What you need to know about the American Opportunity Tax Credit | ZDNet

The American Opportunity Tax Credit (AOTC) provides college students or their parents with an annual tax credit of up to $ 2,500 on eligible expenses of the first $ 4,000. Students are only eligible for the first four years of college and enrollment of at least part time is required.

Unlike other higher education tax credits, AOTC-qualified expenses extend to fees for books and supplies. It is also a refundable tax credit. This means that if your credit reduces your taxes to a balance of zero or less, you could receive an income tax refund on a portion of the money up to $ 1,000.

Qualifying for the AOTC is serious because you can face tax penalties if you claim it in error. Eligibility is determined by number of courses, time in school, and income-based rules. If the taxpayer’s modified adjusted gross income exceeds $ 90,000 as an individual taxpayer or $ 180,000 for married filing jointly, the AOTC cannot be claimed.

American Opportunity Tax Credit vs. Lifetime Learning Credit

The AOTC covers a wider range of expenses than Lifetime Learning Credit (LLC). At $ 2,500 per year, it also provides a credit greater than the $ 2,000 return offered by the LLC. However, the LLC can be claimed for an unlimited number of years, while the AOTC is limited to the first four.

The LLC it is perfect for students who have maximized their AOTC eligibility and still have expenses to deduct. While it does not cover course materials, it is still an opportunity to claim up to $ 2,000 per year in tuition and fee tax credits, no room and board are allowed. If earning a four-year degree takes you longer to complete for any reason or you want to pursue graduate school, LLC is a great tax credit option.

When to choose the LLC: The LLC works for students who are not seeking a specific degree or other recognized educational credit, but who are improving their job skills. For example, if you choose to take a medical coding course or office accounting class at a technical school to advance your career, you can do so and receive the credit without enrolling in a full program. Your eligibility for an LLC ends at lower modified adjusted gross income limits of between $ 69,000 for individual taxpayers and $ 138,000 for joint taxpayers.

When to choose the AOTC: For independent students or parents who meet MAGI or modified adjusted gross income guidelines To be eligible for AOTC, this credit is the best option during your first four years of college because you get credit for more out-of-pocket expenses. This includes textbooks and materials needed for the course. For example, a computer or software required for a design class counts as a supply, but the purchase of a general-purpose computer is not. The AOTC may also provide you with a cash injection. Unless you’re one of the few college students without a cash flow problem, receiving a tax refund of up to $ 1,000 is a huge financial boost. The LLC does not provide a refundable credit.

Eligibility for the American Opportunity Tax Credit

The AOTC allows you to claim up to $ 2,500 of eligible educational expenses. For qualified students, the first $ 2,000 in expenses are covered dollar for dollar. The next $ 2,000 is covered at 25%, or $ 0.25 per $ 1, which means it takes $ 2,000 in costs to generate an additional $ 500 in credit.

Eligibility for the tax credit requires examining both school attendance requirements and income guidelines. Recipients of the AOTC credit must be pursuing a degree or credential and be enrolled at least half-time during a semester, quarter, or quarter that began in the tax year, such as 2021 for a 2021 tax return. Only available during the first four years of higher education and cannot be claimed for more than four years. The student also must not be convicted of a drug-related felony to qualify. Students will need Form 1098-T, a statement of enrollment provided by the university, to qualify.

To claim the full amount of the credit, a single taxpayer needs a MAGI of $ 80,000 or less. For those married filing a joint return, the limit increases to $ 160,000. The credit is phased out for MAGI that exceeds $ 90,000 for singles and $ 180,000 for joint taxpayers. If your MAGI is between $ 80,000 and $ 90,000, you still qualify, but you will receive a reduced credit amount.

According to the IRS, the MAGI for most taxpayers of education credits is the adjusted gross income, or AGI, on the tax return. However, if you earn income abroad, you may need to do additional calculations. Refer to IRS Publication 970, Tax Benefits for Education, to access a worksheet for calculating MAGI for the AOTC.

Unlike a tax deduction, which reduces your taxable income, a tax credit is a reduction in the amount of taxes you owe. Most income tax credits stop applying when you hit a $ 0 tax bill and will not generate a refund. The AOTC provides a refund of up to $ 1,000, making it a valuable credit.

The amount provided in a refund is determined by the 40% rule. The amount of credit remaining after your tax bill reaches $ 0 is multiplied by 40% to determine your credit. To receive the full $ 1,000, you must claim a credit of $ 2,500 and owe $ 0 in taxes. If you have $ 2,000 in credit left after paying the tax balance, you must multiply $ 2,000 by 40% to get a refund of $ 800. If you file taxes independently, you will receive a refund. If you are claimed as a dependent on your parents’ taxes, they are sent to the taxpayers. Parents with multiple dependents in college can claim one credit per eligible student.

How to claim the American Opportunity Tax Credit

To claim the AOTC, you must consult Form 1040, the basic income tax declaration document. On page 1, you will enter the required information regarding your dependents, income, and deductions. Look for the line that says “This is your adjusted gross income.” You need this total to calculate your MAGI.

In Publication 970, enter your AGI on the Worksheet titled “MAGI for the American Opportunity Tax Credit.” Subtract any of the following: foreign earned income, foreign housing deductions, and income from Puerto Rico and American Samoa. This is your MAGI, and it is entered in Form 8863, Educational credits.

Part III of Form 8863 extracts information from the 1098-T form sent by the university and asks questions about the qualification, such as the number of tax years claimed and whether there is a drug conviction. Then you enter your total qualified expenses, including tuition, course fees, and the cost of textbooks and supplies needed. The form guides you through calculating your credit amount. This information is then transferred to Part I of the form.

Part I guides you through determining your income eligibility. If you qualify, use the 40% rule to determine your refundable credit amount. Refundable and non-refundable credits are entered separately in Form 1040, which means you claim the AOTC with two separate entries. The amount of your non-refundable credit is accounted for in Part II and added to other credits and payments on the form Program 3 before being transferred to 1040.

The bottom line

The AOTC is an excellent opportunity to recoup a portion of the costs of higher education, whether you are a student or a parent supporting a child in college. Use Publication 970 to determine your eligibility for the credit.

[This article was originally published on The Simple Dollar in January, 2020. It was updated in December, 2021.]

Leave a Comment