Paying lower taxes is something that everyone enjoys, and college tax credits are one great way to do that. Tax credits actually lower the tax that you owe on a dollar for dollar basis instead of simply lowering your taxable income. If you are a student or have an eligible dependent who is a student, then the American Opportunity Tax Credit might be something that you can take advantage of. This credit offers a way for you to use those education expenses to help lower your tax bill. So, just who is eligible for this credit and how much can it help? We will explain all the details that taxpayers need to know, so just keep reading!
What Is The American Opportunity Tax Credit (AOTC)?
So, what is the American Opportunity Credit? The American Opportunity Tax Credit is a credit allowed by the IRS that helps eligible students and their parents offset the costs of higher education. Formerly, this was known as the Hope scholarship tax credit. The new AOTC tax credit has expanded the former Hope credit and allows you to claim even more education related expenses on your tax return. The AOTC allows you to claim a credit on qualified education expenses for your first four years of higher education.
If you have already claimed the American Opportunity or Hope credit for four years, then you will not be eligible to claim the AOTC again in the current tax year. When claiming the AOTC, you will want to make sure that you keep all your documents related to both your education expenses as well as the documents that you used to determine whether you qualified for the credit. You might be required to produce these documents if the IRS decides to audit your income tax return in the future. If you cannot prove that you actually qualified for the credit and prove your expenses, then you might be forced to repay the credit you received.
Who Can Claim The AOTC?
There are several eligibility rules that must be met before claiming this student tax credit. First, you may claim the credit for yourself or a student who is an eligible dependent. The student must be pursuing a degree or other recognized educational credential. The student must also be enrolled for at least one semester or academic period during the tax year, and he or she must maintain at least half time status during that academic period. In addition, the first four years of higher education cannot have already been completed. If the student has a prior felony drug conviction (either Federal or state), then there is no eligibility for the AOTC.
If you are looking to claim the AOTC, you must have received a Form 1098-T (tuition statement) from an eligible education institution. This institution may be either domestic or foreign, and the form is usually received from your school by January 31. This form can be used to help in the calculation of your credit, although you should know that you are not always entitled to claim the entire amount shown on the form. If you meet all the eligibility requirements mentioned above and receive a 1098-T, then you are eligible to claim the American Opportunity Tax Credit as long as you meet the income requirements laid out in the next section.
Income Limits For AOTC
First, you will need to determine your modified adjusted gross income (MAGI). This figure will determine whether you exceed the income limits for claiming this credit. For single taxpayers, you are eligible for the full amount of the credit if your MAGI is below $80,000 for the tax year. For joint filers, that amount is increased to $160,000. If your income exceeds this amount, then you might still be eligible for a partial credit. However, those with an income higher than $90,000 for the year will not be eligible to claim the credit at all. Similarly, joint filers whose income exceeds $180,000 will be ineligible to receive any credit on their tax return.
IRS Rules For Expense Eligibility
So, what expenses will qualify for the AOTC tax credit? The IRS lays out an extensive list of items that will qualify for the credit, and you must make sure that your expense qualifies before claiming it on your taxes. You may include qualified tuition and fees from any post-secondary education that meets the rules for Federal financial aid. You may include the cost of course materials such as books, supplies, and equipment as long as your purchase relates to your program of study. You may not claim expenses related to room and board, transportation, or medical expenses. These items are not considered qualifying expenses.
If you pay for the expenses with borrowed money such as student loans or credit cards, that does not affect your ability to claim the expense during that taxable year. However, there are a few exceptions. If you received tax free scholarships or fellowships to pay for the expenses, then you may not claim those amounts. In addition, you may not claim any amounts received in the form of tuition assistance from your employer, Pell grants, or refunds from the school. This is why it is so important to make sure that your expenses qualify before you claim them on your return. You will want to make sure that you have all the appropriate documentation to validate your claim, including the fact that your enrollment is at an eligible educational institution. Also, make sure that you keep your tax returns and documentation for the appropriate retention period.
