Navigating student loan repayment can be overwhelming, but there are valuable deductions available to help borrowers ease their financial burden. One such deduction is the American Opportunity Tax Credit.
In this blog post, we’ll delve into what this credit is, who can benefit from it, and address some frequently asked questions.
Table of Contents
Who is this article for?
Any individual who is in their first four years of university paying for tuition or other qualified expenses or knows anyone who could benefit from this information.
Note: The benefit phases out at a MAGI of $90,000.
What is a Tax Credit?
Each year the government determines how much in taxes you owe based on your income also known as the money you made. Generally, your employer withholds some of your taxes so come April when you file taxes you can confirm with the government if you paid enough or underpaid for the previous year.
When you underpay taxes, this means for a given year you did not pay the expected amount of taxes for your income bracket.
Let’s take the example below if you live in Maryland with a salary of $50,000 USD there is an expectation you will pay $4,241 throughout the year.
If you underpay and come tax season owe $1,000. A tax credit allows you to subtract that from any money you would owe. In this example, a $600 tax credit would mean I only need to now pay $400 to the government.
What is the American Opportunity Tax Credit?
The American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.
The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student.
(Source: IRS)
Who is Eligible for the Credit
To be eligible for AOTC, the student must:
- Be pursuing a degree or other 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
- Not have a felony drug conviction at the end of the tax year
Who is Ideal for the American Opportunity Tax Credit?
- Single Fliers making under $90,000 and married filing jointly couples making under $180,000
- Someone who is a 1st time university student paying for university themselves or for parents with students in college.
Real-Life Example
Let’s say Vishal is currently a student and makes $40,000 between his part-time job and being a student.
He underpaid in taxes and owes $1,000. However, let’s say he paid $10,000 in tuition this year. He is eligible to take advantage of $2,000 (20% of 10,000) in tax credits towards his tax bill. Since it’s a refundable tax credit he’ll be able to not only not pay $1,000 in taxes, but he’ll also receive an extra $1,000 back as a refund.
Frequently Asked Questions (FAQ)
- Q: Can I claim the credit if I’m still in school?
- A: Yes, as long as you meet the eligibility criteria and have paid interest on qualifying student loans.
Wrap Up
The American Opportunity Tax Credit is a valuable tax benefit that can help students save money while pursuing their education. By understanding the eligibility criteria, addressing common questions, and exploring real-life examples, students can take the first steps toward maximizing their savings and easing their financial burden. It’s essential to consult with a tax professional or financial advisor for personalized advice.