Oregon Tax Consultants Practice Exam

Is any portion of the American Opportunity Credit refundable?

1. No, none is refundable

2. Yes, 20%

3. Yes, 40%

4. Yes, 10%

The correct answer is: Yes, 40%

The American Opportunity Credit provides financial relief for eligible taxpayers in the form of a tax credit for qualified education expenses during the first four years of higher education. A significant aspect of this credit is that a portion of it is indeed refundable. Specifically, the refundable portion is 40% of the credit, with a maximum of $1,000 available as a refund if the taxpayer does not owe taxes. This means that if a taxpayer qualifies for the full credit amount of up to $2,500, they can receive up to $1,000 as a refund even if they have no tax liability. This feature is particularly beneficial as it allows taxpayers to benefit financially from higher education investments, encouraging continued education without the immediate burden of associated costs. In contrast, the other options suggest various refund percentages, but none of them accurately reflect the actual refundable portion of the American Opportunity Credit. Thus, understanding that the refundable aspect is capped at 40% is essential for effective planning around education-related tax credits.