 |
| Image: Moneybestpal.com |
You might be qualified for a tax credit that can lower your tax liability or boost your refund if you're a student or the parent of a student who is pursuing higher education. The American Opportunity Tax Credit (AOTC), a tax credit that is partially refundable, can assist you in covering some educational costs like tuition, fees, and textbooks.
What is the AOTC?
The AOTC is a tax credit that can lower your tax obligation for the first four years of postsecondary education by up to $2,500 per qualified student. In contrast to a tax deduction, which lowers your taxable income, a tax credit reduces your tax liability dollar for dollar. The AOTC is also partially refundable, which entitles you to a return of up to 40% (or $1,000) of the excess amount if the credit exceeds your tax bill.The amount of qualified education expenditures you pay for yourself, your spouse, or a dependent who is enrolled in school in accordance with the eligibility requirements will determine how much you are eligible for the AOTC. Tuition, fees, and textbooks needed for enrollment or attendance at an approved educational institution are all considered qualified education costs. Any college, university, vocational school, or other postsecondary institution that is qualified to take part in a federal student aid program qualifies as an eligible educational institution.
The amount of the AOTC is calculated as follows:
- 100% of the first $2,000 of qualified education expenses paid for each eligible student
- 25% of the next $2,000 of qualified education expenses paid for each eligible student
For example, if you paid $4,000 of qualified education expenses for an eligible student, you can claim a $2,500 AOTC ($2,000 + 25% x $2,000). If you paid $3,000 of qualified education expenses for an eligible student, you can claim a $2,250 AOTC ($2,000 + 25% x $1,000).
Who can claim the AOTC?
To claim the AOTC, you must meet the following requirements:- You must have covered the costs of eligible education for you, your spouse, or any dependents who are students.
- For at least one academic period beginning in the tax year, the qualified student must be enrolled at least half-time in a degree or certificate program at an eligible educational institution.
- At the start of the tax year, the qualified student could not have finished the first four years of postsecondary education.
- A maximum of four tax years cannot have passed since the qualifying student last claimed the AOTC or the previous Hope credit.
- At the end of the tax year, the qualifying student cannot have a felony drug conviction.
To qualify for the full or partial AOTC, you must also meet certain income requirements. If your modified adjusted gross income (MAGI) surpasses $80,000 ($160,000 if you're married filing jointly), the credit amount is gradually reduced, and if it exceeds $90,000 ($180,000 if you're married filing jointly), the credit is totally phased out. Your MAGI is your adjusted gross income (AGI) less certain adjustments including the exclusion of foreign earned income and the interest paid on student loans.
How to claim the AOTC?
Form 8863 PDF must be submitted along with your federal income tax return in order to claim the AOTC. Moreover, your school needs to provide you Form 1098-T PDF by January 31. This document lists the tuition and fees you paid or were charged during the tax year. The amount of eligible education costs you can deduct for the AOTC might differ from this amount. Also, you need to keep track of any other valid educational expenses you paid for during the year, such as books and materials.The AOTC is a worthwhile tax break that can make it easier for you to pay for higher education. To avoid mistakes or penalties, you must adhere to a number of restrictions and requirements. You might want to speak with a tax expert or use a trustworthy tax software application if you are unsure of your eligibility for the AOTC or how to claim it properly.
