American Opportunity Credit: Key To Education For Lower And Middle Income College Students

Abstract

The Tax Relief Act of 1997 created an important tax provision which helped taxpayers offset the cost of higher education. This provision was in the form of education tax credits. Because a tax credit is a dollar for dollar reduction in tax liability, these education credits were designed to reduce the amount of tax due for college students or their parents. Introduced in 1998, and known as the Hope Scholarship and the Lifetime Learning tax credits, these credits were established to counterbalance the monies spent on tuition, fees, and some course materials during postsecondary education. While these credits proved to be beneficial to many taxpayers over the past decade, most recently, the signing of the American Recovery and Reinvestment Act (ARRA) of 2009 provided a new provision which was intended to increase access to education and to stimulate the economy. The ARRA of 2009 established for two years (2009 and 2010) the American Opportunity tax credit as a replacement for the Hope credit. Similar to the previous education credits, the American Opportunity tax credit helps students and families pay for post-secondary education. However, the most significant condition of this credit is that 40% of the American Opportunity tax credit is refundable and therefore available to households with little or no tax liability. Since refundable credits generate refunds over and above the withholding amount instead of just reducing the tax liability, the American Opportunity tax credit is available to the lowest income tax payers. As a result, it is possible for many taxpayers to receive a maximum amount of refundable credit of up to $1,000. Unfortunately, the American Opportunity credit is proposed to be available only on a taxpayers 2009 and 2010 tax return. After this time, the credit is expected to revert to its original form prior to the ARRA of 2009. Many taxpayers will no longer be eligible for the refundable portion of the credit nor many of its other beneficial provisions. Therefore, the purpose of this paper is to demonstrate the effectiveness of the new American Opportunity Credit and to show the need for the continuance of this credit that is not only crucial for the welfare of the lower to middle income taxpayers but the larger, refundable credit would extend educational assistance to low to moderate income students, making it easier for them or their parents to afford college and thus encouraging attendance.