College is quite an investment, especially for families with multiple children. Saving up for higher education can be a challenge. There always seems to be one more fee to pay, another textbook to purchase, and so on…
Luckily, there is some help available. If you are a parent with one or more children enrolled in a college or university, ask your tax preparer about the American Opportunity Tax Credit. With this, you can save up to $2,500 a year per child enrolled in college.
What is the American Opportunity Tax Credit?
The American Opportunity Tax Credit or AOTC is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. There are some pre-requisites and qualifications that must be met to enjoy the benefits. If you qualify for this tax credit, you can save up to $2,500 per child per year.
Additionally, if the tax credit brings the amount of tax you owe to zero, you may be able to receive up to 40% or $1,000 of this money back as a refund. The amount of the credit is 100% of the first $2,000 of education expenses for each eligible student. After that, it is 25% of the next $2,000 you may pay.
In order to be eligible to receive this tax credit, your child must meet the following criteria:
- In pursuit of a degree or other recognized educational credential
- Enrolled half time for at least one academic period (a semester, a trimester, quarter, or any other time in which school is in session)
- Not have finished the first four years at the beginning of the tax year
- Hasn’t claimed the AOTC or Hope credit for more than four tax years
- Have no felony drug convictions at the end of the tax year
Checking for Eligibility
The IRS encourages all parents and college-age children to check for themselves whether or not they are eligible for such a tax credit. In order to claim the credit, the law requires a taxpayer or their dependent to receive a Form 1098-T as well as a Form 1098-T Tuition Statement. The tuition statement will come from the school, and you should receive this statement before or by January 31st. This form will help you figure the amount of your tax credit.
Before applying for the American Opportunity Tax Credit, here are some things you must do:
- Check your income limits, as this will make a difference. Those who earn more than $90,000 ($180,000 if filing jointly) may not be eligible for such a credit.
- Check your modified adjusted gross income or MAG.
- Make sure all forms are filled out and returned to the IRS by the specified deadlines
- Keep copies of all tax documentation for filing and review purposes until your child graduates.
To be sure you qualify for this tax credit before initiating the process, speak to your tax preparer or contact the IRS.