The American opportunity credit allows taxpaying students or their parents the opportunity to reduce the cost of attending college. The credit typically offers greater tax savings than a tuition deduction since it reduces the tax you owe on a dollar-for-dollar basis rather than just reducing the amount of income subject to tax. However, there are several requirements for eligibility.
Eligible students for the American opportunity tax credit
An eligible student is a person who has not completed the first four years of post-secondary education, enrolls in at least one academic semester during the applicable tax year and maintains at least half-time status in a program leading to a degree or other credential. If the student has ever been a state or federal criminal because of a drug conviction, then he/she isn’t eligible for the tax credit.
Qualified expenses for the American opportunity tax credit
As long as you’re paying the tuition and fees to an eligible educational institution then you can include the credit. But eligible educational institutions can be more than just colleges and universities; they can also include any post-secondary school that satisfies the requirements to participate in the U.S. Department of Education financial aid program.
You can include the cost of books, supplies and equipment the student purchases that relate to the program of study when you calculate the credit.
Paying school expenses for the American opportunity tax credit
The IRS does not require you to reduce qualified expenses by any amount you pay with borrowed funds, such as student loans or credit cards. However, you may not include any amount you receive from tax-free scholarships or fellowships, federal Pell grants, tuition grants from an employer, refunds from the school and other non-taxable assistance you receive other than gifts and inheritances. The credit does not cover the expense you incur for room, board, transportation or medical insurance.
Calculating the American Opportunity Tax Credit
Only one American Opportunity Tax Credit is available per eligible student each tax year. If you have two dependents who are eligible students, you may claim a different educational tax benefit for one student if you claim the American Opportunity Credit for the other student; you do not have to claim the same credit for both dependents. Furthermore, you can’t claim more than one tax benefit per year for each student.
The credit amount is equal to 100 percent of the first $2,000 of qualified expenses plus 25 percent the expenses in excess of $2,000. However, the maximum annual credit per student is $2,500.
Claiming the American Opportunity Tax Credit
Either the student or another taxpayer who claims the student as a dependent may take the credit 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.
The credit begins to phase out for single taxpayers who have adjusted gross income between $80,000 and $90,000 and for joint tax filers when adjusted gross income is between $160,000 and $180,000. The credit is unavailable to taxpayers whose adjusted gross income exceeds the $90,000 and $180,000 thresholds.
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