The American opportunity credit lets tax paying students & also their parents the chance of cutting down their expenses of studying in college. This credit usually gives you better tax savings in comparison with a tuition fee reduction as it slashes down the tax you owe the bank in a dollar for dollar deal instead of simply decreasing the numbers of your earnings subject to tax. That being said, there happen to be a plethora of prerequisites that need to be filled for attaining eligibility.
Eligible students for the American opportunity tax credit
So, who’s an eligible student in this respect?
- Someone who hasn’t already finished the initial 4 years of their post-secondary educational course
- One who joins 1 academic semester throughout the applicable tax year at the least
- as well as one maintains the half-time label for a program which ends up to earn you a credential or degree
That being stated, if he/she has engaged and been a federal or state criminal owing to some sort of drug conviction, then they’d not be eligible.
Qualified costs of the American opportunity tax credit
Provided that you’re paying your college fees & tuitions to an eligible college, you can add the credit then. However, such eligible institutions could be beyond just universities & colleges. They may add any post-secondary school as well in order to satisfy the requirements of participating in the financial aid program of the Department of Education.
You can add the expenses of supplies, books & equipment which the students buy which is associated with the study program if you calculate the credit.
Paying school expenses for the American opportunity tax credit
The IRS doesn’t demand you to cut down qualified costs by any amount of money that you pay using funds that you’ve borrowed, for instance, credit cards or student loans. That said, you might not add any amount of money you get from tax-free fellowships, scholarships, tuition grants received from some employer, federal Pell grants, the refunds from your school and the other no tax included help you receive apart from the heritages & gifts. This credit, however, does not cover up the cost you get for the board, room, medical insurance or transportation.
How Do You Calculate The American Opportunity Tax Credit?
An eligible student can get only one American Opportunity Tax Credit per tax year. If you’ve got two dependants who qualify, you might make a claim for the American Opportunity Credit for one those students. And if you make a claim for the other student, you don’t need to claim the same credit for both of the dependants. What is more, you won’t be able to make a claim for multiple tax benefit each year per student.
The credit quantity equates to 100% of the initial 2,000 US dollars, of eligible spending, on top of 25% of the costs in besides that 2,000 US dollars. That said, the highest yearly credit for each student happens to be 2,500 US dollars.
Claiming the American Opportunity Tax Credit
Either of those students or some other taxpayer claiming the student as a dependant might opt for the credit on a (personal tax return). You have to go through the associated sections of IRS Form 8863 & connect it to your personal income tax return for claiming this credit. To complete IRS Form 8863, you should use IRS Form 1098-T (Tuition Statement, receive this form from college by Jan 31)
Required Forms for deductions:
This credit starts to go stale for single taxpayers — those who adjusted their gross income anywhere from 80,000 USD to 90,000 USD & for joint tax fillers when the adjusted gross income is between 160k to 180k USD. This credit won’t be available to taxpayers of whom the adjusted gross income surpasses the 90k and 180k thresholds.
A good source of additional information is Chapter 2 of IRS Publication 970, Tax Benefits for Education. The statutory language appears in the Internal Revenue Code at 26 USC 25A. The regulations can be found at 26 CFR 1.25A-0, 26 CFR 1.25A-1, 26 CFR 1.25A-2, 26 CFR 1.25A-3, 26 CFR 1.25A-4 and 26 CFR 1.25A-5.
The U.S. Government Accountability Office (GAO) has published several reports about the American Opportunity Tax Credit and other education tax benefits.
- STUDENT AID AND TAX BENEFITS: Better Research and Guidance Will Facilitate Comparison of Effectiveness and Student Use, GAO-02-751, September 2002.
- STUDENT AID AND POSTSECONDARY TAX PREFERENCES: Limited Research Exists on Effectiveness of Tools to Assist Students and Families through Title IV Student Aid and Tax Preferences, GAO-05-684, July 2005.
- REFUNDABLE TAX CREDITS: Comprehensive Compliance Strategy and Expanded Use of Data Could Strengthen IRS’s Efforts to Address Noncompliance, GAO-16-475, May 2016.
- POSTSECONDARY EDUCATION: Multiple Tax Preferences and Title IV Student Aid Programs Create a Complex Education Financing Environment, GAO-07-262T, December 2006.
- HIGHER EDUCATION: Multiple Higher Education Tax Incentives Create Opportunities for Taxpayers to Make Costly Mistakes, GAO-08-717T, May 2008.
- HIGHER EDUCATION: Improved Tax Information Could Help Families Pay for College, GAO-12-560, May 2012.
- HIGHER EDUCATION: Improved Tax Information Could Help Pay for College, GAO-12-863T, July 2012.
Andrew Osterland, CPA, CFA, graduated from West Virginia University with a B.S.B.A. in Accounting in 2011. Mr. Osterland worked for the West Virginia State Tax Department as a Tax/Revenue Auditor. This experience helped him gain some insight into the government side of an audit and the general rules of Sales and Use Tax.