The American Opportunity Tax Credit Was One of the Fastest Growing Tax Credits between 2010 and 2011

 
 
January 07, 2014

Last week, the IRS released its Individual Income Tax Data. This data is a comprehensive look at the 145.4 million tax returns that were filed in 2011. Among the information on incomes, tax rates, and tax shares, this report includes data on refundable and non-refundable tax credits. Tax credits are provisions in the tax code that reduce a taxpayer’s tax bill by a specified amount. This is distinct from a deduction, which allows taxpayers to reduce their taxable income on which the income tax is levied.

One of the largest and fastest growing refundable tax credits is the American Opportunity Tax Credit. This credit gives taxpayers with qualifying education expenses (tuition, enrollment fees, and course materials) up to a $2,500 tax credit. On top of this, 40 percent of the value of the tax credit is refundable. Meaning, taxpayers with no tax liability can still receive up to $1,000. Taxpayers can only receive this credit for four years and have to have an Adjusted Gross Income below $90,000 for singles and $180,000 for married couples.

One of the Fastest Growing Refundable Tax Credits between 2010 and 2011

In 2011, 12.8 million taxpayers received the American Opportunity Tax Credit—refundable and nonrefundable portions combined (Table 1, below). This represented a 7.1 percent increase from the 11.97 million taxpayers who received it last year. The total value of this credit was $11.5 billion in 2011, a growth of 8.4 percent from a $10.6 billion value in 2010. The American Opportunity Tax Credit grew faster than the Earned Income Tax Credit (EITC), which grew by 2 percent by number of returns and 5.6 in dollar amount between the same years.

A Majority of the Refundable Portion is Received by Those with AGIs Under $25,000

IRS data also shows the distribution of the tax credit by income level (Chart 1, Below). In 2011, the refundable portion of the tax credit was valued at about $6.57 billion. Taxpayers with AGIs below $25,000 received a vast majority of the dollars from the refundable portion of the credit (72 percent).  Approximately 45 percent of that went to those with AGIs of $15,000 and lower (including those with AGIs of zero). Only one percent of those who received the refundable portion of the tax credit had AGIs over $75,000 in 2011.

A Majority of the Nonrefundable Portion is Received by Those with AGIs Between $75,000 and $200,000

Not surprisingly, those with higher AGIs and tax burdens received more dollars from the nonrefundable portion of this tax credit. Approximately 50 percent of the credit’s dollars go to taxpayers with AGIs between $75,000 and $200,000. 32.6 percent of the credit dollars go to taxpayers with AGIs between $100,000 and $200,000. No taxpayer with an AGI greater than $200,000 received these credits. This is due to the fact that the AGI limit for the American Opportunity Credit is $180,000 for married taxpayers.

Taxpayers with AGIs between $100,000 and $200,000 received the most Dollars from the American Opportunity Tax Credit in 2011

When combining the refundable and nonrefundable credit dollars, the distribution is somewhat bimodal. There is a high concentration of credit dollars to those with AGIs between $5,000 and $20,000 (approximately 29 percent). This is due to mostly to the refundable portion of the credit. There is also a high concentration of credit dollars to those with AGIs between $50,000 and $200,000 (approximately 35 percent). The group that received the most dollars from the American Opportunity Tax Credit was those with AGIs between $100,000 and $200,000, receiving approximately 14.1 percent of the total.

Read more about education tax credits here and here

Notes about the data:

1: When determining whether the amount of the American Opportunity Tax Credit applies against income taxes, other taxes, or is refundable, the IRS applies the credits in the order in which they appear on the IRS 1040 form. For example, an individual could have an income tax burden of $2,000. When applying the $2,500 credit, the first $2,000 would be applied to their income tax burden. The next $200 could be applied to other taxes. The remaining $300 would be sent to the taxpayer in the form of a refund.

2: Due to the fact that IRS determines the credits by applying them in the order on the IRS 1040 form, it is not possible to simply sum the number of tax returns across the three categories of taxes the credit applies to. A single tax return could theoretically be counted in all three categories. To see the categories broken down by number of returns and dollars amount, see attached tables.

