What is the American Opportunity Credit?

Have you ever wondered what the American Opportunity Credit is? Well, Opportunity Credit is let’s we are here to answer your questions. The American Opportunity Tax Credit (AOTC) is a tax break provided by the government to qualifying students enrolled in a postsecondary institution. The AOTC, which was established as part of President Barack Obama’s 2009 stimulus package, pays the first $2,500 in educational expenses for families in a specified income range.

The student must be seeking a recognized education credential or degree. Cannot have completed her first four years of higher education at the beginning of the tax year, and must be enrolled at least half-time for at least one academic period during that tax year to be eligible for the AOTC. The student must also not have been convicted of a felony drug offence. Each student is only allowed to claim the AOTC once each tax year.

If you are a single filer with a modified adjusted gross income of $80,000 or less, or married filing jointly with a modified adjusted gross income of $160,000 or less, you are eligible to claim the entire AOTC amount.

Qualified educational expenditures include tuition, fees, and course materials that are necessary for enrollment at the student’s institution. but do not include housing and board, medical expenses and insurance, or transportation. Even if the expenses are paid using a student loan, the AOTC can be claimed.

History of The American Opportunity Tax Credit

Well since we have talked about what is the American opportunity credit, let’s take a look at its history. The American Opportunity Tax Credit was included in the American Recovery and Reinvestment Act of 2009 as part of a section. It was developed as a means of providing financial aid to students when post-secondary education in the United States became increasingly pricey.

The Lifetime Learning Credit and the Hope Credit were the only post-secondary education tax credits available before the AOTC. The AOTC took the place of the Hope Credit, which helped to boost the total and per capita amount of tax credits given to students in the United States.

Eligibility Requirements

Since we know what is the American Opportunity Credit and its history let’s take a look at the eligibility requirements. The following is an example of a student who is eligible for the American Opportunity tax credit:

  • Has not finished his or her first four years of post-secondary education.
  • During the applicable tax year, enrolls in at least one academic semester.
  • Maintains at least a half-time enrollment in a degree or certificate program.
  • The student is not qualified for the tax credit if he or she has ever been a state or federal criminal due to a drug conviction.
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Qualifying Expenses

In other to fully understand what is the American opportunity credit we need to also look at the qualified expenses. You can use the credit as long as you pay tuition and fees to an accredited educational institution.

  • More than simply colleges and universities are eligible educational institutions; any post-secondary school that meets the qualifications to participate in the US Department of Education’s financial aid program is also eligible.
  • Qualifying expenses for the American Opportunity credit can include the following items as long as they are related to the program of study: books, supplies; Equipment
  • The credit does not cover the following expenses: room, board, transportation; Medical coverage is a must.

The IRS does not require you to deduct any amounts paid using borrowed cash, such as student loans or credit cards, from qualifying costs. Any money you get from, however, isn’t allowed to be included.

Other than gifts and inheritances, you may get tax-free scholarships or fellowships, federal Pell grants, tuition subsidies from an employer, school refunds, and other non-taxable help.

What are the limits For AOTC

  • Your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married couples filing jointly) to qualify for the full benefit.
  • If your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for couples filing jointly), the credit is reduced.
  • If your MAGI is over $90,000 ($180,000 for joint filers), you cannot claim the credit.

For the most part, MAGI is equal to the amount of AGI (adjusted gross income) reported on your tax return. The following sums are added to your AGI if you file Form 1040:

  • Exclusions for foreign earned income, foreign housing exclusions, and foreign housing deductions
  • Income tax exemption for bona fide inhabitants of American Samoa and Puerto Rico.
  • Worksheets are included in the Publication 970 PDF if you need to alter your AGI to find your MAGI.

Calculating the American opportunities Tax Credit

Since we have a good idea of what is the American opportunity credit let’s look at how it is calculated. Each tax year, only one American Opportunity Tax Credit is offered per qualified student.

