By Bob Vandenbergh, Regional President & COO
The College Board estimated that from 2013-2014, the average cost of tuition and fees
at four-year public out-of-state colleges was $22,203 and $30,094 at four-year private colleges. To help offset the ever-increasing costs of higher education, it’s important that parents of college students and high school seniors are aware of the American Opportunity Tax Credit (AOTC) and how it can save them money at tax time.
The following information will help you understand the AOTC and what it covers as well as determine if you are eligible for this education break.
What is the American Opportunity Tax Credit?
Originally set to expire at the end of 2012, the AOTC was extended to December 31, 2017 with the passage of the American Taxpayer Relief Act of 2012
. The credit reduces the amount of federal income taxes you may have to pay, dollar-for-dollar, up to $2,500 per year for each eligible undergraduate college student for whom you pay qualified tuition expenses. For lower income taxpayers who may not owe $2,500 in tax, up to $1,000 of the credit is refundable.
The credit can be claimed on behalf of an undergraduate for four years, which means you could receive a $10,000 tax subsidy over the course of your child’s college education if you qualify.
What Are the Income Limits?
The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint tax return. The amount of your American Opportunity Tax Credit is gradually reduced if your modified adjusted gross income is between:
- $80,000 - $90,000 if you file as a single taxpayer
- $160,000 - $180,000 if you file a joint tax return
You cannot claim this credit if your modified gross income is greater than $90,000 for single taxpayers or $180,000 for joint filers.
If you fall into the income ranges where you do not qualify and your child is working and required to file a tax return, you may want to consider letting him/her take the credit. However, keep in mind that if you choose this option, you will not be able to claim the child as a dependent on your own tax return. Typically the credit will be enough to absorb the resulting additional tax.
Who is An Eligible Student?
In order for a student to be considered eligible for the AOTC, he/she must meet specific criteria. The below flow chart from the IRS will help you decide whether a student is eligible by guiding you through each of these requirements.
The student must also be attending an eligible educational institution which in this case includes any college, university, vocational school or other postsecondary educational institution eligible to participate in student aid programs administered by the United States Department of Education
What Are Qualifying Education Expenses?
Qualified expenses include tuition and required fees for the enrollment at an eligible post-secondary educational institution as well as course materials such as books, supplies and other equipment needed for a course of study. This can include the cost of a computer if the computer is needed as a condition of enrollment or attendance.
How to Claim the AOTC?
Either the taxpayer claiming the student as a dependent or the student can claim the AOTC on a personal tax return. You must complete the relevant sections of IRS Form 8863
and attach it to a personal income tax return to claim the credit.
For any additional questions you have about the American Opportunity Tax Credit, visit the Questions and Answers page on the IRS website, here
To ensure that you make the most of the tax credits you qualify for meet with a tax advisor** who understands education funding. Lakeland Bank team members are also available to offer one-on-one financial counseling to help you plan for 2014 and to discuss the best way to pay for college using your income and assets
. To set up an appointment, visit lakelandbank.com, call 866-224-1379 or visit any of our office locations.
*Securities are offered through Essex National Securities, LLC, member FINRA & SIPC. Insurance products are offered through Essex National Insurance Agency, Inc. Neither are affiliated with Lakeland Bank. Products are not guaranteed by the bank, not FDIC insured, not a deposit, not insured by any federal government agency, and may lose value including loss of principal.
** Consult a tax advisor for further guidance.