Get to Know: The American Opportunity Tax Credit

When you really think about it, life is one long pursuit of knowledge. But not every lesson is free—in fact, quite the opposite. Education in the United States is quite expensive, costing anywhere from $21,000 to just under $50,000! That’s a serious bill.

Unfortunately, while a college education is considered a must in many fields and career paths, there aren’t enough scholarships and grants to cover the cost for everyone. That’s just one of the many reasons why student loan debt continues to plague so many millions of Americans.

A scholarship shouldn’t be the only opportunity to save on your college education—and lucky you—it isn’t.

When it’s time to file your taxes (or to hire us to do that for you, you’re in a drastically improved position by ensuring you know about every tax credit and tax deduction you may qualify for you. This can help you maximize your tax refund and put a little extra money in your pocket.

We’re here to walk you through the American Opportunity Tax Credit.

In this article, we’ll explain what the American Opportunity Tax Credit, or AOTC, is. We’ll explain how you can qualify for the AOTC, as well as some other helpful tidbits about the AOTC you should remember as you get ready for tax season.

What is the American Opportunity Tax Credit?

You may have heard of the AOTC by its previous name, the Hope Credit; the AOTC is an expanded version. This is the AOTC, according to the IRS:

“The American opportunity tax credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student.”

In plain English, the American Opportunity Tax Credit is a tax credit for folks attending a college or university for up to 4 years. Tax credits are a bit different than tax deductions, because tax deductions affect only your taxable income while tax credits can subtract from your tax bill.

So, how do you know if you might qualify for the American Opportunity Tax Credit?

Who qualifies for the AOTC?

In order to be eligible for the AOTC, you guessed it—you must be a student. But here are a few other boxes you’ll need to check before you can qualify.

  • You must be pursuing a degree or another credential that the IRS recognizes
  • You need to be enrolled at least have time for one academic period
    • An academic period could be a quarter, a trimester, a semester, a summer session, or whatever a period of academic study is called at your school.
  • You cannot have finished your first four years of higher education at the start of the year
  • You can’t have claimed the AOTC or the Hope credit for more than four tax years
  • You cannot have been convicted of a drug-related felony by the end of the year

You might be tipped off that you can claim the AOTC if you’ve received a Tuition Statement (Form 1098-T) from your educational institution. That’s one of the crucial forms you’ll need when claiming the tax credit.

Other AOTC Considerations

Like any other part of your tax return, you don’t want to make mistakes when attempting to claim the American Opportunity Tax Credit. Here are a couple extra considerations the IRS specifically recommends you keep in mind.

1. Be Qualified and Be Careful

You need to be doubly certain you qualify for the tax credit before claiming it, because being incorrect carries consequences. For example, if you’re audited by the IRS and they discover you don’t actually qualify for the AOTC, not only will you have to pay back the total you received with interest, they may also charge you a penalty. You can also be banned from claiming the penalty for up to ten years!

Avoid this peril by keeping the right forms from your school and double-checking with your tax preparer.

2. There Are Income Limits

Like most tax credits, the benefits of the American Opportunity Tax Credit cap out or simply don’t apply to taxpayers with high incomes. For the full credit, you’ll need a modified adjusted gross income (or MAGI) of $80,000 or less ($160,000 for married filing jointly). For a reduced credit, your MAGI will need to be between $80,000-$90,000 (or between $160,000 and $180,000 for married filing jointly).

Anything higher and you can’t claim the credit.

Is the American Opportunity Tax Credit for you?

We hope you now have an idea of whom the AOTC applies to and can benefit. If you’re ready to get started with your tax return, get in touch with our expert tax preparation team today. We’ve spent our lives learning about taxes, and we’re ready to put that knowledge to work for you.

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