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Education Tax Credits: The American Opportunity Tax Credit Explained

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It is time to file your taxes! While most people dislike filing their tax return, all people like receiving a tax refund. The sooner you file your taxes, the sooner you get a potential tax refund! If you are eligible for a tax refund, that means you overpaid/over-withheld taxes during the tax year. In other words, your actual tax liability is less than the estimated tax you paid during the year. In order to properly calculate your actual tax liability at year end, you must remember to claim all your eligible tax deductions and tax credits on your tax return. Doing so will decrease your taxable income and taxes owed.

A tax credit is a tax break for qualified taxpayers that reduces dollar for dollar the amount of tax you owe. Therefore, tax credits have a more significant impact on your tax liability than tax deductions. Below, I will detail the American Opportunity Tax Credit. Find out if you qualify for the educational tax credit!

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What is the American Opportunity Tax Credit?

The American opportunity tax credit is a credit for qualified education expenses during the year. The education expenses must be paid for or on behalf of an eligible student during his or her first four years of higher education. The American opportunity tax credit allows you to claim a maximum tax credit of $2,500 per eligible student per tax year. Additionally, the American opportunity tax credit is a hybrid tax credit in that it is partially non-refundable and partially refundable. More on that later.

The American opportunity tax credit does phase-out based on income limits. The following are the income threshold amounts to claim the AOTC:
  • Full Credit: Modified Adjusted Gross Income (MAGI) is $80,000 or less
  • Reduced Credit: MAGI is between $80,000 and $90,000
  • No Credit: MAGI is greater than $90,000
* The following income limits apply to single filers. If MFJ, the income limits are simply doubled.

Who is an eligible student for the American opportunity tax credit?

To be eligible for the American opportunity tax credit, you must meet several criteria. To begin, you must be a student pursuing a degree or other educational credential. Additionally, you must be attending the university or other educational institution at least half-time during one academic period during the tax year. An academic period can be a semester, trimester, or quarter (as determined by the school). As stated, the credit only applies to your first four years of higher education; therefore, the student must not have finished four years of higher education before the tax year. Lastly, the student cannot have a felony drug conviction on his or her record.

Below is a summary of the AOTC eligibility requirements:

  • Pursuing a degree or educational credential
  • Enrolled at least part time for an academic period
  • Applies only to the first four years of higher education
  • Have not claimed the AOTC for more than four tax years
  • Cannot have a felony drug conviction

What are qualifying expenses for the American opportunity tax credit?

The American opportunity tax credit includes qualified expenses paid to an eligible educational institution. Eligible educational institutions include universities, colleges, and other post-secondary schools that meet the requirements. Check with your school if you are unsure.

Qualified expenses include tuition and fees paid to the eligible school. Additionally, any expenses mandated by the school program may also be considered qualified expenses. These additional qualified expenses may include the cost of textbooks, online software, supplies, and equipment.

It is important to note that AOTC qualified expenses do not include the costs of room and board, transportation, and school-required medical insurance.

Lastly, the IRS does not allow you to include amounts you receive from tax-free scholarships, federal Pell grants, employer-sponsored tuition grants, school refunds, and other non-taxable assistance (not including gifts and inheritances). You can only include in qualified expenses the amount you actually paid rather than the listed price of attendance. For example, if your university tuition costs $10,000 per year, and you receive a $2,000 merit-aid scholarship, you can claim qualified expenses of $8,000 relating to your tuition costs.

How to calculate the American opportunity tax credit?

As stated, the maximum credit for the American opportunity tax credit is $2,500 per student. The tax credit is calculated based on the following:
  • 100% of the first $2,000 of qualified expenses;
  • 25% of the qualified expenses in excess of the first $2,000.
For example, if you have $3,000 in qualified expenses during the year, you will calculate the AOTC as follows:
  • 100% of $2,000 = $2,000
  • 25% of $1,000 = $250
The calculation equals $2,250. Therefore, you may claim a tax credit of $2,250 on your tax return.

Additionally, as stated earlier, the AOTC is a partially refundable tax credit. If the tax credit decreases your tax liability to zero, you may claim 40% of the remaining tax credit as a refundable credit amount. In other words, you can have the excess credit amount refunded to you. 

How to claim the American opportunity tax credit? 

To claim the American opportunity tax credit, you must receive a Form 1098-T, which is a tuition statement provided by your school. If you do not receive the Form 1098-T by January 31, reach out to your educational institution. The 1098-T serves as support for your qualified tuition, fees, and scholarship.

Use the information on the Form 1098-T to complete the Form 8863, which you will attach to your Form 1040 tax return. 

The federal tax credits available to taxpayers represent a major tax savings opportunity. Taxpayers should know and understand the tax credits available to them to save money and increase their 2019 tax refund. Please share the post with others to help them learn about the American opportunity tax credit. Additionally, please comment below or connect with me on social media if you have any questions relating to the American opportunity tax credit.


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