(For my post on the lifetime learning credit see here.)
The American opportunity credit is one of the federal tax credits offered for educational expenses. It bears a reminder that tax credits diminish the total tax you pay on a one-to-one basis, so, for example, a $500 tax credit is literally $500 extra dollars in your pocket. My point is, you want tax credits.
In the most rudimentary explanation, the American opportunity credit works like this: you (or someone else on your behalf) spend money on tuition for college, and then you get a statement called a Form 1098-T, most likely at the beginning of the following year, expressing the amount of tuition paid. After receiving your Form 1098-T, you account for that tuition on your tax return, which renders a tax credit, decreasing your total tax liability.
Getting into the specifics, the maximum tax advantage that a student may derive from the American opportunity credit is $2,500, of which up to $1,000, or 40%, is refundable, meaning that even if your tax incidence is nothing, you receive the remainder of any credit in the form of a tax refund. It should be noted that you cannot take this credit if your income surpasses $90,000 if your filing status is single, head of household, or qualifying widow(er) and $180,000 if married filing jointly.
Furthermore, the American opportunity credit is only available during the first four years after the student finishes high school, which almost always means the first four years of undergraduate education. You must also be pursuing a degree and enrolled as at least a half-time student for a minimum of one academic period (generally a semester) during the subject tax year.
Additionally, “tuition” as pertains to the American opportunity credit means literal tuition, along with required enrollment fees and course materials that are required, meaning not discretionary, by the professors that teach those classes. Moreover, if you receive a scholarship, you may only take the credit for the amount of tuition you (or someone on your behalf) actually had to pay out of pocket. For example, if your total tuition bill was $10,000 for an academic year, but you received a $5,000 scholarship, you may only claim the American opportunity credit for $5,000 (i.e. $10,000 total tuition minus $5,000 scholarship).
One final substantive note on the requirements of the American opportunity credit – you may not take the credit if you were convicted of felony drug possession or distribution. I guess the government wants to discourage that type of behavior by taking away your ability to claim the credit.
To account for your tuition paid and therefore claim the credit, use Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits). Finally, if you’d like more information on the tax benefits of education please consult IRS Publication 970.
If you have questions about the American opportunity credit, or any tax issue in general, please call Dino Tax Co at (713) 397-4678 or send us an email at firstname.lastname@example.org. We’re always happy to discuss your problem initially free of charge. Also, consider liking us Facebook: https://www.facebook.com/dinotaxco