Claiming Your American Opportunity Tax Credit

Are you a college student or a parent of one? If so, you might be excited to learn about the American Opportunity Tax Credit (AOTC)! This tax credit is designed to help students and their families offset the rising costs of college education. Hi, I'm Bette Hochberger, CPA, CGMA, and for today's #TaxTipTuesday, we’ll break down what the AOTC is, who qualifies for it, how much you can claim, and how to apply. Let’s dive in!

What is the American Opportunity Tax Credit?

The American Opportunity Tax Credit is a tax benefit available to eligible students who are pursuing higher education. It allows you to reduce your tax bill by claiming a credit for qualified education expenses. Unlike a deduction, which only reduces your taxable income, a credit directly reduces the amount of tax you owe, making it even more valuable!

Who is Eligible?

To qualify for the AOTC, you must meet certain criteria:

• Enrollment Status: You must be enrolled at least half-time in a degree or certificate program at an eligible institution.
• Student Status: The credit is available for the first four years of higher education. This means if you’re a freshman, sophomore, junior, or senior, you can take advantage of it!
• Income Limits: Your modified adjusted gross income (MAGI) must be below $80,000 ($160,000 for married couples filing jointly). If your income exceeds these limits, the credit begins to phase out.
• No Felony Drug Convictions: If you’ve been convicted of a felony drug offense, you may not be eligible for this credit.

How Much Can You Claim?

The AOTC allows you to claim up to $2,500 per eligible student per year. Here’s the breakdown:

• You can claim 100% of the first $2,000 of qualified education expenses.
• Plus, 25% of the next $2,000 in expenses.

This means that if you spend $4,000 or more on qualifying expenses, you can claim the maximum credit of $2,500! What's even better? If the credit brings your tax liability down to zero, you can receive up to 40% of the credit (up to $1,000) as a refund!

Qualifying Expenses

So, what expenses count towards the AOTC? Here are some examples:

• Tuition and fees required for enrollment
• Course materials, including books, supplies, and equipment
• Other necessary expenses directly related to your education

However, keep in mind that expenses for room and board, transportation, and personal expenses do not qualify.

How to Claim the AOTC

Claiming the American Opportunity Tax Credit is relatively straightforward. First, when you file your federal tax return, you will need to use Form 8863 to claim the AOTC. It's important to keep records of your qualified expenses, so be sure to save your receipts and documents that show your tuition payments and other eligible costs, such as invoices and tuition statements.

If you have any doubts or questions during the process, schedule a meeting with us! We can guide you through the steps and make sure you get the most out of your benefits.

The American Opportunity Tax Credit can be a game-changer for students and families facing the financial burden of college expenses. With the potential to reduce your tax bill significantly, it’s worth exploring to see if you qualify. Remember, education is an investment in your future, and the AOTC is here to help lighten that financial load.

As always, stay safe, and I'll see you next time.