The purpose of the American Opportunity Tax Credit is to reduce the amount of taxes paid by students (or people who claim student status) by allowing them to include education related materials into consideration when it comes to tax reduction. It was introduced as an amendment to and replacement for the Hope Scholarship credit offered by the IRS, which offered similar deductions for a reduced period of time. The American Opportunity Tax Credit allows students to claim deductions for up to four years of college as opposed to the two years of tax incentives offered by the former Hope scholarship credit. To apply for this credit, a student or person claiming to be a student can claim an education tax credit by completing tax form 8863 and attaching it to their normal 1040 or 1040A tax form. If you use a software progra it can do this for you automatically.

This new tax initiative can be claimed for tax years 2009 through 2017 for costs associated with tuition and certain course related materials. Other similar tax deduction related programs such as the Lifetime Learning credit do not offer deductions for things like textbooks, calculators, and other items essential to student academic success. The American Opportunity Tax Credit provides up to $2,500 of the tuition, fees and course materials annually. Up to 40 percent of the credit is refundable. For example, if you owe no taxes, you may be able to receive a $1,000 cash refund.

To be able to claim this tax credit for a student or for yourself, you must have an annual gross income not exceeding $80,000, or $160,000 for joint filers. A person or family with a gross income between $80,000 and $90,000 (or between $160,000 and $180,000 for people filing jointly) may still apply, but may be approved for a reduced amount. Anyone with incomes exceeding 90k or 180k will be disqualified. If you or your new high school graduate hopes to enroll in a college or university this year, they will be eligible to claim the tax credit until 2017.