Grad Students and American Opportunity Credit

[Chowdahead]

I have found info regarding Graduate Students and the Lifetime Learning credit. However, the 1040 Express Answers and the Q&A on the IRS Website are silent on undergrad or grad student school expenses being claimed for the AOC. It simply says "first four years of college". Does this mean undergrad? What if someone is in their first year of grad school?

[grmy2h]

I think grad school comes AFTER the four years of undergraduate for most people.

[Pacun]

The intent was: Bachelors degree or first 4 years, whichever happens firts.

[Chowdahead]

The intent was: Bachelors degree or first 4 years, whichever happens firts.

Perhaps I overthought it then. I was thinking that the credit could be taken for the first four years since it was enacted. So if in 2009 you were a junior in college, you could take the AOC your Junior year and Senior year, and then take it your 1st and Second years in grad school. But if you go onto to med school, your out of luck.

I guess my confusion stems from the fact that the IRS.gov information pages mentions nothing about undergrad. It simply mentions qualified education expenses at an accredited college or technical or trade school.

Anyone else have thoughts on this, or is the consensus that it's strictly an undergrad credit (freshman thru senior years)?

[mcb39]

My understand is that the AOC is an enhanced extension of the Hope Credit which no longer exists. In other words, if student took the Hope Credit for 2 years, he/she can then take the AOC for two years if they happen to fall in 2009 and 2010. From theron it is the Lifetime Learning Credit or the Tuition and Fees deduction. I had to do an amendment last year because of this confusion. Client had three students in college, but one did not qualify for the AOC because of it being her fifth year. They withheld her entire portion of the refund until we did a correction.

[Pacun]

Also, this is part of the regulations:

"Student must be pursuing an undergraduate degree or other recognized education credential"

If the rule would say "the credit is available while you get your bachelor's degree", a lot of people who take 8 years to finish a bachelors degree would qualify to take the AOC for 8 years. Who would get a degree in 8 years you would ask? Tax preparers could take at least half time in in the summer and fall every year. That will give them opportunity to concentrate from Jan to April doing taxes and then go to school. They would qualify for 8 or 10 years of the credit and that's why it is limited to 4 years.

How about those excellent students who finish their bachelor's degree in 3 years and then they go to grad school in the 4th? Do they qualify on the 4th year? I think they DON'T. Wouldn't be nice if the regulation would say... Bachelors degree or first 4 years, whichever happens first? That statement would make it clearer.

[taxbrewster]

So, I have a new client who is still trying to get an undergraduate degree. This is her 5 year of schooling but classified as a junior. I believe in years one and two she took the hope credit, last year took lifetime learning (someone else did the taxes). Now is came to me, I think she would be able to get the AOC this year, should we go back and amend last year for AOC as well?

[Margaret CPA in OH]

I had a client in a similar situation. Quickfinders (not gospel but pretty good) says "To qualify for the credit, the student, as of the beginning of the tax year, must not have completed the first four years of post-secondary education at an eligible educational institution. THE CREDIT CAN ONLY BE CLAIMED FOR FOUR TAX YEARS FOR ANY ONE STUDENT. (My emphasis)I take from that phrase that, because it is an expansion of the Hope Credit and is a temporary 2 year expansion from 2 years, it is usable for only 4 tax years. In my opinion, being in school for the fifth year, even as an undergraduate still, does not qualify. Other opinions?

[Pacun]

So, I have a new client who is still trying to get an undergraduate degree. This is her 5 year of schooling but classified as a junior. I believe in years one and two she took the hope credit, last year took lifetime learning (someone else did the taxes). Now is came to me, I think she would be able to get the AOC this year, should we go back and amend last year for AOC as well?

Yes, you should.

[Margaret CPA in OH]

Pacun, why do think that the stipulation that it can be taken for only 4 TAX years would not apply for 2010 in the taxbrewster client situation? I agree that 2009 would qualify as the client's 4th tax year and should be amended but why would the 5th tax year, 2010, meet the qualification? Thanks for clarifying for me. It would help my client but I couldn't, based on my reading, justify it.

[Pacun]

Pacun, why do think that the stipulation that it can be taken for only 4 TAX years would not apply for 2010 in the taxbrewster client situation? I agree that 2009 would qualify as the client's 4th tax year and should be amended but why would the 5th tax year, 2010, meet the qualification? Thanks for clarifying for me. It would help my client but I couldn't, based on my reading, justify it.

This is a hard one. Now I go back to the intent. I think the intent was to limit each student to 4 years. Your client will use only 3 by amending. I think you should be OK but I am not certain. I will have an answer for you in a day or so.

[Terry D EA]

I find the following according to Pub 970.

1. This is the first year of the AOC credit, so it would be impossible to have already claimed the credit for any previous tax years. The gray area here is the fact that the AOC is an extension of the Hope Credit and if the Hope Credit has been claimed for any two previous tax years, then is there only two years remaining to claim the AOC? So far, I have found nothing to support that but it still very well may be the case.

2. The eligile student requirements are pretty clear. The credit is ONLY for undergraduate work. We all know that if a student is enrolled in graduate school, he/she had to have completed undergrad work.

