With the rising cost of higher education, student loans now encompass the lives of those who have degrees. To help offset this cost, the government offers different education tax deductions and credits for qualified students enrolled in eligible degree programs or schools.
The American Opportunity Tax Credit (AOTC) is one of the more beneficial tax breaks for parents and students paying the high costs of tuition. Unfortunately, if you take the AOTC, you cannot take other education credits or deductions, but this holds true for most education tax breaks.
For this reason, it’s a good idea to have a tax professional prepare your annual tax return if you want to try to take advantage of the best tax credits and deductions. He or she will know which break is best for your particular situation.
What is the American Opportunity Tax Credit (AOTC)?
The American Opportunity Tax Credit (AOTC) was created to help parents and students reduce the cost of higher education by offering a tax credit on their annual tax returns.
The AOTC is a tax credit for qualified education expenses paid for an eligible student. It is only valid for the first four years of post-secondary education and must be used for qualified expenses only. Basically, this includes the cost of tuition, fees, supplies, and books needed for college classes.
The tax credit gives you a nice break on your tax return by giving you a partially refundable credit worth up to $2,500 per eligible student per tax return. You cannot take this tax credit with most other education tax credits or deductions.
Who is considered to be an eligible student?
There are some specific rules on what makes up an “eligible student” to the Internal Revenue Service.
To be eligible for the American Opportunity Tax Credit, the student must:
- Be pursuing a degree or other recognized education credential
- Be enrolled at least half of the time for at least one academic period
- Not have finished the first 4 years of higher education at the beginning of the tax year
- Not have claimed THIS tax credit for more than 4 tax years
- Not have a felony drug conviction at the end of the tax year
Note: An academic period can be semesters, trimesters, quarters, or any other period of study, such as summer school. The school doesn’t have to have academic terms, though. If the school doesn’t have these, the payment period can be used as the academic period.
What do you need in order to claim this tax credit?
Form 1098-T: Tuition Statement Form
To claim the American Opportunity Tax Credit, the taxpayer or dependent must have received Form 1098-T: Tuition Statement from an eligible educational institution, whether domestic or foreign. To claim the credit, use IRS Form 8863, and attach the completed form to your annual tax return.
Note: You should receive Form 1098-T: Tuition Statement Form from your school by January 31. If you did not receive the form from your school by this time, contact them directly. When you do receive the form, make sure your school reported the correct amount.
A Valid Taxpayer Identification Number (TIN)
You must also have a valid TIN for the qualifying student. It must be issued or applied for on or before the due date of the tax return (including any tax extensions). A valid TIN can be your Social Security number, an individual taxpayer identification number (ITIN), or an adoption taxpayer identification number (ATIN).
Note: Since this is a requirement, make sure you obtain the required TIN ahead of time if you plan to take this tax credit on your tax return. After all, you don’t want to miss out on this just because you didn’t receive your taxpayer identification number on time.
What is considered to be qualified education expenses?
It’s important to understand what qualifying expenses are for tax purposes so that you know which education expenses are covered and what are not.
According to the Internal Revenue Service, qualified education expenses are amounts paid for tuition, fees, and other education-related expenses for an eligible student. These expenses must have been incurred for an eligible student and must be required for enrollment or attendance at an eligible educational institution.
Qualified expenses also include student activity fees that a student is required to pay to enroll or attend the school, such as fees a student is required to pay to fund any on-campus student organizations and activities.
The American Opportunity Tax Credit considers eligible expenses to be books, supplies, and equipment that the student needs for a course of study even if it is not paid to the school. The example provided on the IRS’s website is the cost of a required book for a course that was bought from an off-campus bookstore.
Regardless of the education tax deduction or credit, room and board, insurance, medical expenses (including student health fees), and transportation do not qualify as eligible expenses.
In other words, qualified expenses for the AOTC include tuition, fees, books, supplies, and equipment necessary to obtain the degree but within these specific parameters.
What are the income limits for the AOTC?
To claim the full amount of the American Opportunity Tax Credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married couples filing joint tax returns). You can receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for those filing joint tax returns).
You cannot claim this tax credit if your MAGI is over $90,000 or over $180,000 if filing a joint tax return. For most taxpayers, the MAGI is the amount of adjusted gross income as shown on your annual tax return.
What is the American Opportunity Credit worth?
The American Opportunity Tax Credit gives you a maximum annual credit of $2,500 per eligible student. It is, however, partially refundable. If the tax credit brings the amount of tax you owe to zero, you may have 40% of any remaining amount of the credit, up to $1,000, refunded to you.
The amount of this tax credit is 100% of the first $2,000 of qualified education expenses paid for each eligible student and 25% of the next $2,000 of qualified education expenses you paid for that particular student.
What else do I need to know about the AOTC?
It’s important that you make sure you are qualified to take this credit before taking it. Keep copies of all documentation that you used to take the tax credit, including your tax return itself.
The reason this is so important is that if the IRS audits you and determines you did not qualify for the AOTC or do not have adequate backup documentation, the IRS will make you pay back the amount of the AOTC, including interest. They may also charge you an additional penalty and ban you from claiming the credit for 2 to 10 years.
You will not be able to claim both the tuition and fees deduction and the AOTC for the same student when you file your tax return. The rules are pretty strict if you have claimed the AOTC in previous years as well, so have a consultation with a tax accountant if you plan to take an education tax deduction or credit.
How can I take the American Opportunity Tax Credit on my taxes?
To claim the American Opportunity Tax Credit, use Form 1098-T: Tuition Statement from your school. The amount on this form that you need will be found in box 1. To determine the amount you will need to claim or for more information about this form, see IRS Publication 970: Tax Benefits for Education.
To claim the American Opportunity Tax Credit on your tax return, you just need to complete IRS Form 8863: Education Credits. Then, attach that form to your IRS Form 1040 or 1040-A.
If you are considering taking a tax break for education costs this year, you should try to take this one, as it is very beneficial. It has fewer restrictions than some of the other tax breaks related to education expenses and has a great partially refundable tax credit that you can take advantage of. If you need assistance, please schedule a tax consultation with a qualified professional, such as a tax accountant.
Are you expecting an audit or want to be prepared “just in case?” We can represent you in the event of an audit, or walk you through the entire process step by step. You should consult a qualified tax accountant when preparing for a tax audit. We are here to help.
Are you a student or parent needing help claiming the American Opportunity Tax Credit? If you need assistance with tax credits or help with your tax return, please contact us today for a free consultation. We are happy to help make this tax season easy for you. You can trust Indiana’s tax expert!