The American Opportunity Tax Credit Calculation
The calculation for your credit depends on the total amount of your eligible expenses. Thankfully, the calculation is quite easy and not too complex. If your eligible expenses are less than $2,000, then you can claim full credit for these expenses. You can claim 25% of any expenses that exceed $2,000. However, the maximum credit amount that you can claim is $2,500. This is still quite a large tax break that you can receive for all four years of college. When you are ready to claim this credit on your taxes, then you simply need to complete Form 8863 (Education Credits) and attach it to your 1040. This is also known as the AOTC Form or Lifetime Learning Credit Form.
If you have multiple students who may be eligible for this credit, you should know that you can only claim one credit per student. So, suppose that you have two children in college who are still legal dependents at the end of the tax year. If they meet all the eligibility requirements discussed above, then you may claim this credit for each of them. Similarly, you may claim different tax credits related to education expenses for each of them. So, you might claim the AOTC for one and the Lifetime Learning Credit (LLC)for the other. However, you can only use one education tax credit per student to reduce the amount of tax that you owe for the year. You should also know that you cannot take both a tuition and fees deduction in addition to the AOTC or LLC. Even though tuition and fees are tax deductible, you must choose between the deduction or the credit. If you are married filing separately, this might also affect your ability to claim this credit.
How AOTC Differs From Lifetime Learning Credit
Perhaps you are trying to decide between these two credits and which one is best for you. There are a few differences between the two, so here is how they are different. One of the biggest differences between the two is the number of years for which you can claim the credit. While you can only claim the AOTC for four years, the LLC can be claimed for an unlimited number of years. Hence, it allows you to reduce your tax liability and get tax benefits for education for your lifetime.
The amount of the credit that you can receive is also another big difference. You may claim up to $2,500 per eligible student with the AOTC, while the limit for the LLC is $2,000 per return. Even if you have multiple eligible students, you can only claim $2,000 in total per year. There is also a bit of difference in eligible expenses. The AOTC allows you to claim tuition, fees, and course materials; however, the LLC only allows for the claiming of tuition and fees. Lastly, the income limits for the LLC are quite a bit lower than those for the AOTC. While the AOTC income limit is $90,000 ($180,000 joint), the limits for the LLC are $69,000 ($138,000). This means that the credit phases out at a much lower income for the LLC than it does for the AOTC.
The Bottom Line
The American Opportunity Tax Credit is a great way to help you reduce your tax bill if you have qualifying educational expenses during the tax year. You can reduce your tax liability by up to $2,500 if you meet all the eligibility requirements. If you do not qualify for this credit, then you might still be able to take advantage of the Lifetime Learning Credit. These are just a few of the ways that the IRS encourages continued learning and offers some financial assistance for higher education.
Frequently Asked Questions
Can I claim the American Opportunity credit for myself?
Yes, you can absolutely claim this credit for yourself. In fact, you must either claim it for yourself or for an eligible dependent. If someone else can legally claim you as a dependent on their tax return, then you cannot claim the credit for yourself. Maybe you’re wondering, “Do I have to file taxes to receive a credit?” Yes, you will need to file a tax return to get these credits.
Can I claim the American Opportunity Tax Credit if I get financial aid?
Yes, even if you pay for your qualified expenses using student loans, then you can still be eligible for the AOTC. However, there are a few instances where you cannot qualify. If you received Pell grants or tuition assistance from your employer, then you cannot claim that amount. In addition, if you received tax free scholarships or a refund from your school, then those amounts cannot be claimed either. Many people also ask, “What is the refundable American Opportunity Credit?” The AOTC is partially refundable because you may receive up to $1,000 as a refund even if your tax liability is decreased to zero by the credit.
Why am I not eligible for the American Opportunity credit?
It depends on your specific situation. However, you might not be eligible because you have already claimed the Hope credit or the AOTC for four years. Perhaps you are not enrolled in a qualifying educational institution or you did not maintain half-time status during the academic period. Similarly, you must have been enrolled for at least one academic period during the tax year. If you did not receive a Form 1098-T from your school, then you might not be eligible for this credit.
Who is eligible for the American Opportunity credit?
Students who are enrolled in their first four years of higher education at a qualifying educational institution are eligible for the credit. You must be enrolled at least half-time for at least one academic period during the year. There are a few other items that determine final eligibility, but that is the minimum requirement to qualify for the credit. You must not have used the Hope credit or AOTC for four years previously, and you must have qualifying expenses during the tax year in which you claim the credit.