Taxation (American Opportunity Tax Credit) – Essay Sample

Taxation (American Opportunity Tax Credit) – Essay Sample

Congress recently passed a tax deal that includes H.R. 4853, an extension of the American Opportunity Tax Credit (AOTC). According to the National Association of Student Financial Aid Administrators (NASFAA), more than 8 million students and families from lower and middle-income background have benefitted from the AOTC which provides an education credit of up to $2,500 (Dervarics, 2011).

AOTC has several advantages over its predecessor, the Federal HOPE scholarship. Unlike the HOPE scholarship, families can get up to 40 percent of the credit or $1,000 for eligible tuition costs even if they have no tax liability. In addition, AOTC $2,500 credit is larger than HOPE and can also be applied towards course materials in addition to tuition and fees. Individuals earning up to $80,000 and couples with income up to $160,000 are eligible for the AOTC. The credit phases out above $80,000 for individuals and $160,000 for married couples, disappearing at $90,000 and $180,000 respectively (Franklin, 2011). The bill also extends credit to employers who provide tuition assistance to their employees. Workers may receive up to $5,250 in tuition assistance on a tax–free basis.

AOTC was set to expire in 2010 but has been extended to 2012.  The credit can be claimed for all four years of undergraduate education. The tax deal also extends contribution levels and qualified tax-free distributions for Coverdell education saving accounts. Coverdell education saving accounts can be used to fund elementary and secondary school expenses in addition to college costs. Had the tax deal not passed, maximum contribution levels towards Coverdell education savings account would have dropped from $2,000 to $500 beginning in 2011 and tax-free distributions would have been limited to college expenses.

The education tax credits could not have come at a better time. At a time when states have been cutting college funding and many colleges and universities have responded by increasing tuition and fees, tax credits will help keep college education within the reach of more citizens. Colleges are also scaling back on scholarships and tax credits will absorb some of the additional financial burden on the students due to declining scholarships.

Lower and middle income families will especially benefit because they are already under increased economic hardships in the wake of recent financial crisis and record unemployment rates. The AOTC also does a great job of allowing the credits to be used towards course materials that often exceed tuition and fees in many low cost universities and community colleges. AOTC thus, offers more flexibility to the students and the families to use their education tax credits. AOTC also ensures that its benefits will reach more families because it is independent of one’s tax liability situation. Lower income families sometimes don’t have enough tax liabilities to take advantage of education tax credits and AOTC effectively addresses this shortcoming. By setting $80,000 limit for individuals and $160,000 for married couples, AOTC will cover most of the lower and middle income families.

The best thing about AOTC is that the credit can be claimed for all four years of undergraduate. This will help ensure that more and more students are able to complete their degree instead of dropping out in between due to the financial constraints. By extending credits to the employers, AOTC will help promote greater employees’ education. This will allow America’s employees to gain diversified knowledge and stay competitive in the global arena.

AOTC education tax credits should be made permanent. Emerging economies such as India and China are now producing more graduates than America owing to their huge populations and other Asian countries such as Singapore and South Korea have also been making great progress. Thus, America needs to raise the proportion of people who get college degree and one way to do so is to make education more affordable. The AOTC tax credits may be limited to only low and middle income families because high income families can afford education even without it. By limiting AOTC to low and middle income families, AOTC may be sustainable over the long term.

AOTC does a great job of covering course materials in addition to tuition and fees because course materials often comprise a significant cost of the total college expenses. It is not unusual for course materials to cost over $1,000 per academic semester. Coverdell education saving accounts could be used for elementary and secondary school expenses which is also encouraging. Taxpayers should be given more choices as to how they want to use education tax credits. Any policy that can help raise high school and college graduation rates should be encouraged. Moreover, Coverdell education savings account maximum contribution levels should be kept at least $2,000 if the credits are extended once again beyond 2012. College costs have been risisng and previous maximum contribution of $500 will be insufficient going forward.

The government should limit tax credits to the rich class and use the revenues to fund programs of strategic importance such as education. Education funding at both federal and state level has been declining and in the face of rising competition from Asian economies, America should increase rather than decrease support of its educational institutions. Education tax credits are a step in the right direction and will help raise college education rates by making education more affordable. Many students with potential to complete college degree are forced to drop out due to financial constraints and education tax credits will help ease the financial burden on such students.





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