Tuesday, March 29, 2011

The American Opportunity Award

With tax time just around the corner, you need to become familiar with this fairly recent tax credit.The American Opportunity Award was enacted for 2009 and 2010 tax years and replaced the existing Hope Scholarship tax credit. If you are eligible, it puts $2,500 back in your pocket.

Here's how AOTC works:
1. The first $2,000 in qualified expenses (tuition, fees, textbooks, and course materials) for 2010 receives a dollar-for-dollar tax credit. In other words, if you spend $2,000 on qualified expenses in 2010, you will owe $2,000 less in federal taxes.
2. The next $2,000 you spend on qualified expenses receives a 25 percent credit. In other words, if you spend an additional $2,000, you will receive a $500 tax credit ($2,000 X 25 percent).
3. If you owe absolutely no taxes, meaning that even everything taken out of your paycheck for federal taxes was refunded to you, the AOTC might also be refundable at a rate of 40 percent. For example, if you earned the entire $2,500 credit and had no taxes to use the credit against, the IRS would send you 40 percent of the credit, or $1,000 ($2,500 x 40 percent).

No comments: