The American Opportunity Credit modifies the existing Hope Credit for 2009 and 2010, making it available to more taxpayers. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

The American Opportunity Credit, in many cases, offers greater tax savings than existing education tax breaks:

• Tuition, fees, books and other required materials generally qualify. In the past, books usually were not eligible.
• The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
• The full credit is available for individual taxpayers whose modified adjusted gross income is $80,000 or less ($160,000 or less for married filing joint). The credit begins to phase out for higher incomes. These limits are higher than under the existing Hope and Lifetime Learning credits.
• Forty percent of the American Opportunity Credit is refundable, so even people who owe no tax can get up to $1,000 for each eligible student. Existing credits and deductions do not provide a benefit to people who owe no tax.

Eligible parents and students can get the benefit of this credit during the year by reducing their withholding with a new Form W-4, claiming additional withholding allowances.

More information, including income and qualification restrictions, is available on the IRS Tax Benefits for Education Information Center.