- The Hope Scholarship Credit for qualified higher education expenses was replaced by the American Opportunity Tax Credit, which now provides up to $2,500 in reduction of income taxes .
- The AOTC now covers four years of post-secondary expenses per eligible student, instead of just two years offered by the Hope Credit.
- For a student who’s already exceeded attending four years of college, or who is taking continuing education courses, consider the Lifetime Learning Credit instead.
Rising college costs, tuition and fees. Required books, materials and even equipment. All these educational expenses start adding up. According to the National Center for Education Statistics, college expenses at public institutions rose 31% between school years 2006-2007 and 2016-2017. Prices for undergraduate tuition, fees, room, and board at public institutions at private nonprofit institutions rose 24%. Considering that these numbers are already adjusted for inflation, the double-digit increase in costs of attending a college or university can easily discourage parents or students with already stretched budgets.
Yet, the U.S. government extends hope and assistance in the form of tax credits that reduce the income tax liability on a parent or student’s tax return. Once known as the Hope Credit (or the Hope Scholarship Credit), the American Opportunity Tax Credit offers up to $2,500 of credit per student. As a dollar-for-dollar credit on income taxes owed, plus the ability to get a refund if the credit brings the taxes you owe to zero, the AOTC offers much needed financial assistance indeed.
What is the American Opportunity Tax Credit (formerly known as “Hope Credit”)?
In 2009, the U.S. Congress authorized the American Opportunity Tax Credit which expanded the Hope Credit by making this education tax credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. The AOTC also added required course materials to the list of qualifying expenses and expanded the credit to be claimed for four post-secondary education years instead of two.
The AOTC is worth up to $2,500 per eligible student on one tax return, and reduces income taxes owed at the end of the tax year. The amount of the credit is 100% of the first $2,000 of qualified education expenses (such as tuition paid to an educational institution) you paid for each eligible student attending his or her first four years of college at least half-time. You also get an additional 25% of the next $2,000 of qualified education expenses you paid for that student. That means you get $2,000 plus $500, respectively, for a total credit of $2,500 per student on your taxes owed.
Note that the AOTC is not a “tax deduction”. A tax deduction is generally a qualified expense that is deducted to arrive at your income that eventually gets taxed based on marginal tax rates. A tax credit is more valuable than a tax deduction, because the credit reduces your income tax liability dollar-for-dollar.
To claim the AOTC, you must complete Form 8863 with your tax return. One significant advantage of this Credit over the previous Hope Credit terms is that the IRS will issue a refund, up to 40% of your remaining credit, if your taxes owed drops to zero because of the AOTC.
Requirements to Claim Education Tax Credit
The full American Opportunity Tax Credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is reduced (“phased out”) for taxpayers with incomes above these levels. These income limits are higher than what was offered by the Hope Credit.
Who doesn’t qualify for this education tax credit? Taxpayers whose income exceeds $90,000 for individuals or $180,000 for married couples, and couples who are married but file taxes separately do not qualify. If the student is claimed as a dependent on another person’s tax return may not be claimed again, e.g., a student whose parents are separated may only be claimed as a dependent for the AOTC by one parent.
The IRS has tight requirements for students claimed for the AOTC, and defines an “eligible student” as a student who:
- Is enrolled in a program leading toward a degree, certificate or other recognized post-secondary (after high school) educational credential;
- Has not completed the first four years of post-secondary education as of the beginning of the taxable year;
- Carries at least half-time of the normal full-time attendance work load for the course of study the student is pursuing; and
- Has not been convicted of a felony drug offense.
If you find that you or your student is ineligible because of these strict requirements, there may be an alternative benefit for you with the Lifetime Learning Credit. Read on for guidance on which one might be best for you, and how you might be able to take advantage of both.
What are Qualified Education Expenses?
Once limited to tuition only, the American Opportunity Tax Credit expanded the expenses allowable by the Hope Credit to include course materials if these materials are a condition of enrollment at the educational institution.
With the AOTC, you can include tuition plus student-activity fees paid to the college or university, books. Supplies and equipment that your student needs for enrollment or for a course are also allowable educational expenses.
For example, more universities require enrolled students to have a personal laptop computer. If a PC is a condition for enrollment by the university, you can claim this expense towards the AOTC.
What About the Lifetime Learning Credit?
While the American Opportunity Tax Credit offers many advantages, such as higher income limits and a higher credit amount, many taxpayers might not qualify for the AOTC. In some cases, such as for students attending courses past the first four years of college, the Lifetime Learning Credit becomes the best choice.
The Lifetime Learning Credit (LLC) also offers a way to reduce your tax bill dollar-per-dollar. You can save up to 20% on the first $10,000 of qualified expenses that equals $2,000 of credit a year. An LLC can be claimed for any post-secondary education expenses taken by yourself, your spouse, or your dependent.
Qualified education expenses are somewhat less restricted with the LLC, in that they can include tuition and fees required to attend any course after high school even if the student is not pursuing a degree. For example, if your student has already been claimed for four years of college expenses for the AOTC, the LLC can be used to cover expenses for the fifth year. The LLC can also be applied for graduate school, or continuing education to acquire or improve job skills.
However, expenses are limited to tuition and fees only. Books, materials and equipment, even if they’re required to enroll in a course, are not allowable for the LLC.
Lastly, income limits are lower with the LLC: individual taxpayers with income greater $67,000 do not qualify for the LLC. For married taxpayers, the income limitation is $134,000. Moreover, only one LLC is allowed per tax return whereas the AOTC is allowed per student.
Review this table for a comparison of the requirements and benefits of the American Opportunity Tax Credit and the Lifetime Learning Credit, and see which one best applies to you.
The Hope Credit: Get What’s Due to You
In 2015, the “Protecting Americans Against Tax Hikes (PATH)” Act of 2015 made the American Opportunity Tax Credit a permanent tax benefit for millions of taxpayers and families with one or more students pursuing a higher education degree.
Many Americans have to increase their education savings, apply for student financial aid, and even take out federal student loans (whether subsidized or unsubsidized) or private student loans to afford their higher education goals. Tax credits like the AOTC or the Lifetime Learning Credit provide welcome relief in the form of a dollar-for-dollar reduction in your taxes owed. Come tax time, be sure to claim the educational tax credit that’s due to you.