33.8 American Opportunity Credit

For 2012, you may claim an American Opportunity credit on Form 8863 for up to $2,500 of qualified tuition and fees paid for each eligible student in the first four years of college or other post-secondary institution. Note that the American Opportunity will expire at the end of 2012 unless Congress enacts legislation that extends the credit.

An eligible student must meet the following requirements: (1) be enrolled in one of the first four years of postsecondary education, (2) be enrolled in a program that leads to a degree, certificate, or other recognized educational credential, (3) be taking at least one-half of the normal full-time workload for his or her course of study for at least one academic period beginning during the calendar year, and (4) not have any felony conviction for possessing or distributing a controlled substance.

For each eligible student, the American Opportunity credit is 100% of the first $2,000 and 25% of the next $2,000 (for a maximum of $2,500) of tuition, student-activity fees that are required as a condition of enrollment or attendance, and books, supplies, and equipment needed for courses. The books, supplies, and equipment qualify for the credit whether or not they had to be purchased from the educational institution.

Phaseout of credit depends on MAGI.

The tentative credit (100% of the first $2,000 and 25% of the next $2,000 of qualified expenses) is phased out over a modified adjusted gross income (MAGI) range of $80,000–$90,000 if you are single, head of household, or a qualifying widow(er), or $160,000–$180,000 if married filing jointly. The example below illustrates the application of the phaseout.

Modified adjusted gross income is the same as adjusted gross income (AGI) unless you are claiming the foreign earned income exclusion (36.3) or foreign housing exclusion or deduction(36.4), or the exclusions for income from Puerto Rico (36.10) or American Samoa (36.9). If so, adjusted gross income is increased by such amounts on Form 8863.

Refundable and nonrefundable parts of the credit.

After applying the phaseout rule (33.10), 40% of the allowable credit is refundable, meaning that you claim it on your return as if it were a tax payment, like withholding, that you get back even if it exceeds your tax liability for the year. However, none of the credit is refundable if you are under age 24 with investment income subject to the kiddie tax (24.2).

The balance of the credit (60% unless the kiddie tax applies) is a nonrefundable credit. When this book went to press, the law allowing nonrefundable credits to offset regular tax plus AMT (minus certain credits) had not yet been extended to 2012 by Congress, but the extension was expected (23.3). The Form 8863 instructions have a credit limit worksheet for applying the tax liability limitation.

For example, assume that after applying the phaseout rule, you are allowed a $2,500 credit. 40% of the $2,500, or $1,000, is a refundable credit. The $1,500 balance is a nonrefundable credit provided it is no more than your total tax liability. Assume your regular tax plus AMT liabilities total $1,300. Your nonrefundable credit is reduced from $1,500 to $1,300. You may claim a $1,000 refundable credit and a $1,300 nonrefundable credit. Also see the following example for how the refundable and nonrefundable portions of the credit are figured after application of the phaseout rule.