Under Admitster’s microscope today are tax credits for college expenses. I know, I know – not the glitziest of topics, but this is good information to have in your head! In particular, I want to bring your attention to the American Opportunity Tax Credit. Before jumping into the details of the AOTC, however, you should have a basic definition of “tax credit” in-hand. Ladies and gentlemen, a tax credit is “a tax incentive which allows certain taxpayers to subtract the amount of the credit from the total they owe.” See Taxes Made Simple for more in-depth information! The American Opportunity Tax Credit, as you’ve probably already guessed, is a tax credit specifically for college expenses.
The Internal Revenue Service clearly states on their website that the American Opportunity Tax Credit is “a credit for qualified education expenses paid for an eligible student for the first four years of higher education.” The maximum annual credit is $2,500 per student and – good news – you can claim 40% of the credit (up to $1,000) even if you owe no taxes. The IRS elaborates on the credit in great detail, and we’ll explore the highlights here.
To begin with, in order to be eligible for the tax credit, the student must:
- Be in the midst of pursuing a degree
- Be enrolled in school at least half time and for at least one academic period
- Not have finished the first four years of his/her higher education at the start of the tax year
- Be felony and drug conviction-free at the end of the tax year
The cost of tuition, enrollment fees, and course materials all qualify for the credit. However, the following expenses don’t meet the qualifying criteria: insurance, room & board, medical expenses, transportation costs, and expenses used for other tax deductions.
Finally, know that there are income limits for this tax credit. If your modified adjusted gross income (MAGI) is $80,000 or less ($160,000 or less for joint filers), you can claim the credit. If your MAGI is greater than those numbers then the credit is reduced. But if your MAGI is more than $90,000 ($180,000 for joint filers) then you’re not eligible to claim this particular tax credit. For more information about the American Opportunity Tax Credit, click here.
To sum up, if you’re paying college expenses and you meet the eligibility criteria, then be sure to claim the American Opportunity Tax Credit, thereby directly reducing what you owe on your tax bill. To claim the credit, complete this form and, come tax time, submit it along with your Form 1040.
Every little bit helps!