by Michael Lodge
Every tax season we have clients calling and asking questions about the American Opportunity Tax Credit. Let’s go over some of the questions and try and answer them.
Q1. Have there been any changes in the past few years to the tax credits for college expenses?
A. Yes. The American opportunity tax credit, which expanded and renamed the already-existing Hope scholarship credit, can be claimed in tax-years 2009 through 2017 for expenses paid for tuition, certain fees and course materials for higher education .
Q2. The Hope scholarship credit originally applied only to the first two years of college. Has that changed?
A. Yes. The American opportunity tax credit can be claimed for expenses for the first four years of post-secondary education.
Q3. How does the American opportunity tax credit differ from the Hope scholarship credit and Lifetime Learning credit?
A. Unlike the other education tax credits, the American opportunity tax credit includes expenses for course-related books, supplies and equipment that are not necessarily paid to the educational institution. It also differs from the Hope scholarship credit because it allows the credit to be claimed for four years of post-secondary education instead of two.
Q4. How much is the American opportunity tax credit worth?
A. It is a tax credit of up to $2,500 of the cost of tuition, fees and course materials paid during the taxable year. Also, 40% of the credit (up to $1,000) is refundable. This means you can get it even if you owe no tax.
Q5. What are qualified expenses for purposes of the education tax credits?
A. In general, qualified expenses for the education tax credits include tuition and required fees for the enrollment or attendance at an eligible post-secondary educational institution. To be creditable, the expenses paid during a taxable year must relate to: (1) an academic period that begins in the same taxable year; or (2) an academic period that begins in the first three months of the following taxable year. See Publication 970, Tax Benefits for Education.
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.
Q6. What additional education expenses qualify for the American opportunity tax credit?
A. For the American opportunity tax credit, qualified expenses have been expanded to include expenditures for course materials, as well as tuition and required fees. For this purpose, the term “course materials” means books, supplies and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance. Some or all of these expenses will be recorded on Form 1098-T, Tuition Statement. The student should receive a Form 1098-T from the educational institution that the student attended. If the student does not receive a Form 1098-T, the student should contact the educational institution and request the form.
Q7. Does an expenditure for a computer qualify for the American opportunity tax credit?
A. Whether an expenditure for a computer qualifies for the credit depends on the facts. An expenditure for a computer would qualify for the credit if the computer is needed as a condition of enrollment or attendance at the educational institution.
Q8. How is the American opportunity tax credit calculated?
A. Taxpayers will receive a tax credit based on 100 percent of the first $2,000, plus 25 percent of the next $2,000, paid during the taxable year for tuition, fees and course materials.
Q9. How will the American opportunity tax credit affect my income tax return?
A. You will be able to reduce your tax liability by one dollar for each dollar of credit for which you’re eligible. If the amount of the American opportunity tax credit for which you’re eligible exceeds your tax liability, the excess will be refunded to you up to the lesser of 40 percent of the credit or $1,000.
Q10. Who can claim the American opportunity tax credit?
A. Generally, a taxpayer whose modified adjusted gross income is $80,000 or less ($160,000 or less for joint filers) can claim the credit for the qualified expenses of an eligible student. The credit is reduced if a taxpayer’s modified adjusted gross income exceeds those amounts. A taxpayer whose modified adjusted gross income is greater than $90,000 ($180,000 for joint filers) cannot claim the credit.
Q11. What is “modified adjusted gross income” for the purpose of the American opportunity tax credit?
A. It is the taxpayer’s adjusted gross income increased by foreign income that was excluded, and by income excluded from sources in Puerto Rico or certain U.S. possessions.
Q12. Who is an eligible student for the American opportunity tax credit?
A. For the American opportunity tax credit, an eligible student is a student who: (1) is enrolled in a program leading toward a degree, certificate or other recognized post-secondary educational credential; (2) has not completed the first four years of post-secondary education as of the beginning of the taxable year; (3) for at least one academic period is carrying at least ½ of the normal full-time work load for the course of study the student is pursuing; and (4) has not been convicted of a felony drug offense.
Q13. If a student was an undergraduate during the first part of the taxable year and became a graduate student that same year, will the student qualify for the American opportunity tax credit?
A. If a student has not completed the first four years of post-secondary education as of the beginning of the taxable year, and has not claimed the Hope scholarship credit and/or the American opportunity tax credit for more than four taxable years, the student can claim the American opportunity tax credit for qualified expenses paid during the entire taxable year.
Q14. I’m just beginning college this year. Can I claim the American opportunity tax credit for all four years I pay tuition?
A. Generally, yes. Under current law, the credit will be available through tax-year 2017.
Q15. How does a taxpayer claim an education tax credit?
Q16. Can I claim the tuition and fees tax deduction in addition to claiming the American opportunity tax credit?
A. No. You cannot claim the tuition and fees tax deduction in the same taxable year that you claim the American opportunity tax credit or the Lifetime Learning credit. You must choose between taking an education tax credit or taking the deduction for tuition and fees. You also cannot claim the tuition and fees tax deduction if anyone else claims the American opportunity tax credit or the Lifetime Learning credit for you in the same taxable year. A tax deduction of up to $4,000 can be claimed for qualified tuition and fees paid. Although the credit will usually result in greater tax savings, taxpayers should calculate both the tax credit and the deduction on the tax return to see which is most beneficial. Often, tax software will automatically compare the tax result, from taking the education credit or taking the deduction, for you.
Q17. What is Form 1098-T, Tuition Statement, and who provides it?
A. Educational institutions are required to file a Form 1098-T, Tuition Statement, with the IRS and to provide a copy of the form to the student, for each enrolled student for whom there is a reportable transaction. A reportable transaction includes payments received, amounts billed or refunds made for tuition and related expenses. For the Form 1098-T to be accurately prepared, the educational institution must address boxes 8 and 9. Note that box 8 will be checked if the student was enrolled at least half-time, and box 9 will be checked if the student was enrolled as a graduate student. There are some exceptions where an educational institution is not required to file and provide the Form 1098-T. These exceptions include:
- Courses for which no academic credit is offered, even if the student is otherwise enrolled in a degree program.
- Nonresident alien students, unless the student requests the institution to file Form 1098-T.
- Students whose tuition and related expenses are waived entirely or paid entirely 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.
Q18. How do I know if my school is an eligible institution?
A. A student can check with the educational institution. However, this link from the Department of Education, http://ope.ed.gov/accreditation/, shows all accredited schools. If your school is found using this link, then it is an eligible institution and you can claim the American opportunity tax credit.
Q19. Can F-1 Visa students claim the AOTC?
A. For most alien individuals 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 would not count toward determining whether he or she was a resident alien under the substantial presence test for federal tax purposes. Thus, if you are an alien individual with an F-1 Student Visa, you are probably a nonresident alien. In general, if you are a nonresident alien for any part of the year, you do not qualify for the AOTC.
However, your parents may qualify for the credit even if you are a nonresident alien student if they claim you as a dependent on their tax return. If you are a U.S. resident filing Form 1040, and your parents do not claim you as a dependant, and you meet all of the other requirements for the credit, you may qualify for the credit.
Q20. What if the student’s return was incorrectly prepared and filed by a professional tax preparer?
A. The IRS urges you to choose a tax preparer wisely. You are legally responsible for what’s on your tax return, even if it is prepared by someone else. For more information, read IRS’ Tips for Choosing A Tax Return Preparer.
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