The American opportunity tax credit (AOTC) can help to reduce the amount of taxes you owe in a given year if you have paid qualified education expenses. As the costs of higher education continue to increase, this tax break can make a big difference in your finances. While many students can qualify for the AOTC, not all can claim it. Here’s what you need to know to claim this credit the next time you file your taxes.
American Opportunity Tax Credit Basics
The AOTC is available to students in their first four years of college, and it can be applied for those in any degree program. The maximum credit that the Internal Revenue Service (IRS) will allow is $2,500, though the actual amount you can claim may be lower, depending on the costs of your education.
You’ll receive a 100-percent credit for the first $2,000 you spend on qualified education expenses in the tax year. For the next $2,000 in qualified expenses, you can claim 25 percent, totaling an additional $500. If you are eligible to claim the full amount, your tax burden will go down by $2,500.
One of the best things about the AOTC for students is that it is partially refundable. What this means for you is that if the credit reduces your tax liability to $0 or less, you can receive 40 percent of the remaining amount as a tax refund. This 40-percent value equates to $1,000.
Because many students don’t work during school or only work part time, their tax liability is relatively low to nonexistent in the first place. If you owe less than $2,500 in taxes for the year, you’ll get the remainder of the tax credit as a tax refund, up to a total of $1,000. If you are already eligible to receive a tax refund, that amount could increase by up to the $1,000 AOTC limit, putting even more money back in your pocket.
It is important to note that if your parents pay your tuition and claim you as a dependent on their tax returns, they will be the ones to collect any return from the American opportunity tax credit, not you. You can only qualify for the credit if you are the one making the payments for higher education costs.
American Opportunity Tax Credit Eligibility Requirements
There are several criteria that students must meet in order to qualify for the AOTC. These requirements are the same regardless of who is footing the bill. For starters, you must be enrolled in a degree program or be pursuing another recognized education credential, like a diploma from a trade school or vocational school. If you are taking classes simply for your own personal enrichment, you will not qualify for the credit; you must be actively working toward your degree.
In addition, you must be enrolled in school at least half-time during at least one academic period over the course of the tax year. For the purposes of the AOTC, an academic period can mean quarters, trimesters or semesters. Summer sessions are also included. Each school determines its own academic periods.
In some cases, schools don’t follow traditional academic periods, instead, tracking students’ progress via clock hours or credit hours. If your school follows this type of arrangement, an academic period will typically be defined as the payment period for your tuition. For example, if you have to pay your tuition every 6 months, that would be your academic period for the AOTC.
The AOTC is only available for the first four years of higher education. If you have already completed four or more years of school, you will no longer be eligible to claim the credit. Even if you are only going to school part-time and it will take you more than four years to complete your degree, you can only claim the credit for the first four years.
Finally, you must not have any felony drug convictions on your record. If the threat of fines and jail time wasn’t already enough to discourage you from getting arrested on felony drug charges, this is just one more potential drawback on an already-extensive list.
Additional Tax-Filing Requirements
In order to file your taxes with the IRS or for your parents to claim you as a dependent on their own tax returns, you’ll need to have a valid taxpayer identification number (TIN) prior to filing the return. This can include:
- Social Security numbers
- Individual taxpayer identification numbers
- Adoption taxpayer identification numbers
This typically is not an issue for students who are natural-born American citizens as they receive social security numbers shortly after birth. However, it can present complications for international students or students whose parents are immigrants. To ensure you are able to claim the American opportunity tax credit, be sure that you have filed your application for a TIN well in advance of filing your taxes for the previous year.
Your TIN must be issued or your application has to be in progress before the due date for your tax return. If you are eligible for an extension on your taxes, your number must be issued or your application submitted before you file for the extension due date.
Qualified Education Expenses
As mentioned previously, you can only claim the AOTC for the first $4,000 of qualified education expenses for the prior tax year. This includes your tuition, some school fees and any required course materials, like textbooks, lab supplies, software applications and other items that are specifically required for participation in a particular course. It does not apply to items simply used in the general course of your education.
For example, if you are required to submit typed reports or essays rather than handwritten ones, you would likely not be able to claim the credit for the cost of your computer and word processing software as the course does not specify that you must own your own computer. As you are free to use the school library and other public resources, purchasing your own laptop does not meet the criteria for qualified education expenses.
