New federal tax credit program for textbooks and course materials

American Opportunity Tax Credit

Under the American Recovery and Reinvestment Act (ARRA) signed into law by President Obama on February 17, 2009, textbook and other course material expenses incurred in 2009 and 2010 that are not covered by scholarship or grant aid may be counted towards the newly created tax credit called the American Opportunity Tax Credit on that year’s tax return.

According to the IRS, the new credit temporarily replaces and expands the previous Hope Credit for tax years 2009 and 2010, making the American Opportunity Tax Credit available 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
Allows the credit to be claimed for the first four post-secondary education years instead of two

Many of those eligible will qualify for the maximum annual credit of $2,500 per student, which is more than $700 higher than the old Hope Credit, and, for the first time, will provide a partial refund of up to $1,000.

For example:
If you or your student has out-of-pocket course material expenses or tuition and fees during 2009 or 2010 and no other financial grant aid covers those expenses, you will be able to claim the expenses as a credit. For each student the credit is limited to $2,500.

Let’s say your federal tax liability for 2009 is $2,000 before the American Opportunity Tax Credit and your student had $5,000 in allowable higher education expenses. The first $2,000 in out-of-pocket textbook purchases, tuition, and fees goes towards your tax credit at 100%. Everything over that is allowable at 25% up to a total credit per student of $2,500. You would have a credit of $2,000 plus $500 of the remaining $3,000 (25% of the expenses over $2,000 up to an extra $500 credit). Because this credit is partially refundable, the $2,500 credit results in a refund of $500! If your 2009 tax liability is zero and your student’s textbook credits were $2,500, you can receive a refund of $1,000 because the credit is 40% percent refundable (.40 x $2,500 = $1,000).

American Opportunity Tax Credit At A Glance

In 2009 and 2010, tax credit of up to $2,500 of the out-of-pocket cost of tuition and related expenses including course materials paid during the taxable year

Eligible for the first four years of college

100% of the first $2,000 and 25% of the next $2,000

40% of the credit is refundable with the maximum refundable amount of $1,000

Phase-out for taxpayers with adjusted gross income in excess of $80,000 or $160,000 for married couples filing jointly (AGI phase out limits are $90,000 individual, $180,000 married couples filing jointly)

President Obama has proposed to make credit permanent


Visit or contact your tax return preparer for specific information.