Today, the day you’re reading this, higher education has never been more expensive. The cost of attending a college or university has been growing at a rapid pace in the past decade or two, forcing parents and students alike to look for ways to bring down the price tag on a diploma.
What if I told you there exists a tax credit — one not enough people take advantage of — that could reduce your higher education costs by up to $2,500 per year? What if I told you that, in 2014, this tax credit saved families who claimed it nearly $18.2 billion? You’re not trapped in a fever dream — such a tax credit exists. It’s called the American Opportunity Credit, and it’s one of three tax breaks available to families and students who are paying for a higher education in the United States. The American Opportunity Credit was authorized in the American Recovery and Reinvestment Act.
Let’s learn more about the credit, who qualifies for it, and how you can claim it.
American Opportunity Credit Eligibility Requirements
Eligibility for the American Opportunity Tax Credit is fairly broad as far as students (and families of students) go. The person the credit is being claimed on behalf of cannot be a dependent on someone else’s taxes. The student also can’t be past his or her fourth year of college at the start of the tax year (sorry, Van Wilder). The credit cannot be used more than four years total, which means you won’t be getting any tax breaks for your graduate school education. And hopefully you’ve stayed out of trouble — you cannot claim the credit if you’ve ever been charged with a felony drug conviction.
If you can clear all of these requirements, you could be eligible! But don’t celebrate just yet — there are some income requirements, too.
The amount of money a student — or the parents of a student — brings in can also affect eligibility for the American Opportunity Credit. Income requirements are based off of AGI, which stands for adjusted gross income. If the student or parents make under $80,000 filing single or $160,000 filing jointly, the credit can be claimed. From $80,000 single ($160,000 jointly) to under $90,000 single ($180,000 jointly), the AOC can be claimed at a reduced amount. Incomes over $90,000 single ($180,000 jointly) are ineligible to claim the American Opportunity Credit.
Now that you’ve got those pesky requirements out of the way and you’ve (hopefully) confirmed your eligibility, let’s take a look at the expenses you can claim using the credit.
We talked a bit in the beginning about the outrageous leap college costs have taken since your mom and dad went to school. Tuition has increased significantly, sure, but there are other costs, too — the kinds you might not necessarily think about when you’re shopping around for the right school.
Fortunately, many of these costs can be claimed under the American Opportunity Credit. On top of tuition, your college textbooks (which somehow rack up hundreds of dollars in cost per semester) can be applied to the credit. You can also claim any fees charged by your college in addition to your tuition expenses, such as student union fees, technology fees, and basically any other fee your college or university bills you for being enrolled.
Things you can’t claim with the AOC? Your housing costs — even if you live on campus — is one example. You also cannot claim any medical expenses you incur, living expenses (such as your groceries), or any transportation costs. Even if taking the bus to your campus is a necessity for getting your higher education, your bus pass doesn’t get you any reimbursement under the American Opportunity Credit.
Now here’s a fun side note: the AOC is what’s called a “refundable” tax credit. This means that, if you’re a student who doesn’t owe a whole lot of (or any) taxes already, you could be eligible to receive up to 40% of what’s remaining of the AOC credit. That’s right — this tax credit could actually pay you back for attending school.
Claiming the Credit
Now comes the fun part — how do you claim the American Opportunity Credit? This part actually isn’t so bad!
Hopefully you’ve kept your receipts over the tax year. You’ll want to save these in the unfortunate event you’re audited by the IRS. The good news is, your college or university will send you an IRS Form 1098-T when tax season rolls around, which includes your tuition-and-fee-related costs.
Next, you’ll want to complete IRS Form 8863. This helps you determine how much you’re able to claim for that given tax year. Keep in mind — the credit works against 100% of your first $2,000 in expenses, and 25% against the next $2,000. If you have over $4,000 in expenses, you’ll likely get the entire $2,500 in credit. Just don’t be surprised if your expenses come in under $4,000 and you don’t get to claim the entire credit amount.
Your federal tax return is your last stop on this journey. Lines 50 and 68, located on the last page of your federal return, both ask for information from your Form 8863. Fill those in, send your return away for the year, and you’re done!
Other Tax Credit Options
There are two other tax breaks that are available for higher education. The Lifetime Learning Credit can provide up to a $2,000 tax credit, and the Tuition & Fees Deduction program can provide up to $4,000.
Maybe you qualify for the American Opportunity Credit, and maybe you don’t. Go through the requirements laid out above, go through your finances, and make the determination. What do you have to lose? You could save up to $2,500 per year on your education costs, and even put some extra money back in your pocket if you don’t owe a lot of taxes. And for students, a bit of extra money is never a bad thing, right?