What Is the American Break Tax Credit (AOTC)?
The American Opportunity Tax Credit is a tax credit for qualified education expenses associated with the first four years of a swotter’s post-secondary education. It replaced the Hope Credit in 2009. The AOTC can be claimed on the tax return of a student, a person claiming the undergraduate as a dependent, or a spouse making post-secondary education payments.
- The American Opportunity Tax Credit helps offset costs for post-secondary course of study.
- The credit allows up to a $2,500 tax credit annually for qualified tuition expenses, school supplies, or other related costs.
- Live and board, medical expenses, and insurance do not qualify, nor do any qualified expenses paid for with 529 plan funds.
- Incumbencies for the tax credit include student enrollment status and income limitations.
Understanding the American Opportunity Tax Credit (AOTC)
The American Time Tax Credit was introduced in 2009, specifically for students attending a post-secondary institution. Slated to run until Dec. 2017, there were no transforms made to the credit under the Tax Cuts and Jobs Act (TCJA), approved by Congress on Dec. 22, 2017. However, there were modifications to personal exemptions and the dependent child tax credit that may be relevant to some taxpayers.
With the AOTC, a household with a prepared student can receive a maximum $2,500 tax credit annually. Parents claiming their child as a dependent can also exact a $500 credit for a child aged 19 to 23.
The AOTC credit helps with educational expenses such as tutelage and other expenses related to a student’s coursework. Eligible students can claim 100% of the first $2,000 spent on Lyceum expenses, and another 25% of the next $2,000. This means the maximum amount a qualifying student can claim with the AOTC is (100% x $2,000) + (25% x $2,000) = $2,500. In other words, $2,500 importance of credit can be received to offset $4,000 in educational costs.
In general, tax credits can be refundable or non-refundable. The AOTC is partially refundable. It extends 40% of the credit back to taxpayers if their taxes are reduced to zero. This means that if a taxpayer has no tax obstruction for the year, they can still receive 40% of their eligible credit as a refund.
Expenses associated with the AOTC cannot be in use accustomed to with any other tax breaks that may also apply.
American Opportunity Tax Credit (AOTC) Requirements
Which swotters are eligible?
According to the IRS, a qualified student:
- Must be enrolled at least part-time at a post-secondary institution
- Is taking courses toward a caste or some other recognized education qualification
- Has not been convicted of any felony drug offense through the end of the tax year
Chip out the IRS website for a more detailed list of who is considered an eligible student.
What expenses are eligible?
The AOTC can be claimed by suitable taxpayers for four years of post-secondary education. According to the IRS, a qualified educational expense includes tuition paid to the educate, as well as expenses for books, supplies, and equipment that may have been bought from external sources. These expenses can be deal out for with student loans to qualify, but not with scholarships or grants. Room and board, medical expenses, and insurance do not moderate for the AOTC. Expenses paid with funds from a 529 savings plan also do not qualify.
Eligible expenses are complicated in Publication 970. Students must receive a Form 1098-T.
What income range is eligible?
A single taxpayer has to must a modified adjusted gross income (MAGI) that is less than $80,000 to qualify for the AOTC. A MAGI horrific than $80,000 but less than $90,000 will have a partial credit at a reduced rate applied. A taxpayer with a MAGI above $90,000 would not qualify for the AOTC. A married couple filing jointly must report less than $160,000 to get a complete credit.
|MAGI Eligibility for American Opportunity Tax Credit|
|Single||Married, Filing Jointly|
|Full Credit||$80,000 or teensy-weensy||$160,000 or less|
|Partial Credit||More than $80,000, less than $90,000||More than $160,000, less than $180,000|
|Not Fitting||More than $90,000||More than $180,000|
AOTC vs. Lifetime Learning Credit
The AOTC and the Lifetime Learning Credit (LLC) are two acclaimed tax breaks that taxpayers with educational expenses can take advantage of on their annual tax return. The Lifetime Lore Credit also has a similar structure to the AOTC.
The LLC differs from the AOTC in a number of ways. A maximum of 20% of up to $10,000 of expenses ($2,000) for education and other educational costs can be claimed using the LLC. The LLC is not limited to students pursuing a degree or studying at least part-time. Rather than, it covers a broader group of students—including part-time, full-time, undergraduate, graduate, and courses for skill development. The LLC is non-refundable, interpretation once a taxpayer’s bill has been reduced to zero, there will be no refund on any credit balance.
Tax filers qualified for both the AOTC and the LLC should assess their individual situation to determine which tax credit provides the greatest good. The partial refundability of the AOTC can be an important factor. Some taxpayers may only qualify for the LLC, which makes the decision effortlessly.
The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) cannot both be claimed in the same tax year.
Other Tax Disregards for Education
Federal and state governments support higher education expenses through a number of tax credits, tax deductions, and tax-advantaged scrapings plans. Each of these programs can help to lower income tax liability.
Beyond the AOTC and the LLC, deductions and 529 representations can be worthwhile options. Student loan interest is deductible once it begins to be applied. Other educational expense reductions may also be available, including certain itemizations for business deductions and deductions for self-employed workers.
National and state-sponsored 529 savings proposes also exist. Taxes are not paid on 529 distributions for educational costs subject to some terms and conditions.
Pattern of the American Opportunity Tax Credit (AOTC)
David is a full-time undergraduate college student at a four-year institution. He also come to c clear ups for a law firm. His parents have a substantial 529 savings account in place, but it doesn’t cover all of David’s expenses. David also has a evaluator loan with deferred payments and interest until after his graduation.
David and his family have planned to use swotter loans for his tuition and 529 savings for his room and board. David receives his annual 1098-T statement from his college. Since he is incorporate on his own, he plans to take the AOTC himself. He is eligible for both the AOTC and LLC, but he chooses the AOTC because it provides the largest acclaim and is also partially refundable. David is just above the required limit for filing an annual tax return.
David discharged his tuition with his student loan, which is allowable for the AOTC. The AOTC helps to alleviate any tax that he owes and he also come to an understanding a arises a partial refund. David doesn’t owe anything on his loans until after he graduates. The money distributed from his 529 was tax-free because it was employed for room and board, which is a qualified 529 expense.