by Michael Lodge
There are various questions that come up on education credits. The IRS has set specific rules for everyone to follow. Let’s go over the various questions that come up by tax clients on education expenses.
Have there been any changes in the past few years to the tax credits for higher education expenses?
Yes, the he American Taxpayer Relief Act of 2012 extended the AOTC through December 31, 2017. The credit helps with the cost of higher education expenses such as tuition, certain fees and course materials for four years.
How does AOTC differ from the previous Hope and Lifetime Learning credits?
Unlike the other education tax credits, the AOTC includes expenses for course-related books, supplies and equipment that are not necessarily paid to the educational institution. It also differs from the previous Hope credit because you can claim the credit for four years instead of the two allowed under the Hope credit. See Education Credits: AOTC and LLC for more information.
How much is the AOTC worth?
It is a tax credit of up to $2,500 of the cost of tuition, fees and course materials paid during the tax year. Also, 40 percent of the credit for which you qualify that is more than the tax you owe, up to $1,000 is refundable. This means you can get the credit even if you owe no tax.
How does AOTC affect my income taxes?
You reduce the amount of tax you owe dollar for dollar by the amount of the AOTC for which you qualify. If the amount of the AOTC is more than the tax you owe, up to 40 percent of the credit (a maximum amount of $1,000), may be refunded to you.
What are qualified expenses for the education tax credits?
In general, qualified expenses for the education tax credits include tuition and required fees for the enrollment or attendance at eligible post-secondary educational institutions (including colleges, universities and trade schools). The expenses paid during the tax year must be for: an academic period that begins in the same tax year or an academic period that begins in the first three months of the following tax year.
The following expenses do not qualify:
- Room and board
- Medical expenses
- Student fees unless required as a condition of enrollment or attendance
- Same expenses paid with tax-free educational assistance
- Same expenses used for any other tax deduction, credit or educational benefit
The student should receive a Form 1098-T from the educational institution the student attended. If the student does not receive a Form 1098-T, the student should contact the educational institution and request the form.
What additional education expenses qualify for the AOTC?
For the AOTC, qualified expenses include amounts paid for books, supplies and equipment needed for a course of study. You do not have to buy them from the educational institution. Add these amounts to Form 8863 with your other adjusted qualified education expenses, but the total of all expenses for determining the AOTC cannot exceed $4,000. See Qualified Education Expense for more information.
Does a computer qualify for the AOTC?
It depends. The amount paid for the computer can qualify for the credit if you need the computer for attendance at the educational institution.
Who is an eligible student for the AOTC?
An eligible student is a student who:
- Was enrolled at least half time in a college program leading toward a degree, certificate or other recognized educational credential for at least one academic period during the tax year,
- Has not completed the first four years of post-secondary (college) education at the beginning of the tax year,
- Has not taken (or someone else has not taken) the Hope or American Opportunity Tax Credits for the student for more than four years, and
- Was not convicted of a federal or state felony drug offense at the end of the tax year.
If a student was an undergraduate student during the first part of the tax year and became a graduate student that same year, can the student qualify for the AOTC?
Yes, the student can claim the AOTC for qualified educational expenses paid during the entire tax year, if the student:
- Has not completed the first four years of post-secondary (college) education as of the beginning of the tax year, and
- Has not claimed the Hope scholarship credit and/or the AOTC for more than four years.
I’m just beginning college this year. Can I claim the AOTC for all four years I pay tuition?
Yes, if you remain an eligible student, the AOTC is available for qualifying expenses paid during each tax year up to four tax years (at least through December 31, 2017).
How do I calculate AOTC?
You receive a tax credit based on 100 percent of the first $2,000 of qualifying expenses, plus 25 percent of the next $2,000, paid during the tax year.
Is there an income limit for AOTC?
Yes. To claim the full credit, your MAGI, modified adjusted gross income (See below for MAGI definition) must be $80,000 or less ($160,000 or less for married filing jointly). If your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly), you receive a reduced amount of the credit. If your MAGI is over $90,000 ($180,000 for joint filers), you cannot claim the credit.
What is “modified adjusted gross income” for the purpose of the AOTC?
For most filers, it is the amount of your AGI, adjusted gross income, from your tax return. If you file Form 1040A, it is line 22. If you file Form 1040, you add the following back to the amount on line 38:
- Foreign earned income exclusion
- Foreign housing exclusion
- Foreign housing deduction
- Exclusion of income by bona fide residents of American Samoa or Puerto Rico.
How do I claim an education tax credit?
Can I claim the tuition and fees tax deduction and the AOTC?
