American Opportunity Credit

Peter VanderWoude, CPA, CGMA

April 1, 2017

Many high school seniors by the beginning of April have a good idea where they are going to college in the fall. As a parent, you and your child may now be studying college financing packages. Your next decision with your student is to decide where to send in the deposit to secure a place in this fall’s freshman class. Congratulations to your child!

The American Opportunity Credit can also help you afford to pay college tuition and related educational expenses. With the cost of college escalating in the late 1980s and 1990s, the federal government implemented the Hope Credit in 1998 to help people pay for college. This credit evolved to become the American Opportunity Credit in 2009. A tax credit offsets your income tax liability dollar for dollar.

Each student in your family can qualify for the American Opportunity Credit for up to four taxable years if it is for the first four years of post-secondary education. If a student receives their post-secondary education over a longer term, the fifth tax year and beyond (no limit) will qualify for the lower value Lifetime Learning Credit or Tuition and Fees deduction.

The American Opportunity Credit is taken by the person who can claim the student as a dependent on their income tax return. Another requirement is your student must attend college at least halftime, usually six credit hours, to qualify for the credit. In January, the college will publish a Form 1098-T (Tuition Statement) for that student that is filed with the IRS. As a parent, you will have to ask your child for this form to prepare your taxes if it is not sent to your home. It can also be accessed via the college’s online student center.

This tax credit can reach a maximum of $2,500 which is split into a $1,500 non-refundable and $1,000 refundable portion on one’s income tax return. The first $2,000 of this education credit is generated dollar for dollar by the first $2,000 spent on tuition (room and board does not qualify) that is not offset by scholarships and grants. The next $2,000 of tuition is matched at a 25 percent rate for an additional $500 credit. New York State also grants up to a $400 education credit.

To demonstrate how the credit is determined, let’s say your child is going to Cornell University or Ithaca College and has received a desirable financing package but you and your student still have to pay more than $4,000 for tuition with loans and cash payments. You will max the credit out at $2,500. Another example, your  child is living at home and going halftime to Tompkins Cortland Community College for the fall semester of their freshman year. The Form 1098-T, received in January, lists $1,800 in tuition and zero for scholarships received. In this case your credit will be $1,800, covering the full cost of education for that fall semester.

Now that we have calculated the American Opportunity Credit for your student, can you receive the full benefit of this credit on your tax return? That depends on your tax picture. If you have a tax liability exceeding the credit, you will likely be able to take all of it. If you don’t, you will wipe out the tax liability that you do have and receive as a tax refund the refundable portion of the credit, which is 40 percent of the overall credit. Two or more students in college? You could receive up to $2,500 for each student in that tax year.

What if you, the parent, completed your Associate’s degree years ago and the Hope or Amercian Opportunity Credit was never taken on you? If getting your Bachelor’s degree is on your bucket list then you might consider going halftime to SUNY Cortland or SUNY Empire State College. You can take the American Opportunity Credit for yourself and make a major dent in paying for college for up to four tax years. Hey, it’s something to think about!

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