What Is It?
The American Opportunity credit (formerly the Hope credit) is an education tax credit that covers a maximum of $2,500 of a student's qualified tuition and related expenses for each of the first four years of a student's post-secondary education in a degree or certificate program. The student must be attending the educational institution on at least a half-time basis. Graduate students are ineligible for the credit.
The credit is calculated as 100 percent of the first $2,000 of a student's qualified tuition and related expenses for the year, plus 25 percent of the next $2,000 of such expenses. Up to 40 percent an individual's allowable credit is refundable (meaning that it can be more than the individual's tax liability).
Tip: Because a credit is a dollar-for-dollar reduction against taxes owed, it is more valuable than a tax deduction of the same amount.
- For at least one academic period beginning during the calendar year, the student must be enrolled in a degree or certificate program on at least a half-time basis.
- The student must be claimed as a dependent on your federal income tax return.
- The expenses must be incurred at an "eligible educational institution" (generally a post-secondary institution that offers a degree program and is eligible to participate in federal student aid programs).
- The credit covers only qualified tuition and related expenses (no room and board).
- In 2020, the full credit is limited to single filers with a modified adjusted gross income (MAGI) below $80,000 and joint filers with a MAGI below $160,000. A partial credit is available for single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000.
- If you are married, you must file a joint return.
- The student cannot have a felony drug conviction.
How Does It Work?
Two general rules govern the operation of the American Opportunity tax credit:
- The credit can be claimed for the first four years of the student's post-secondary education.
- The credit cannot be taken in the same year as the Lifetime Learning credit on behalf of the same student (for an example of the interaction between the two credits, see Questions & Answers)
Provides Maximum $2,500 Tax Credit per Student
If you qualify, the American Opportunity credit allows you to take a deduction of up to $2,500 per year for the first four years of your child's college education.
Can Be Taken For More Than One Student in Same Year, Provided Each Student Qualifies Independently
The credit is calculated per student, not per tax return. So, for parents who have two children in college at the same time, they can calculate the credit for each child and then claim the total amount on their tax return.
Example: Mom and Dad have two children in college in a given year--one is a freshman and the other a sophomore. Assuming each child's tuition expenses qualify for a $2,500 credit, Mom and Dad can claim a total $5,000 American Opportunity credit on their joint tax return for that year.
Available In Same Year as Tax-Free Distribution from 529 Plan or Coverdell Education Savings Account
You can claim the credit in the same year that you receive a tax-free distribution from your 529 plan or Coverdell ESA. The only catch is that the education expenses you intend to cover with your 529 plan or Coverdell ESA funds cannot be the same expenses used to qualify for the credit.
Ability to Take Credit Depends on Income
The full credit is limited to single filers with a modified adjusted gross income (MAGI) below $80,000 and joint filers with a MAGI below $160,000. A partial credit is available for single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000. For information on how to calculate the credit if you’re MAGI falls within these ranges, see Questions & Answers.
Cannot Be Used For Room-And-Board Expenses
The American Opportunity credit covers only qualified tuition and related expenses.
Cannot Be Taken In Same Year as Lifetime Learning Credit for the Same Student
Parents can take either the American Opportunity credit or the Lifetime Learning credit for a student in a given year, but not both. For a discussion of which credit to choose when both apply to a particular student, see Questions & Answers.
How to Do It
If you pay qualified tuition and related expenses to an eligible educational institution, the institution generally must issue you a Form 1098-T by February 1 of the following year. You then have to file a completed Form 8863 with your federal income tax return to claim the credit if you qualify.
Questions & Answers
Can You Claim The Credit For College Expenses Your Child Has Paid?
Yes, as long as you claim your child as a dependent on your tax return. If you do, any qualified tuition and related expenses your child pays are considered paid by you for purposes of the credit.
Can A Student Claim The Credit on His or Her Tax Return?
It depends. If the student is claimed as a dependent by his or her parents, then the student cannot take the credit for that tax year on his or her own tax return. However, if the student is not claimed as a dependent on anyone else's tax return, the student can claim the credit on his or her own tax return.
How Do You Calculate the Credit If You’re Modified Adjusted Gross Income Falls within the Phaseout Range?
The American Opportunity credit is phased out for single filers with a MAGI between $80,000 and $90,000 and joint filers with a MAGI between $160,000 and $180,000, depending on how far the taxpayer is into the phaseout range.
Example: Alex and Elizabeth file a joint tax return and have a college-bound son, Ben, who will start college in 2020. Assume Alex and Elizabeth's combined MAGI is $164,000; thus, they'll be $4,000 into the $20,000 phaseout range for joint filers ($164,000 minus $160,000). To calculate the available credit, multiply the maximum credit available ($2,500) by the fraction of the phaseout range remaining ($16,000/$20,000 =.8). The result is that Alex and Elizabeth can take a credit of $2,000 in 2020.
How Do You Decide Whether To Take The American Opportunity Credit Or The Lifetime Learning Credit for Your Child's College Expenses?
Unfortunately, the American Opportunity credit and the Lifetime Learning credit cannot both be taken in the same year for the same student, so you'll need to pick one.
The Lifetime Learning credit is a maximum $2,000 credit allowed per year for college expenses, while the American Opportunity credit is a maximum $2,500 credit per student per year, so all other things beings equal, the American Opportunity credit is the better deal. The American Opportunity credit has higher income limits to qualify and can be taken for multiple students in the same year, provided each student qualifies independently (by contrast, the Lifetime Learning credit is limited to $2,000 per tax return, not per student). But if a student is enrolled less than half-time or has already gone through four years of college, the Lifetime Learning credit is the only option because the American Opportunity credit is limited to students attending their first four years of college on at least a half-time basis.
Does The Credit Affect The Alternative Minimum Tax That a Taxpayer May Owe?
The American Opportunity credit can be claimed against alternative minimum tax liability.
Are There Circumstances Where Your Qualified Tuition And Related Expenses Must Be Reduced For Purposes of The Credit?
Yes. Because the amount of qualified tuition and related expenses for the American Opportunity credit must be actual out-of-pocket costs, any such expenses for the tax year must be reduced by amounts paid for the benefit of the student, such as employer-sponsored educational assistance, any income earned by U.S. savings bonds used to pay college expenses, distributions from a Coverdell ESA, and any scholarships the student obtains.
Also, there are instances when all or part of the credit you have taken in a given year may need to be repaid pursuant to recapture rules. According to the IRS, if, after you file the current year's tax return, you receive tax-free educational assistance for, or a refund of, an educational expense that you used to figure the American Opportunity credit on your tax return, you must recalculate your credit as if the assistance or refund had been received in the current year. For more information on how and where to report the repayment (recapture), see the instructions for your federal tax forms.
Is The Credit Available Only In The Tax Year The Educational Expenses Are Paid?
Yes, the credit is available in the tax year the expenses are paid, as long as the education begins during that year or in the first three months of the following year.
Example: In December of Year 1, Bob pays qualified tuition and related expenses to College Z for the second semester of his freshman year, which begins on January 15 of Year 2. Bob's parents can claim the American Opportunity credit on their Year 1 tax return for the December Year 1 payment, because the education that is the subject of the payment begins during the first three months of the following year. If Bob had paid the expenses in January of Year 2 instead of December of Year 1, his parents would take the American Opportunity credit in Year 2.
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