What you need to know about American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) provides an annual tax credit of up to $ 2,500 of eligible expenses to college students or their parents out of the first $ 4,000. Students are only eligible for the first four years of college, and need at least half-time to enroll.
Unlike other tax credits for higher education, guaranteed costs for the AOTC extend to books and supply taxes. It is also a refund tax credit. This means that if your credit reduces your taxes to a balance of zero or less, you would receive an income tax refund of a portion of the money up to $ 1,000.
Eligibility for the AOTC is bad because you can pay tax penalties if you claim it in error. Eligibility is determined by course, school time, and income-based rules. If the modified income of the tax file exceeds $ 90,000 as a single filer or $ 180,000 for joint marriage filing, the AOTC cannot be claimed.
American Opportunity Tax Credit vs. Lifelong Learning Credit
The AOTC covers a wider range of costs than the Lifelong Learning Credit (LC). At $ 2,500 per year, it also offers credit greater than the $ 2,000 per product that the LLC offers. However, the LLC can be claimed for several unlimited years while the AOTC is limited to the first four.
The LLC this is perfect for students who have the potential to reach the AOTC and still have costs to bear. Although it does not cover course materials, it is still an opportunity to claim up to $ 2,000 per year in tuition and tax credits - no place or board allowed. If a four - year degree gives you more time for any reason or you pursue graduate school, the LLC is a great tax credit option.
When to choose the LLC: The LLC works for students who are not pursuing a specific degree or other recognized educational credit but who are improving work skills. For example, if you choose to take a medical coding course or an office accounting class at a technical college to further your career, you can do so and get the credit without enrolling in a full program. Your eligibility for an LLC ends at lower modified total income limits between $ 69,000 for single filers and $ 138,000 for joint tax filers.
When to select the AOTC: For independent students or parents who meet MAGI or modified income guidelines for AOTC eligibility, this credit is the best option in your first four years of college as you will receive credit for more out-of-pocket expenses. This includes textbooks and essential course supplies. For example, a computer or software required for a design class counts as a supply, but the purchase of a computer is not for general purposes. The AOTC could also give you money suction. Unless you are one of the few college students who does not have a cash flow problem, getting a tax refund of up to $ 1,000 is a great financial incentive. The LLC does not provide repayment credit.
American opportunity tax credit eligibility
The AOTC allows you to claim up to $ 2,500 of eligible education expenses. For qualified students, the first $ 2,000 in expenses is covered by dollar for dollar. The next $ 2,000 is covered at 25%, or $ 0.25 per $ 1, meaning it will take $ 2,000 in costs to generate an additional $ 500 in credit.
To apply for a tax credit it is necessary to check both school attendance requirements and income management. Recipients of AOTC credit must pursue a degree or certification and be enrolled at least half-time for one semester, trimester, or quarter beginning in the tax filing year, such as in 2021 for the 2021 tax return. is only available for the first four years of higher education, and cannot be claimed for more than four years. The student may also not be convicted of a qualitative drug offense. Students must complete Form 1098-T, a tuition statement issued by the college, to qualify.
To get the full credit amount, one needs a MAGI file of $ 80,000 or less. For those who are married and filing together, the limit goes up to $ 160,000. The credit steps out for MAGI will exceed $ 90,000 for singles and $ 180,000 for joint files. If your MAGI is between $ 80,000 and $ 90,000, you will still be eligible but you will receive a smaller credit amount.
According to the IRS, the MAGI for most educational credit registrars is the modified total income, or AGI, on the tax return. However, if you are earning an income abroad, you may need to make additional calculations. See Publication IRS 970, Tax Benefits for Education, for a worksheet to calculate MAGI for the AOTC.
Unlike tax relief, which reduces your taxable income, tax credit is a reduction in the amount of tax you have. Most income tax credits stop when you reach a $ 0 tax bill and do not generate a refund. The AOTC offers refunds for up to $ 1,000, making it a valuable credit.
The amount given in refund is determined by the 40% rule. The amount of credit left after your tax bill reaches $ 0 is multiplied by 40% to prove your credit. To receive the full $ 1,000, you must apply for $ 2,500 credit and pay $ 0 in taxes. If you have $ 2,000 of credit left after paying the tax balance, you would multiply $ 2,000 by 40% to reach a $ 800 refund. If you charge taxes independently, you will receive a refund. If you claim to be your parent's tax dependent, it will go to the taxpayers. Parents with multiple dependents in college can apply for one credit for each eligible student.
How to Apply for the American Opportunity Tax Credit
To claim the AOTC, you need to consult Form 1040, the main income tax filing document. On page 1, you enter the necessary information regarding your dependents, income and discount. Look for the line that says "This is your total modified income." You need this total to work out your MAGI.
In Disclosure 970, enter AGI in the worksheet titled "MAGI for American Opportunity Tax Credit." Subtract any of the following: foreign earned income, foreign housing allowances, and income from Puerto Rico and American Samoa. This is for MAGI, and is registered on Form 8863, Education Credits.
Part III of Form 8863 overlaps information from the form 1098-T submitted by the college and asks questions regarding certification, such as the number of tax years claimed and if there is a drug conviction. You then submit total certified expenses, including tuition, course fees, and the cost of required textbooks and supplies. The form guides you through measuring how much credit you have. This information is then transferred to Part I of the form.
Part I guides you through determining your income-based eligibility. If you qualify, it will use the 40% rule to determine your repayment credit amount. Repayment credits and unfunded credits are submitted separately on Form 1040, meaning you are claiming the AOTC with two separate entries. Your unfunded credit amount is reduced in Part II and added to other credits and payments on a Schedule 3 form before being moved to 1040.
The bottom line
The AOTC is a great opportunity to recoup some of the higher education costs if you are a student or a parent supporting a child in college. Use Disclosure 970 to find out if you qualify for credit.
[This article was originally published on The Simple Dollar in January, 2020. It was updated in December, 2021.]