No, you cannot claim the tuition and fees tax deduction in the same tax year you claim either the AOTC or the Lifetime Learning credit. You must choose between taking an education tax credit or taking the deduction for tuition and fees. Also, you can’t claim the tuition and fees tax deduction if anyone else claims an education credit for you in the same tax year. Although the credit usually results in a greater tax savings, calculate both the tax credit and the deduction on the tax return to see which is better. Most tax software automatically compares the tax result for you. See Education Benefits, No Double Benefits allowed for more information. Note that the Tuition and Fees deduction expired December 31, 2013. You can claim it on your 2013 tax return but not for tax years after that.
My dependent child attended college half time in 2013 for a semester and will attend full time starting 2014. She expects to graduate from college in 2017. Can I skip taking the credit for 2013 because her expenses are low and claim the credit for 2014, 2015, 2016 and 2017?
Yes, you are not required to claim the credit for a particular year. If your child’s college does not consider your child to have completed the first four years of college at the beginning of 2017, you may take the credit in 2017.
I completed two years of college right after graduating from high school before there was the Hope or American Opportunity credits. I just returned to finish my degree on a part time basis, can I claim the AOTC and, for how many years?
You can claim AOTC, for any semester or other academic period if you take at least half the full-time course load for the first four years of college. If you take half the course load for at least one semester of each tax year and your college does not consider you to have completed the first four years of college as of the beginning of the tax year, you may qualify to take the AOTC for up to four tax years.
What is Form 1098-T, Tuition Statement, and how do I get it?
The educational institution is required to file a Form 1098-T, Tuition Statement, with the IRS and provide a copy to the student when there is a reportable transaction. A reportable transaction includes payments received, amounts billed or refunds made for tuition and related expenses.
The educational institution is not required to file and provide the Form 1098-T for the following:
- Courses taken for no academic credit, even if the student is enrolled in a degree program
- Courses taken by nonresident alien students, unless the student requests the institution to file Form 1098-T
- Students whose tuition and related expenses are entirely waived or paid with scholarships or grants
- Students whose tuition and related expenses are covered by a formal billing arrangement with the student’s employer or a government agency, such as the Department of Veterans Affairs or the Department of Defense
The student should contact the school if he or she hasn’t received the Form 1098-T.
Make sure the school completes boxes 8 and 9 of the Form 1098-T if applicable. Box 8 shows if the student was enrolled at least half-time and box 9 is checked if the student is enrolled as a graduate student.
How do I know if my school is an eligible educational institution?
An eligible educational institution is a school offering higher education beyond high school. It is any college, university, vocational school, or other post secondary educational institution eligible to participate in a student aid program run by the U.S. Department of Education.
This includes most accredited public, nonprofit and privately-owned–for-profit postsecondary institutions.
If you aren’t sure if your school is an eligible educational institution:
• ask your school if it is an eligible educational institution, or
• aee if your school is on the U.S. Federal Student Aid Code List.
TIP: A small number of schools, not on this list, may be eligible educational institutions. So, you may need to ask the school.
I received a letter from the IRS questioning my AOTC claim. What should I do?
If you receive a letter or are audited by the IRS, it may be because the IRS did not receive a Form 1098-T, Tuition Statement, verifying the student’s enrollment. Or, we need additional information to support the amounts of qualified expenses you reported on Form 8863. Review your Form 1098-T to make sure the student’s name and social security number are correct. If they do not match, contact the school to correct the information for future 1098-T reporting. If the student should have and did not receive the Form 1098-T, contact the school for a copy. Note: There are a few exceptions in which educational institutions are not required to furnish Form 1098-Ts. For details please see “What is Form 1098-T, Tuition Statement and how do I get it?”
If you claimed expenses that were not reported on the Form 1098-T in Box 1 as amounts paid or if your school reported the amount you were charged for qualified expenses in Box 2, please send us copies of paid receipts, cancelled checks or other documents as proof. See your letter for further instructions for what documents to send. If you do not have the letter, see Forms 886-H-AOC and 886-H-AOC-MAX for examples. Form 886-H-AOC is also available in Spanish.
Can students with an F-1 Visa claim the AOTC?
For most students present in the U.S. on an F-1 Student Visa, the answer is no. Generally speaking, the time spent by an alien individual studying in the U.S. on an F-1 Student Visa is not counted to determine whether he or she is a resident alien under the substantial presence test. But, if your parent or parents claim you as a dependent on their tax return, your parent may qualify for the credit. See Publication 519, U.S. Tax Guide for Aliens for more information.
What should I do if the student’s return was incorrectly prepared and filed by a professional tax preparer?
The student is legally responsible for what’s on his or her tax return, even if someone else prepares it. IRS urges you to choose a tax preparer wisely. For more information, read IRS’s Tips for Choosing a Tax Return Preparer.
If you need tax help call our office at: 877.778.1770