Using The American Opportunity Tax Credit to Help Pay for College (Rev 11/2020)
Jann Kostecke • September 21, 2017
The American Opportunity Tax Credit, or AOTC, is the best way you can recoup some of your investment in your family’s education. You can get up to $2500 in tax credits if you qualify.
Qualifying for the American Opportunity Tax Credit
Here are the qualifications:
- The credit is based on qualified education expenses which include tuition, fees that are required by the school, books, and equipment required for the classes taken.
- The qualified education expenses must be paid during the year, i.e. either with cash, a check or a credit card.
- The education is for you, your spouse or your dependents.
- The student is attending a qualified educational institution that is post-secondary and pre-graduate level, and is taking classes in order to obtain a degree.
- The credit can only be claimed for the first 4 years of education.
- The student must be considered full-time, which is defined as 50 percent or greater of a full course load.
- The student does not have a felony drug conviction.
- The claimer of the credit cannot be a dependent of another taxpayer or file taxes as Married Filing Separately
This credit is maximized when your modified adjusted gross income (MAGI) is $160,000 (MFJ) or less, and phases out between $160,001 and $180,000 or $80,000/$90,000 for single and head of household taxpayers.
You should receive a Form 1098-T each year from the school which summarizes some of this information for you, such as tuition paid, if the student is full-time, if the tuition was for graduate school, and how much was received in scholarships and grants.
What if the 1098-T Doesn’t Contain Enough Information?
Often the 1098-T does not include critical information that you need to make sure that you or your tax preparer can maximize the credit, such as
- The nature of scholarships and grants, i.e. are they taxable or not? You cannot claim tuition which was offset by nontaxable scholarships or grants.
- The details of tuition paid, such as who paid it, was it paid from 529 plan funds, etc.
- Types of fees charged and were they required or optional?
- Other student expenses, such as books, required materials and supplies, computers/laptops/tablets, etc.
Make sure you provide this additional information to your tax preparer, or if you are preparing the return, make sure you take into consideration all this information.
Guidance on Other Expenses
What about books and materials? Those expenses are usually not on the student’s account. You need to get these costs from the student, and the support for the costs, such as a receipt that shows the title and matches the syllabus for the course.
The cost of materials can also be used to claim the AOTC, such as laptops (if they are required), art supplies, camera supplies, etc. but make sure that you have documentation that indicates the materials are required.
Make sure this tax season to use not only your 1098-Ts but also the detail of each student’s account and support for books and materials expenses to make sure you maximize your American Opportunity Tax Credit.
Happy tax season! I know that many people are not enthusiastic in a positive way about tax season. Reasons vary, but usually it comes down to a couple of things: 1) you can’t find the information and forms you need and spend lots of time you don’t have to track them down, or 2) you’re afraid of how much money you may owe and you don’t want to confront it. How do you overcome this tendency to put off filing your taxes? Here are some recommendations: 1) Set up a file to collect all the documents you will need to prepare your taxes. This file is where all your W-2s, 1099s, charitable donations, health insurance 1095s, etc. will be stored. 2) Look through your mail every day from January through April 15th for envelopes marked “Important Tax Information” or something similar. Save all of those envelopes, as well as any thank-you letters you receive from charitable organizations, mileage records, home sale/purchase documents, etc. Put these into your tax file. (Continue to review your mail after April 15th, just in case!) 3) Much of your tax information comes to you electronically now, so be sure to scan your email for notifications from your pension provider, investment firm, or bank that tax documents are ready on-line. Go on-line and retrieve your tax documents as soon as possible and put them in your tax folder. If you have any trouble signing in or finding your information, it’s a lot easier to get help with this now than it will be the second week of April. 4) Make sure your business mileage documentation is complete. Your mileage log should include details of business mileage, including date, purpose of each trip, who you visited (if applicable), miles, and your odometer readings. If you use more than one vehicle for business, you should keep a mileage log for each vehicle. Fill in any blanks in your mileage log(s) now. It will be easier now than later. 5) It’s easy to summarize your business deductions if you have a dedicated business credit card and business bank account. Then, you can download a listing of all of your transactions for the year that is easy to summarize versus searching for receipts and transactions in your personal accounts. Remember that you also need to keep your receipts to support credit card charges and checks written for business expenses. 6) If you go to a professional tax preparer like me, you may receive an organizer. The organizer has a lot of questions and it includes information from last year that will help you understand what you need to bring to your tax appointment. Please fill out your organizer! It will save all of us some time. 7) If you are afraid of how much tax you owe this year, the worst thing you can do is put off finding out how much it will be. Get your tax return done early, even if you don’t want to pay until April 15th. The earlier you understand how much you owe, the better you can plan to pay it, and the sooner we can plan for a better 2021 tax season.
Since the federal Tax Cuts and Jobs Act went into effect in 2018, many people stopped keeping track of their deductions. The TCJA doubled the federal standard deduction while limiting or eliminating the deductions for state and local taxes and miscellaneous expenses. Taxpayers often were better off taking the standard deduction, because their itemized deductions were lower. That is true for many taxpayers if you only consider their federal income taxes, but how about Wisconsin income taxes? Wisconsin did not change how income taxes are calculated with the new federal laws. Wisconsin has a standard deduction that decreases as Wisconsin income increases. You completely phase out of the Wisconsin standard deduction at $124,279 in income if you are married, and at $105,500 if you are single or head-of-household. If you are partially or fully phased out of the Wisconsin standard deduction, you can benefit from the Wisconsin itemized deduction credit. This credit is 5% of the total of medical and dental expenses (except health insurance), mortgage interest, and charitable contributions, including noncash donations to Goodwill, etc. Most people have mortgage interest and contributions they can claim for this credit but not medical expenses, which have to be reduced by 7.5% of your income as they are on the federal return. If you pay for your own health insurance premiums or long-term care insurance premiums directly (not through an employer) you can deduct most or all of those costs on your Wisconsin return even if you can’t on your federal return. This includes Medicare premiums, COBRA payments, and dental insurance. The Wisconsin school tax credit can be claimed based on Wisconsin property taxes or rent and lowers your taxes up to $300. Don’t miss out on Wisconsin tax savings! Keep track of your deductions this year and make sure you get credit for them on your Wisconsin tax return.
The IRS uses a nine factor test to help determine if you are a hobby or business. If the answer is "hobby," the Hobby Loss Rule is followed.
On exactly which types of income must I pay taxes? Find the answer to five relatively common instances of income and any caveats that must be satisfied.
Ask all of the right questions when shopping for a new tax preparer. Are they certified? Reputable? Trustworthy and capable? Find out for yourself.
Understanding your tax liability: The rules plus three handy tips to help you plan ahead and avoid federal tax underpayment penalties.
Curious about your car deductions? Here are six guidelines on taking mileage and depreciation that you need to know.