What Is The American Opportunity Tax Credit?

American Opportunity Tax Credit

If you or a family member is about to head out to college, you should take advantage of the American Opportunity Tax Credit (AOTC). It’s a federal tax break that allows students to reduce their paid expenses for the first four years of college, making higher education more affordable. 

Since the yearly AOTC credit is $2,500 per qualifying student, it’s considered the most valuable education tax credit available. But to get the most out of its benefits, you must be eligible for its requirements. 

Who Qualifies For The American Opportunity Tax Credit?

One way is to calculate with the American opportunity tax credit calculator. Other than this, there are other easy tricks to qualify for the American opportunity tax credit.

The AOTC is meant for current college students or their parents as long as they qualify for the following criteria. 

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  •     You currently have qualified education expenses at a participating educational institution, whether private or public.
  •     The qualified student is you, your spouse, or a dependent that’s listed on your tax return.
  •     You’re studying for a degree or other recognized education credential.
  •     You’re enrolled at least half-time for at least one academic period at the beginning of the tax year.
  •     You haven’t finished the first 4 years of your college education at the beginning of the tax year.
  •     You haven’t claimed the AOTC for more than 4 tax years.
  •     You don’t have a felony drug conviction by the end of the tax year.

When claiming the credit, make sure you’re qualified for each criterion, or else you’ll need to repay the AOTC amount you received plus interest once the Internal Revenue Service (IRS) finds out your claim is ineligible. They can also charge you with a fraud penalty or ban you from claiming the AOTC for 2-10 years. 

What Is Included In The American Opportunity Tax Credit?

The qualified education expenses that AOTC covers include:

  •     Tuition fees
  •     Compulsory enrollment and activity fees
  •     Books and other educational supplies and materials 

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Note that you can claim the AOTC if you paid for the expenses through your student loans. But it’s not counted if you paid through a scholarship, grant, 529 plan, or other tax-free educational assistance. Even you can perform the American opportunity tax credit audit. This way, you can calculate the Tax credits and find any changes and differences from your expected results.

Unfortunately, room and board, transportation, insurance, and medical fees are not included in the AOTC, so you must set aside a budget for these costs. 

How Is The American Opportunity Tax Credit Calculated?

Once you’re considered eligible for the AOTC, you can claim 100% of the first $2,000 you spent on your qualified education expenses. Then, you can get 25% of the next $2,000 you pay, which brings to a total maximum of $2,500  per tax year. 

Remember that you can only claim the American opportunity tax credit once per qualifying student annually. If you’re a parent of 2 or more eligible students, you’re free to claim other types of education tax credits. You’re not required to only get AOTC for all your dependents to stay qualified. 

Are There Any Income Limitations For The American Opportunity Tax Credit?

Aside from qualifying the criterion above, the modified versions of adjusted gross income (MAGI) also could be about $80,000 or less than ($160,000 or less for married filing jointly) to claim full credit. 

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But if your MAGI reaches over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly), you can only get partial credit.

If your MAGI exceeds $90,000 (over $180,000 for married filing jointly), you won’t be able to claim any credit. The American opportunity tax credit isn’t also available if you have a married filing separate status. 

Is The American Opportunity Tax Credit Refundable?

The great thing about the AOTC is it’s 40% refundable. So you can still receive a refund of $1,000 of your annual credit even if you didn’t earn any income last year or don’t have any owed taxes. 

But if you have a balance of owed taxes, you can use the remaining $1,500 of your credit to lessen your tax bill. 

How Do You Apply For The American Opportunity Tax Credit?

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To apply for the American opportunity tax credit, you’ll need to file a federal tax return, complete Form 8863, and attach it to your tax return. 

You’ll also need to obtain a Form 1098-T Tuition Statment from your school. It’s usually given out by January 31, so make sure to contact them if you haven’t received one. The form will contain the payments you received and the amounts billed or refunded for your tuition and other expenses.

Bottomline: 

If you, your spouse, and the eligible student must also have a valid taxpayer identification number (TIN) to be able to claim the American opportunity tax credit. If you don’t have one, you must file on or before the deadline, or else you won’t be able to get the credit on a later original return. 

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