Kids in College? Don’t Overlook The American Opportunity Tax Credit

Amy Merkel on WTOL news setIf you’ve got kids in college, we’ve got some information on a way to save some money. It has to do with something called the “American Opportunity Tax Credit.” But, there are some things about this credit than can get a little tricky…

Gilmore Jasion Mahler CPA Amy Merkel appeared on WTOL this week with some good information for students and parents.

What is the American Opportunity Tax Credit?

The American Opportunity Tax credit can reduce your tax liability up to $2,500 per year, it is even partially refundable if you do not have any federal tax liability. This AOC is available if you or one of your dependents is a college student and meets the qualifications.  100% of the first $2,000 paid + 25% of the next $2,000 paid

Who qualifies?

  • Tuition was paid for yourself or one of your dependents
  • Student is at least a half-time student for one academic period in the tax year or the first 3 months of the following year
  • First four years of college
  • Cannot have claimed the Hope or American Opportunity Credit for more than 4 years
  • Modified AGI (basically AGI, line 22 from your tax return) must be less than $80,000 single/$160,000 for MFJ to get full credit

What expenses does it cover?

  • Tuition – generally the amount reported on form 1098-T by the educational institution
  • Books – do not have to be purchased from the institution
  • Supplies and equipment, though NOT a computer unless it is required for attendance
  • NOT room and board costs

What’s “tricky” about the tax credit?

Be careful with 529/qualified tuition program or education savings plan funds – no double benefit allowed; you can use the 529 funds to pay tuition and take advantage of the AOC at the same time, however some of the earnings of the 529 account may end up being taxable.

How do student loans factor in?   

Loans = tuition paid. If using the credit with a loan – remember, it is when the expenses are paid/NOT when you get the loan money or when you pay the loan back.

Who actually gets the credit?

You need to remember that the AOC follows the students’ exemption. It doesn’t matter who pays the tuition. What matters is who claims the student as a dependent. This credit follows the exemption…no matter who actually pays the tuition costs. (example: using grandparents and student payments) The student (if not yourself) must be claimed as a dependent on your tax return for you to claim the credit.

Need more information?

Look for IRS form 8863. You’ll need to file it with your tax return to claim the credit. Also IRS Publication 970 has some good info on the American Opportunity Tax Credit.. in easy to understand language.

Amy Merkel is a Tax Senior Manager at Gilmore Jasion Mahler. She works with clients across many industries.

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