ARRA Expands Hope Scholarship Credit

By Steve C. Schuster, CPA, Pulakos & Alongi, Ltd., Albuquerque, NM

Editor: Michael D. Koppel, CPA, PFS

The American Recovery and Reinvestment Act of 2009, P.L. 111-5 (ARRA), includes an expansion of the Hope scholarship credit that will provide additional support to many American families that have members attending postsecondary educational institutions. The expanded credit, called the American opportunity tax credit, modifies the existing Hope credit for tax years 2009 and 2010.

Hope Scholarship Credit

The Hope scholarship credit established a nonrefundable credit for higher education (Sec. 25A(b)). A taxpayer claiming the exemption deduction for an individual attending a qualified educational institution could receive a credit against federal income taxes of up to $1,800 per eligible student (Rev. Proc. 2008-66). The credit phased out for taxpayers with modified adjusted gross income between $50,000 and $60,000 for the 2009 tax year ($100,000 and $120,000 for married taxpayers filing a joint return).

Individuals were eligible to claim the Hope scholarship credit for each of the first two tax years of postsecondary education. The credit is based on qualified tuition and related expenses. Examples of related expenses include books, supplies, and equipment if required for course studies. The expenses must be paid in the tax year for which the Hope credit is claimed. Under the existing Hope scholarship credit, certain prepayments of qualified tuition and related expenses will qualify in the tax year the expenses are paid if the next academic period begins within three months following the tax year. Expenses are reduced by any scholarships, Pell grants, and employer assistance received, if such assistance is deemed nontaxable (other than gifts and inheritance).

Qualified higher education expenses must be incurred by the taxpayer, the taxpayer’s spouse, or a dependent of the taxpayer in order to receive the Hope scholarship credit. If the eligible student is claimed as a dependent on the parent’s return, the student may not claim a credit on his or her personal return, but the parent can. The eligible student must be enrolled at least half time at an eligible educational institution in a degree or certificate program. The eligible student may not have been convicted of a felony drug offense. The institution must be eligible to participate in the Department of Education student aid programs to qualify.

Practice tip: An eligible student may not claim the Hope scholarship credit while taking a deduction for tuition and fees in the same tax year (Sec. 222(c)(2) (A)). It is best practice to determine which education tax opportunity method provides the lowest net tax each year, depending on individual circumstances. Taxpayers may claim the credits on Form 8863, Education Credits.

American Opportunity Tax Credit

The American opportunity tax credit (Sec. 25A(i)), which is effective for the 2009 and 2010 tax years, will apply to more American families than its predecessor, the Hope scholarship credit. It will benefit families with higher incomes, and it extends the number of years for which the credit may be claimed. Unlike the Hope scholarship credit, the American opportunity tax credit may also be partially refundable.

The modified credit has an increased phaseout range. The credit will begin to phase out ratably for individuals with modified adjusted gross income between $80,000 and $90,000 for the 2009 year ($160,000 and $180,000 for married taxpayers filing jointly) (Rev. Proc. 2009-21), allowing individuals with higher incomes to take advantage of these educational/ tax saving incentives. Married individuals who file separate returns will not qualify for the credit (Sec. 25A(g)(6)).

ARRA increased the amount of the credit as well. The first $2,000 of qualified educational expenses incurred can be taken as a credit against tax, dollar for dollar. The next $2,000 of qualified educational expenses provides a credit against tax at a rate of 25%, for a combined maximum credit of $2,500. The expanded credit allows the cost of course materials to be included as qualified education expenses. Payments for qualified tuition and related expenses only qualify for the American opportunity tax credit if they are paid in 2009 or 2010 for education furnished in those years. Payments in December 2008 for 2009 education are subject to the 2008 rules, not to the expanded credit.

The credit is also expanded to apply to the first four years of postsecondary education, provided the eligible student has not already completed his or her first four years of postsecondary education. This change makes the American opportunity tax credit larger than the lifetime learning credit (Sec. 25A(c)) for years three and four of postsecondary education. The modified credit may also be used to offset an individual’s alternative minimum tax liability (Sec. 25A(i)(5)).

Another key change allows the American opportunity tax credit to be partially refundable (Sec. 25A(i)(6)). Up to 40% of the credit can be refundable, as opposed to being limited to the amount of a taxpayer’s year-end tax liability. Therefore, an individual who incurred in excess of $4,000 of higher education expenses and who owes no tax can receive a $1,000 American opportunity tax credit refund ($2,500 maximum credit × 40% limit on the refundable portion of the credit).

There are restrictions, however, to the refundable portion of the American opportunity tax credit. The modified credit will not be refundable to an individual who is a child under age 18. In addition, the credit will not be refundable to a student under age 24 if the student does not provide at least one-half or his or her own support, does not file a joint return, and has a living parent. The taxpayer, however, may still claim the nonrefundable portion of the modified credit.


Michael Koppel is with Gray, Gray & Gray, LLP, in Westwood, MA.

Unless otherwise noted, contributors are members of or associated with CPAmerica International.

For additional information about these items, contact Mr. Koppel at (781) 407-0300, or

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