3. The statment is clear regarding (4) four tax years. Going forward, the credit can only be claimed for four tax years, there is no statement that these years have to be consecutive. So, if a student took a break for one year and then resumed, he is still eligible to claim the remaining credit. So, if a student took 8 years to obtain a bachelors degree and there were a year or so break, then it appears he/she could take the credit for (4) tax years. However, if a student takes (8)consecutive years to complete a four year degree because he/she is a half time student, then it is clear the credit can only be taken for (4) four tax years.

To the scenario of a student who is a junior enrolled in a four year bachelors program could only take the credit for the two remaining tax years and the first two years of grad school... the student is not eligible to take the two remainig years of AOC credit simply because the credit is allowed for pursuit of a four year undergraduate degree

[Margaret CPA in OH]

Terry, AOC was available for 2009 and 2010 to extend the Hope Credit for 2 more years. Look in your software or irs website, American Opportunity Credit FAQ. It is in QF and I utilized it on 2 students who qualified in 2009.

[Terry D EA]

Thanks Margaret, Pub 970 doesn't mention when the credit became available but does mention that you cannot use the Hope Credit this year. It is always good to keep each other straight with these ever changing issues.

[Pacun]

I asked:

New client came to me yesterday. He got his his bachelors degree this year and will start his masters this year. 2005 claimed the Hope credit 2006 claimed the hope credit 2007 claimed the Life Learning credit 2009 Claimed life learning credit by mistake, since he qualify for the American Opportunity credit. Can I amend 2009 and claim the American Opportunity Credit? Can I claim the American Opportunity for 2010? If I don't amend 2009, can I claime the AOC for 2010 and 2011?

In response to your question, this information is provided:

The expanded Hope credit, called the American Opportunity credit, can only be used for the first four years of undergrad. It was expanded to four years, from two, initially for 2009 and 2010. Then this fall, it was extended for 2011 and 2012 in the most recent tax bill.

You did not mention 2008 in your question, but he only could take the Hope credit for two years, 2005 and 2006. Then he had to switch to the Life Time Learning for 2007, which he did.

If 2009 was his fourth year, he could have used the American Opportunity credit if that gave him more money. It probably would make sense to amend.

After his fourth year, whether that was 2008 or 2009, the Life Time learning is his only credit.

However, don’t forget the tuition deduction provision, which also was extended in the new bill. That can be used for graduate school and is extended through 2011.

[taxbrewster]

Thanks for the input. I guess I am confused on if the IRS means 4 calendar years or 4 tax years. When does the clock start, the second you are a freshman? I still believe that if a student has been in school for 6 years. First 2 years, used hope, then decided to work and go to school so next two years, they are part time only achieve the "junior" status at school, using the life time learning credit. This year being their 5th year in school, but only a junior, why would they not use AOC this year. They meet the requirements. Still pursuing undergrad status and have not used 4 years of Hope and AOC...right??

[Pacun]

Thanks for the input. I guess I am confused on if the IRS means 4 calendar years or 4 tax years. When does the clock start, the second you are a freshman? I still believe that if a student has been in school for 6 years. First 2 years, used hope, then decided to work and go to school so next two years, they are part time only achieve the "junior" status at school, using the life time learning credit. This year being their 5th year in school, but only a junior, why would they not use AOC this year. They meet the requirements. Still pursuing undergrad status and have not used 4 years of Hope and AOC...right??

The clock starts when you got your first HOPE credit or your first year at a University, whichever happens last.

By the way, the answer I posted came from a professional organization which have research questions as a benefit to the members.

[taxbrewster]

understood, thanks for your help.

[jainen]

>>The clock starts when you got your first HOPE credit or your first year at a University, whichever happens last.<<

In my opinion, the two requirements are applied separately. You can claim the Hope/AOC in four tax years, but I don't see the word consecutive anywhere. You can claim it for a couple of years, then drop below half time and take the Lifetime Learning Credit for a while, then come back for two more years of AOC. However, you can only claim AOC during the first four years of the curriculum, i.e., undergraduate. The school defines what qualifies as those first four years.

In other words, a student in their 5th or 6th year of undergraduate studies can still take AOC if they have not used it four times yet. This is not uncommon in big state universities where a student can't get in to classes in the right order, so it takes more than four years to graduate.

[Pacun]

>>The clock starts when you got your first HOPE credit or your first year at a University, whichever happens last.<<

In my opinion, the two requirements are applied separately. You can claim the Hope/AOC in four tax years, but I don't see the word consecutive anywhere. You can claim it for a couple of years, then drop below half time and take the Lifetime Learning Credit for a while, then come back for two more years of AOC. However, you can only claim AOC during the first four years of the curriculum, i.e., undergraduate. The school defines what qualifies as those first four years.

In other words, a student in their 5th or 6th year of undergraduate studies can still take AOC if they have not used it four times yet. This is not unocommon in big state universities where a student can't get in to classes in the right order, so it takes more than four years to graduate.

That's correct. I just wanted to make sure that if you used two hope credits, you can only use 2 AO credits. You could use ONLY 2 hopes in life and you can ONLY use 4 AO credits per life. Again a student that used 2 hope credits can use only 2 AO credits.