  • If you have two eligible students as dependents, you can claim a different educational tax benefit for one of them if you claim the American Opportunity Credit for the other. You do not have to claim the same credit for both.
  • For each student, you can only claim one tax advantage each year.
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The credit is calculated as follows:

  • 100% of the first $2,000 in eligible expenses, plus 25% of the remaining expenses over $2,000.
  • The maximum credit per student per year is $2,500.

American Opportunity Credit vs Lifetime learning Credit

Students in the United States can take advantage of two major tax credits: the American Opportunity Credit and the Lifetime Learning Credit (LLC). Unlike the AOTC, which is only available to students pursuing a degree, the LLC is open to anyone pursuing any post-secondary education, including graduate school and undergraduate studies, including those lasting more than four years.

Besides, students can recover up to 20% of their $10,000 in educational expenditures. However, unlike AOTC, when a taxpayer’s tax obligation is lowered to zero, he or she will not receive a tax refund.

Conclusion

We have looked in-depth at what is the American opportunity credit, its history, requirements, and more. On a personal tax return, the student or another taxpayer who names the student as a dependent may claim the credit. To claim the credit, you must fill out the applicable sections of IRS Form 8863 and attach them to your income tax return.

FAQ

What is the maximum amount a taxpayer can claim?


A taxpayer may claim a credit of up to $2,500 for each student’s qualified tuition and related expenditures paid during the taxable year for the American Opportunity Tax Credit.

The credit amount for the Lifetime Learning Credit is up to $2,000 per return for eligible tuition and related costs.

This is my first year at college. Is it possible to claim the American Opportunity Tax Credit (AOTC) for each of the four years I pay for college?


If you have not claimed the AOTC or the previous Hope credit for more than four tax years, you can claim the tax credit for all four years of higher education. If you do not qualify for the AOTC, you may be eligible for the Lifetime Learning Tax Credit for tuition and fees paid in 2020.

What are the requirements for a student to be eligible?


Each student in the taxpayer’s family (i.e., the taxpayer, the taxpayer’s spouse, or an eligible dependent) may claim credit for qualified tuition and related expenditures.

A student who (1) is enrolled in 6 credits or more, (2) is in one of the first four years of postsecondary education; (3) is enrolled in a program leading to a degree or certificate, can claim the American Opportunity Tax Credit. and (4) has never been convicted of a criminal offence involving the possession or distribution of a controlled substance, whether federal or state.

Students do not need to be enrolled in 6 credits or more for the Lifetime Learning Credit, nor do they need to be in their first two years of post-secondary study. Non-resident aliens are typically ineligible for both tax credits.

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Who is eligible for the tax credit?


An individual may claim credit for his or her qualified tuition and related expenditures. As well as those of his or her spouse and any eligible dependents (including children) for whom the dependency exemption is claimed.

In general, a parent may claim the dependency exemption for his or her unmarried kid if the youngster is under the age of 19. Or the youngster is a full-time student under the age of 24 and the parent provides more than half of the child’s support for the taxable year.

Is it necessary for you to know my Social Security number?


Yes, to follow Internal Revenue Service Treasury Regulation 1.6050S-1(e)(4) and Section 6109 of the Internal Revenue Code, the College must ask for your Social Security Number (SSN). Or Individual Taxpayer Identification Number (ITIN) to provide you with an annual statement (IRS form 1098-T) of tuition and fees that may qualify for the American Opportunity tax credit or the Lifetime Learning tax credit.

On the other hand: You will not be refused admission to the college if you do not submit your SSN or ITIN; nevertheless, your 1098-T will be erroneous. For further information on whether you or your tax advisor may be subject to civil fines for failing to give an accurate SSN or ITIN, consult Internal Revenue Code Sections 6109 and 6723. The college shall secure your SSN/ITIN against unlawful use and/or disclosure per state law (RCW 28B.10.042) and federal law (Family Educational Rights and Privacy Act).

References

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