A Little Education on Education Tax Credits
If you haven’t already heard, there is a tax break that can come with that expensive college education! It’s called the American Opportunity Tax Credit (AOTC). It can be applied to qualified education expenses for the traditional first four years of college with a maximum of $2,500 credit annually for each eligible student you have. Meaning, more kids in college, more tax credits. The amount of the credit is 100% for the first $2,000 for each student then 25% of the next $2,000 that you paid for that student. However, if the credit pays your tax down to zero, you are able to get 40% of the remaining amount of tax credit, up to $1,000, refunded to you.
Income Restrictions
Like with all tax laws, there are some stipulations. To claim this full tax credit you must earn a modified adjusted gross income of $80,000 if you’re single, $160,000 if you’re married filing jointly, or less. If you make between $80,000 and $90,000 ($160,000-$180,000 if married filing jointly) you are eligible for some but not all of the credit. Anything more than that and you won’t get any education credit. To be honest, we strongly disagree with this and it makes us a little mad. If you are middle class you’re likely to get very little financial aid and you are footing the majority of that education bill. Given the fact that the average cost of college for a public school was $20,770 and a private school was $46,950 for the 2017-2018 school year, most families could use the help, regardless of income. It’s a kick in the pants.
Divorced or split households
Whoever claims the kids claims the education credits. This is extremely important to consider if you are trying to do what’s best for your family overall during tax season. Say the mother makes $100,000 a year and the father makes $55,000 but the kids live with the mom most of the time. She may want to claim the kids, but she’d lose that tax benefit. It would give their family as a whole more money back if the father claims the kids to get the education credit. We just recently wrote a whole article on Divorce and Taxes. If you have a split family, our recommendation is to seek out professional support to sort out the nuances of tax deductions before accidentally costing your family a boatload of money.
College Students Filing Independently
In some cases, if the child is earning enough income to claim they are supporting themselves, there could be more refund dollars on the table if the parents let the kid file independently. This is another thing we could help you sort out, but it should be at least a conversation. Be sure everyone is clear on who is claiming who to avoid any IRS red flags that could lead to an audit.
Extended College Education Beyond 4 Years
Year 5 is a no go, you can only get the AOTC for the first 4 years. Meaning, freshman year your student is only in school for a few months and the fifth year they are January to May. Typically, there is no credit this year unless they move on to a 5th full year of schooling. At that point you are eligible for a different, much less exciting, credit called the Lifetime Learning Credit.
Claiming the Credit
The first $10,000 in tuition, not including room and board, will cause you to max out the AOTC credit. If paying discounted tuition rates, be sure to include the cost of books and supplies. Laptops and other equipment are only allowed if REQUIRED by the school and not because it is a convenience to the student. It may feel only logical for your student to need a laptop but if it’s not listed as a requirement you can’t count it towards the total education expenses. However, if you live in Massachusetts you want to be sure to tally up all those book costs and any additional fees because Massachusetts’ deduction allows for over $10,000 to be considered in the credit.
If you have a student in college, consider all of the factors that could go into receiving that American Opportunity Tax Credit before ignoring this credit or deciding who is claiming that student on their return. For a deeper understanding of the Education Tax Benefits, download our handout with more information.
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