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College Students Reap Rewards of Tax Credit

College costs tax credits piggy bankNearly 10 million taxpayers have claimed the American Opportunity Tax Credit saving an average of $2,277 per family according to new IRS statistics.  To claim this popular tax credit, the taxpayer, their spouse or their dependent must have been a student who was enrolled at least half time for one academic period. The credit is available for four years of post-secondary education and can be worth up to $2,500 per eligible student.

AOTC is a tax credit that helps pay a taxpayer back for qualified education expenses for the first four years of higher education.  While $2,500 may seem like a drop in the bucket when considering the high price of a college education, taxpayers with college expenses find this tax credit is a big help.  Also, another bonus that is unusual for tax credits, if the credit brings the amount of overall income taxes owed to zero, 40% (up to $1,000) of any remaining amount of the credit may be refunded to the taxpayer.

Families with multiple qualifying students have the right to claim up to the full AOTC tax credit amount for each student.  Newly released data show roughly 775,000 taxpayers had two children that qualified for the credit in their household, and more than 60,000 families who qualified for the tax credit had three children in college.

Students and families who want to apply, are required to have a Form 1098-T Tuition Statement from the school they attend. Then the taxpayer would fill out a Form 8863 to request the education credit and file it with their tax return.

An qualifying academic period can be a semester, quarter, trimester or summer school session which is determined by the school.  For higher education schools that do not use clock or credit hours nor academic terms, the student’s required payment period may be treated as an academic period.

Warning: make certain when you claim this tax credit that you are qualified as well as understand the guidelines and the need for accuracy.  Keep copies of your documentation.  If you are audited and the IRS finds that the AOTC claim is incorrect or you don’t have proper documentation, you may have to pay back not only the amount of the tax credit you received, but also interest and a possible fraud penalty. You may also be banned from claiming the credit again for two to ten years.

To be eligible for AOTC, the student must:

  • be pursuing a degree or another recognized education credential,
  • be enrolled at least half time for at least one academic period beginning in the tax year,
  • not have finished the first four years of higher education at the beginning of the tax year,
  • not have claimed the AOTC (or the former Hope credit) for more than four tax years, and
  • not have a felony drug conviction at the end of the tax year (this was added as part of the national effort to cut drug abuse).

There are income limits based on a taxpayer’s modified adjusted gross income (MAGI) which must be no more than $80,000 (or $160,000 for married filing jointly).  You cannot claim the credit if your MAGI is over $90,000 (or $180,000 for joint filers).

Many students complete their higher education with degrees that cost tens of thousands of dollars and have major student loan debt. This kind of tax credit is bringing some relief to millions of Americans as they seek more ways to finance their or their dependent’s college education.

If you have any questions or need more information about the AOTC, please contact one of our tax preparation specialists at McRuer CPAs online or by calling 816.7431.7882.


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