Know Your Tax Credits - The American Opportunity Tax Credit

by John Cooney on Jan 21, 2020

Taxes, Education, Tax Planning

As we move towards April 15th’s tax filing deadline, I wanted to spend a few blogs on explaining some of the more popular tax credits that may be available to you.  Up first, the American Opportunity Tax Credit (AOTC).  The AOTC is a credit for qualified education expenses paid for an eligible student during their first four years of higher education.  The credit is calculated by factoring in 100% of the first $2,000 in qualified expenses and 25% of the next $2,000 in qualified expenses, for a maximum per-student total of $2,500.  The credit is a refundable credit, meaning that even if you don’t owe any tax, or that the credit brings your tax liability down to zero, you could still possibly have 40% (or up to $1,000) refunded to you.  Let’s get into some of the details on who is an eligible student, what income limits are in place, and how you claim it.

Who Is An Eligible Student?

  • Student must be pursuing a degree or other recognized education credit.
  • Be enrolled at least half time for at least one academic period beginning in the tax year.
  • Not have finished the first four years of higher education at the beginning of the tax year.
  • Not have claimed the AOTC or the former Hope credit for more than four tax years.
  • Not have a felony drug conviction at the end of the tax year.

What Are The Income Limits?

  • For Single filers, to claim the full credit, your Modified Adjusted Gross Income (MAGI) must be $80,000 or less; if your MAGI is over $80,000 but less than $90,000, you are eligible for a portion of the credit; if your MAGI is over $90,000 you cannot claim the credit.
  • For those who are Married, Filing Jointly, to claim the full credit, your Modified Adjusted Gross Income (MAGI) must be $1600,000 or less; if your MAGI is over $160,000 but less than $180,000, you are eligible for a portion of the credit; if your MAGI is over $180,000 you cannot claim the credit.

How Do You Claim the Credit?

  • To claim the credit, you must have received a Form 1098-T (tuition statement) from an eligible educational institution.
  • The 1098-T will have an amount in Box 1 to show you the total amount received during the tax year.
  • This may not be the total of all of your qualified educational expenses, make sure to keep track of those expenses throughout the year to maximize your credit.
  • Use IRS Form 8863 when filing your taxes to claim your AOTC.

Example, Married Couple with One Student

  • Tom and Mary’s son Stephen just finished his Freshman year at the University of Massachusetts, where he was a full-time student with no drug convictions.  He has not previously claimed the AOTC.  For the year, Tom and Mary’s MAGI was $130,000.  In February, Tom and Mary received a 1098-T from UMass showing a total of $19,500 in Box 1.  They had no other qualified expenses during the year.  Tom and Mary would be able to claim the full $2,500 AOTC.

                        Total Qualified Expenses - $19,500

                        AOTC Credit – 100% of first $2,000 = $2,000

                                                  25% of next $2,000 = $500

                        Total AOTC = $2,500

Don’t Be Like George and Double Dip!

  • From the example above, you can see the AOTC accounted for $4,000 of Tom and Mary’s qualified education expenses.  Tom and Mary could still use other tax benefits to help with the remaining $15,500, such as a distribution from a 529.
  • It is important to remember though, much like Timmy from Seinfeld, the IRS does not like double dipping!  Since they are claiming the AOTC, that reduces the qualified expenses that can be accounted for by a 529 distribution to $15,500.

One Last Thing

  • The AOTC is a per-student credit, not per-taxpayer.
  • What that means is if Tom and Mary had three children and all met the requirements to be an eligible student, they could claim up to $7,500 in the AOTC; $2,500 X 3.

Have questions on whether you or your child are eligible for the AOTC?  How about on how to calculate how much of the credit you can claim?  We are here with your tax answers, set-up a complimentary tax planning meeting by contacting me at john@greenandgoldfinancial.com.