The College Board estimated that the average cost of tuition and fees for the 2016–2017 school year was $33,480 at private colleges and $24,930 for out-of-state residents attending public universities (up 3.6% from 2015-2016). 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?
The AOTC is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. 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 these specific criteria:
- Is enrolled in a program leading toward a degree, certificate or other recognized post-secondary educational credential;
- Has not completed the first four years of post-secondary education as of the beginning of the taxable year;
- Is enrolled at least half time for at least one academic period beginning in the tax year;
- Has not claimed the AOTC or the former Hope credit for more than four tax years; and
- Has not been convicted of a felony drug offense at the end of the tax year.
The student must also be attending an eligible educational institution that 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.
The following expenses do not qualify:
- Room and board
- Medical expenses
- Student fees unless required as a condition of enrollment or attendance
- Expenses paid with tax-free educational assistance
- Expenses used for any other tax deduction, credit or educational benefit
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.