Table 1: American Opportunity Tax Credit, Tax Years 2010 and 2011 (Millions of Dollars, Thousands of Returns)

 

 

Refundable Portion

Non-Refundable Portion

Total

Used to offset income tax

Used to offset all other taxes

Total

Year

Number of Returns

Amount

Number of Returns

Amount

Number of Returns

Amount

Number of Returns

Amount

Number of Returns

Amount

2011

7637

$ 6,573.00

5911

 $ 4,647.00

592

 $ 298.00

See Note 2

 $ 4,945.00

12824

 $ 11,517.00

2010

7219

$ 6,040.00

5345

$ 4,241.00

640

 $ 340.00

See Note 2

 $ 4,581.00

11979

 $ 10,620.00

Percentage Change

5.8%

8.8%

10.6%

9.6%

-7.4%

-12.3%

See Note 2

7.9%

7.1%

8.4%

Table 2: Distribution of American Opportunity Tax Credit, Percent of Returns and Dollars, 2011

 

Refundable Portion

Used to Offset Income Tax

Used to Offset All Other Taxes

Total Refundable and Non-Refundable

 

Number of Returns

Amount

Number of Returns

Amount

Number of Returns

Amount

Number of Returns

Amount

No AGI

3.8%

4.3%

0.0%

0.0%

2.3%

3.4%

See Note 2

2.5%

$1 under $5,000

8.0%

7.9%

0.0%

0.0%

14.0%

5.4%

4.6%

$5,000 under $10,000

15.3%

15.6%

0.0%

0.0%

11.1%

9.7%

9.2%

$10,000 under $15,000

17.1%

17.7%

0.6%

0.1%

8.0%

8.1%

10.4%

$15,000 under $20,000

15.3%

15.8%

2.0%

0.4%

7.5%

6.4%

9.4%

$20,000 under $25,000

11.2%

10.7%

5.0%

1.7%

8.0%

7.3%

7.0%

$25,000 under $30,000

8.4%

7.6%

6.1%

5.3%

6.7%

6.6%

6.6%

$30,000 under $40,000

9.6%

9.1%

10.0%

8.3%

12.9%

15.6%

8.9%

$40,000 under $50,000

5.7%

5.6%

9.2%

7.9%

11.5%

13.7%

6.8%

$50,000 under $75,000

4.6%

4.7%

21.6%

22.1%

13.8%

17.2%

12.0%

$75,000 under $100,000

0.8%

0.9%

17.7%

20.2%

3.4%

5.1%

8.8%

$100,000 under $200,000

0.2%

0.1%

27.7%

34.6%

0.8%

1.5%

14.1%

$200,000 or more

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

 

Table 3: Distribution of American Opportunity Tax Credit, Number of Returns and Dollar Amount, 2011 (Thousands of Dollars)

 

Refundable Portion

Used to Offset Income Tax

Used to Offset All Other Taxes

Total Refundable and Non-Refundable

 

Number of Returns

Amount

Number of Returns

Amount

Number of Returns

Amount

Number of Returns

Amount

No AGI

291719

 $ 281,570.00

603

 $          376.00

13679

 $ 10,271.00

See Note 2

 $  292,217.00

$1 under $5,000

612762

 $ 516,323.00

0

 $                 -  

82887

 $ 16,145.00

 $  532,468.00

$5,000 under $10,000

1171109

 $ 1,026,217.00

0

 $                 -  

65934

 $ 28,771.00

 $1,054,988.00

$10,000 under $15,000

1308673

 $ 1,165,698.00

33960

$        3,511.00

47128

 $ 24,086.00

 $1,193,295.00

$15,000 under $20,000

1165947

 $ 1,039,374.00

119408

$      20,897.00

44389

 $ 19,147.00

 $1,079,418.00

$20,000 under $25,000

852150

 $    702,702.00

297033

$      80,920.00

47218

 $ 21,789.00

 $   805,411.00

$25,000 under $30,000

641587

 $    497,544.00

360378

$    246,300.00

39728

 $ 19,632.00

 $   763,476.00

$30,000 under $40,000

730485

 $    596,891.00

594074

$    384,386.00

76518

 $ 46,445.00

 $1,027,722.00

$40,000 under $50,000

434463

 $    369,947.00

544256

$    367,787.00

67957

 $ 40,723.00

 $   778,457.00

$50,000 under $75,000

351872

 $    310,016.00

1279246

$ 1,024,613.00

81793

 $ 51,094.00

 $1,385,723.00

$75,000 under $100,000

63960

 $      58,809.00

1044692

$    940,041.00

20374

 $ 15,194.00

 $1,014,044.00

$100,000 under $200,000

11945

 $        7,599.00

1637822

 $1,607,686.00

4756

 $   4,420.00

 $1,619,705.00

$200,000 or more

0

 $                  -  

0

$                -  

0

 $             -  

 $                -  

 

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