Health & Fitness
American Opportunity Credit Helps Pay for First Four Years of College
Most parents and students can use a federal education credit to offset part of the cost of college under the American Opportunity Credit. This article from Scarsdale CPA Paul Herman will show you how this can be done.
Scarsdale CPA Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions!
More parents and students can use a federal education credit to offset part of the cost of college under the American Opportunity Credit. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.In many cases, the American Opportunity Credit offers greater tax savings than existing education tax breaks. Here are some of its key features:
- Tuition, related fees and required course materials, such as books, generally qualify. In the past, books usually were not eligible for education-related credits and deductions.
- The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
- The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less ($160,000 or less for filers of a joint return). The credit is reduced or eliminated for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.
- Forty percent of the American Opportunity Credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed, or may be taxed, at the parent’s rate, commonly referred to as the kiddie tax. See IRS Publication 929, Tax Rules for Children and Dependents, for details.