaced the Hope credit for 2009 and 2010 and with this extension will continue to do so for 2011 and 2012.  This education tax credit is expected to provide $18.2 billion in tax relief to make college more affordable next year, and 9.4 million families are expected to benefit from an average credit of $1,900.

The AOTC provides a $700 increase over the Hope credit it replaced and in addition allows students to apply it to the first four rather than two years of college. It also covers text books, unlike past education tax credits.  In addition, the AOTC is partially refundable, meaning that families with no federal income tax liability can receive the credit. These families are expected to receive more than $4 billion in refunds from the AOTC in 2011. For students claiming the maximum credit for four years of graduate or undergraduate school, the AOTC will provide up to $10,000 to help pay for the cost of college. The maximum available credit this year would cover about 80 percent of tuition and fees at the average two-year public institution, or about a third of tuition and fees at the average four-year public institution in 2011, according to a new Treasury analysis.

In addition, more families are eligible for larger credits because the income limits were expanded compared to the Hope credit. Families whose adjusted gross income (AGI) is $80,000 or less ($160,000 for married couples) will be eligible for the full credit. The credit is phased out for taxpayers with incomes above these levels and cannot be claimed for taxpayers with an AGI greater than $90,000 ($180,000 for joint filers) .

Claiming the AOTC Credit – This tax credit is claimed using Form 8863, attached to your main tax return (form 1040 or 1040A)

Other initiatives the Administration has undertaken to make college more affordable and accessible, including simplifying the free application for Federal Student Aid and increasing Pell grants, which are the main source of federal aid for low-income students enrolled in institutions of higher education.

It is likely that the President, who is very pro-education, will introduce new education measures and incentives (tax credits) when the 2012 budget is announced.

Sources: Treasury Department

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