The American Opportunity Tax Credit (AOTC) offers college students or their parents an annual tax credit of up to $2,500 for eligible expenses out of the first $4,000. Students are only eligible for the first four years of college, and it requires enrollment at least half-time.
Unlike other tax credits for higher education, qualifying costs for AOTC extend to books and provisioning fees. It is also a refundable tax credit. This means that if your credit drops taxes to a balance of zero or less, you can get a partial income tax refund up to $1,000.
Qualifying for AOTC is very serious as you could face tax penalties if you claim in error. Eligibility is determined by course volume, length of schooling, and income-based rules. If a taxpayer’s adjusted adjusted gross income exceeds $90,000 as a single filer or $180,000 for filing a marriage together, the AOTC cannot be claimed. .
American Opportunity Tax Credit vs Lifetime Learning Credit
AOTC covers more types of expenses Lifetime Learning Credits (LLC). At $2,500 per year, it also offers a larger line of credit than the $2,000 per return offered by the LLC. However, an LLC can be claimed for an unlimited number of years while an AOTC is limited to only the first four years.
LLC is perfect for students who have maxed out their AOTC eligibility and still have to deduct costs. While it doesn’t include course material, it’s still an opportunity to claim a tax credit of up to $2,000 per year for tuition and fees – no accommodation allowed. If earning a four-year degree is taking you longer to complete for whatever reason, or you’re pursuing a graduate program, an LLC is a great tax credit option.
When to choose an LLC: LLC works for students who are not pursuing a specific degree or other accredited educational credit but are improving job skills. For example, if you choose to take a medical coding course or an office accounting class at a technical college to further develop your career, you can do so and receive credit. without enrolling in a full program. Your eligibility for an LLC ends at lower adjusted adjusted gross income limits of between $69,000 for single filers and $138,000 for joint filers.
When to choose AOTC: For independent students or parents who meet MAGI or revised gross income guidance To qualify for AOTC, this credit is the best option for your first four years in college because you get credit for extra out-of-pocket expenses. This includes required textbooks and school supplies. For example, a computer or software required for a design class counts as a supply, but purchasing a general purpose computer does not. The AOTC can also give you a cash bonus. Unless you’re one of the few college students who don’t have cash flow issues, getting a tax refund of up to $1,000 is a huge financial boost. LLC does not offer refundable credit.
Eligibility for the American Opportunity Tax Credit
AOTC allows you to claim up to $2,500 in qualifying education expenses. For eligible students, the first $2,000 in costs are covered in dollars. The next $2,000 is insured at 25%, or $0.25 for every $1, which means it takes $2,000 in costs to generate an additional $500 of credit.
Eligibility for the tax credit requires checking both the attendance requirements and income guidelines. AOTC credit recipients must be pursuing a degree or certificate and enrolled at least half-time for a semester, three months, or quarter beginning in the tax filing year, such as in 2021 for a tax return. tax return 2021. It is only available for the first four years of higher education, and it cannot be claimed for more than four years. Students also do not have to be convicted of a felony drug offence to be eligible. Students will need Form 1098-BILLIONa tuition statement provided by the university, for eligibility.
To claim the full amount of credit, an applicant needs a MAGI of $80,000 or less. For those who are married and filing together, the limit will increase to $160,000. The divergence credit for MAGI exceeds $90,000 for singles and $180,000 for joint applicants. If your MAGI is between $80,000 and $90,000, you are still eligible but will receive a reduced credit amount.
According to the IRS, the MAGI for most people who file for an education credit is adjusted gross income, or AGI, on tax returns. However, if you earn income abroad, you may need to do some extra calculations. Refer IRS Publication 970Tax Benefits for Education, to access the worksheet to calculate MAGI for AOTC.
Unlike a tax deduction that reduces your taxable income, a tax deduction is a reduction in the amount of tax you owe. Most income tax credits stop applying when you reach your $0 tax bill and are non-refundable. AOTC offers cashback up to $1,000, making it a valuable credit.
The amount to be refunded is determined by the 40% rule. The amount of credit remaining after your tax bill reaches $0 is multiplied by 40% to determine your credit. To get the full $1,000, you must claim a $2,500 credit and owe $0 in taxes. If you have $2,000 in credit left after the tax balance is paid, you’ll multiply $2,000 by 40% for a $800 refund. If you file your taxes independently, you will receive a refund. If you are declared a tax dependent of your parents, it will be passed on to the tax preparer. Parents with multiple college dependents may claim one credit per eligible student.
How to claim the US Opportunity Tax Credit
To request AOTC, you need to consult Model 1040, core income tax return documents. On page 1, you will enter the necessary information regarding your dependents, income and deductions. Look for the line that says “This is your adjusted gross income.” You need this total to calculate your MAGI.
In Publication 970, enter your AGI in the Worksheet titled “MAGI for the US Opportunity Tax Credit.” Subtract any of the following: foreign earned income, foreign home deductions, and income from Puerto Rico and American Samoa. This is your MAGI and it is entered Model 8863Education Credit.
Part III of Form 8863 takes information from a 1098-T form submitted by the university and asks questions related to qualifications, such as tax years claimed and drug convictions or not. Then, you enter the total of your eligible expenses, including tuition, tuition, and the cost of textbooks and essentials. The form shows you how to calculate your credit amount. This information is then moved to Part I of the form.
Part I teaches you how to determine your eligibility based on income. If you qualify, it uses the 40% rule to determine your refundable credit amount. Refundable credits and non-refundable credits are entered separately Model 1040, which means you request the AOTC with two separate entries. Your non-refundable credit amount is shown in Part II and is added to other credits and payments in the form Schedule 3 before being converted to 1040.
Key point
AOTC is a great opportunity to recoup some of the cost of higher education whether you are a student or a parent attending college. Use Publication 970 to determine your eligibility for the credit.
[This article was originally published on The Simple Dollar in January, 2020. It was updated in December, 2021.]
