American Opportunity

Tax Credit

American Opportunity Tax credit systems are in place to let taxpayers deduct a certain amount from their tax liability to the state or federal government based on different programs. One such initiative is the American Opportunity Tax Credit, or commonly known as AOTC. This tax credit system is designed specifically for college going students, allowing them to settle their college costs via tax credits. AOTC is much more beneficial when compared to tuition deduction since it allows for an actual reduction in taxes that you owe to the government. But there are certain eligibility criteria that one must meet to be able to benefit from this system.

Student Eligibility

A student is eligible to benefit from the American Opportunity Tax Credit system is the person has not completed their four years of schooling. The student must also have enrolled themselves for at least one semester for the financial year into consideration and must main a half time status for the course they have enrolled. Any student having a drug-related offense against their name is automatically disqualified from the program.

Expenses Qualified under the program

Any fees that you pay to an educational institution that is eligible and recognized, you can claim the same for tax credits. The tax credit system is not restricted to colleges and universities alone. It is applicable to post-secondary schools also as long as these schools meet the requirements set by the United States Department of Education Financial Aid Program. As a part of the credit system, you can also claim costs spent on supplies, books, and other equipment necessary as per your course curriculum.

Paying for the expenses

Fees and other expenses that you pay via funds borrowed such as a credit card of loan qualify for the tax credit. There usually aren’t any deductions from those amounts. However, there are restrictions when it comes to tuition grants, tax-free scholarships, Pell grants, or other gifts and non-taxable expenses that you inherit. The credit system also doesn’t cover expenses such as room rent, boarding, food expenses, transportation, or even medical insurance. One can think of these as exclusions.

How to calculate the American Opportunity Tax Credit?

The tax credit system is applicable to one eligible student for a tax year. In the event that you have two dependents who are eligible for the American Opportunity Tax Credit, one only of them can avail the same. Also, if you claim AOTC for one of the students, you cannot claim any other education tax credit systems for the other student. Apart from the above, you also cannot opt for more than one tax credit systems for an eligible student. As per the government guidelines, the tax credit system is applicable to entire amount up to $2000 expenses that are qualified. Any amount exceeding $2000 would fetch a 25% qualification for the tax credit system. And the maximum cap limit is set at $2500, which means you cannot seek for credits beyond this amount.

How to claim the American Opportunity Tax Credit?

American Opportunity Tax Credit can be availed either by a student or another tax payer who declares the student as dependent on their individual tax returns. The IRS provides the Form 8863 for the same purposes. Thus, one must duly fill up the form and ensure that it is a part your personal tax filing. Single tax payers who have the adjusted gross income in the range of $80000 to $90000 are eligible for the credit. Similarly, jointly filing tax payers who have adjusted gross income in the range of $160000 and $180000 are eligible. But tax payers with AGI above $90000 and $180000 for the respective categories cannot opt for this credit.