The education credit reflects the government’s interest in encouraging people to get an education, it has been generous in offering tax credits for qualified college or post secondary education expenses. First called the Hope Credit and applicable to 2008 or earlier, the new American Opportunity Tax Credit is an expanded education credit that provides additional benefits beyond those allowed by the Hope Credit for the years 2009 and 2010. The opportunity tax credit increases the amount of the credit and applies for a longer period of time.

The Hope Credit was in effect replaced by and renamed as the American Opportunity Tax Credit. The Hope Credit allows a credit of $1,800 on the first $2,400 of eligible undergraduate college expenses. The new opportunity tax credit allows for an education credit equal to $2,500 of the first $4,000 spent on tuition and fees and books for undergraduate expenses. The opportunity tax credit applies to the first 4 years of college expenses whereas the Hope credit only applied to the first 2 years.

The American Opportunity Tax Credit also raised the income levels compared to the Hope Credit. People with a tax status of married filing jointly who earn up to $160,000 can claim the full credit. People filing as single can earn up to $80,000 and take the full credit. The new education credit phases out for income levels beyond that up to $180,000 for married couples and $90,000 for single filers. The phase out means you can claim a partial credit rather than a full credit.

Here’s the Deal…Take the Education Credit Even When You Don’t Owe

Another advantage of the American Opportunity tax credit is you can take the credit even if you don’t owe any income tax. The credit is capped at $1,000 in that case. The IRS encourages you to file a tax return even if you don’t owe tax because of credits like the education credit. The really good news is that the education credit is a refundable credit. For example, if you don’t owe any income tax you can get the $1,000 as a refundable credit. If you owed $1,800 in income tax and qualified for the full $2,500, your tax would be wiped out and you would get $700 back as a refundable credit.

Many people who did not qualify for the Hope Credit now qualify for the American Opportunity Credit. But that is not the end of the education credit opportunities. The lifetime learning credit also allows for a credit that is equal to 20% of college or post-secondary expenses up to $10,000 in expenses meaning the maximum education credit is $2,000. The credit can be taken by tax filers for students in the family. The nice thing about this education credit is that the student does not have to be enrolled at least half time in one of the first two years of college whereas that is a requirement for the Hope Credit and the American Opportunity Tax Credit. Under the lifetime learning credit rules you can be taking one course or not even working towards a degree and be eligible for the credit. It is applicable to undergraduate, graduate or professional level education.

Under the American Opportunity Credit rules, the qualifying expenses include tuition and fees and required course materials like books. If eligible for the Hope or American opportunity credit and the lifetime learning credit, you can only choose one education credit for a student. Currently the American opportunity credit applies only through 2010, but it could very well be extended to later years. The best way to determine if you are eligible for the education credit is to use a program like Turbo Tax which asks you to enter the information about income and qualifying college expenses so the program can figure your credit.