Education Tax Credits Pt. 1 – American Opportunity Credit
Education costs may be daunting, but there are many types of financial aid to help support expenses. For this article series, we will be highlighting two educational tax-benefits the federal government offers to its citizens, the American Opportunity Credit and Lifetime Learning Credit.
Unlike simple deductions (e.g. expenses for school supplies) that only reduce the income that you will be taxed on, the American Opportunity and Lifetime Learning Credits can reduce your tax liability. In simple terms, that means the tax bill that YOU will ultimately have to pay to the IRS after deductions and other things are calculated. The biggest difference between the two credits is that the American Opportunity Tax Credit is a refundable credit, which means if your final tax bill due to the IRS, after all the calculations are done, is a negative amount, you can receive some money back.
Of course there are some rules to take into consideration before deciding on which one to claim. For starters, you can only take the American Opportunity Credit OR the Lifetime Learning Credit. Not both.
American Opportunity Credit
The American Opportunity credit allows you to claim up to $2,500 in qualified educational expenses. The first $2,000 of your expenses is 100% refundable, while the next 25% of $2,000 in expenses is refundable. To illustrate:
Juan spent a total of $2830 in qualified educational expenses (registration fees, books, and lab materials) for his two semesters at Pasadena City College. Assuming he meets the other requirements, the first $2,000 of his expenses will be considered entirely refundable if he claims the American Opportunity credit, while of the remaining $830, only $207.50 ($830 x .25) will be refundable. He can get a total of $2,207.50 back for his qualified education expenses.
Payments made for the tax year, or for the 3 months prior to the next one can also be claimed. For example, expenses paid in December 2018 for the following semester in 2019 can be claimed for 2018.
The American Opportunity credit can only be claimed for 4 years, but those years do not have to be consecutive. You must be pursuing a degree or certificate and be considered a part time student.
If you are a parent of a dependent child in college, you can claim the credit on behalf of the dependent. Additionally, if you have more than one dependent in college, you may claim more than one credit per student.
There is an income limit to claim the credit though. The limit is based on your Modified Adjusted Gross Income (MAGI), which is your adjusted gross income after certain adjustments are calculated. The limit is $90,000 if you file as single and $180,000 for those married filing jointly (the credit cannot be claimed if married, filing
separately).
For the next part in this series, we will look at the Lifetime Learning Credit and go over its uses and rules.
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