If, on the other hand, a course requires you to use a specific software application that you must purchase in order to complete the coursework, you would likely be able to claim the credit for that amount, though not necessarily for the computer itself.
It is important to note that room and board are not included so you won’t be able to claim the credit for the costs of living in dormitories or other student housing. While you may be able to use tax-sheltered accounts to pay for these expenses, you will not be able to add them into your total eligible amount for the AOTC.
Income Limits for the American Opportunity Tax Credit
Although many students can qualify for the AOTC, there are certain income limits that could reduce the amount you can claim. In order to receive the full credit, your modified adjusted gross income (MAGI) cannot exceed $80,000. For married couples filing jointly, the income limit increases to $160,000. If your parents are the ones footing the bill for your education, the limit will apply to their income, not yours.
If your income exceeds the limits set by the IRS, you may still be able to claim a portion of the credit, as long as your income is less than $90,000 for individual filers or $180,000 for married couples filing jointly. The higher your income, the smaller the percentage of the credit you’ll be eligible to claim. If your income exceeds the limits for partial credit, you will not be able to claim the AOTC at all.
These limits are for the 2018 tax year, though it is possible for them to change in the future. Congress has the option to adjust the limits in accordance with inflation, so if you are not eligible to claim the AOTC this year, it is possible that you might be able to claim it in future years if Congress increases the limits and you still meet the requirements for eligibility.
Claiming the American Opportunity Tax Credit
In the months before you file your taxes, you should receive a Form 1098-T Tuition Statement. This document outlines any funds you have contributed toward your tuition in the previous year. In most cases, you’ll receive your statement by January 31st but check with your school to be sure of the specific date you can expect it. You must have this form in order to claim the AOTC, so contact your school directly if you have not received it by the time you plan to start filing your taxes.
This document only shows your tuition expenses so you may be able to claim more than just the amount stated. If you have any other qualified education expenses, you’ll add them to the total amount, up to the claim limit of $4,000. If you are including additional expenses in your claim, it is crucial that you have proper documentation for those expenses, like receipts, to prove that they are, indeed, qualified education expenses.
The IRS can choose to audit anyone’s tax return, and you’ll need to be prepared to verify any information you submitted. If the audit finds that your claim was inaccurate, you’ll have to pay back any excess credit you received, plus interest. You may also be charged with a fraud penalty if the audit determines that you intentionally inflated your numbers to claim the credit. They also have the option of barring you from claiming the credit for up to 10 years.
To claim the AOTC credit, you’ll need to add Form 8863 to your tax return. If you were previously banned from claiming the credit, you may also need to include Form 8862 to reinstate your eligibility.
Comparing the AOTC with Other Education Tax Breaks
The AOTC is a bit more lenient than some other tax breaks in terms of what qualifies as an education expense. For example, the Lifetime Learning Credit (LLC) only allows credit for tuition, not for any other education expenses. The same was true for the tuition and fees deduction, which was available in previous tax years but is no longer available after 2018.
There are other key differences between the AOTC and the LLC in terms of the eligibility requirements. Whereas the AOTC is only available for the first four years of your education, you can claim the LLC for any post-secondary education, including undergraduate school that takes more than four years to complete, as well as graduate and professional school. There is no limit to the number of times you can claim the LLC, and there are no enrollment requirements.
Finally, the LLC is not refundable like the AOTC. This means that if the credit you receive from the LLC reduces your tax liability to $0 or less, you will not receive any refund for the credit. As explained previously, the AOTC is refundable up to $1,000. Check with your tax professional to ensure you are taking full advantage of the credits available to you.
Saving More Money on Higher Education Expenses
While the American opportunity tax credit and other education tax breaks can help you weather the costs of your education, you may still have to take out student loans to cover the rest of the bill. If you are struggling to repay your loans, Iron Fist Legal may be able to help.
We work with licensed attorneys to evaluate your student loan contracts, looking for any discrepancies we can use to get your loan amounts reduced. We can’t guarantee a specific reduction amount, but we can assure you that we will do everything in our power to get your loan balances down as much as possible. We have helped some of our past clients reduce their student loans by up to 70 percent!
Get in touch with our team today to learn more about our services and how we might be able to help you reduce your student loan payments. Call now to schedule a free consultation.