If you have qualifying education expenses you may be able to deduct them using the American Opportunity Credit. This credit covers the first $2,000 of education expenses that qualify, plus 25% of the next $2,000 for a total maximum credit of $2,500 annually.
Who is eligible for the credit?
If you pay for qualifying education expenses for a child, a spouse or yourself you are eligible to use the American Opportunity Tax Credit. If you have more than one student in your family, you can claim the credit multiple times for qualifying expenses of each student. An example of this is if you have 2 children in college, and your spouse as well you can claim up to $7,500 in credit from the American Opportunity Tax Credit.
This American Opportunity Tax credit is only qualifying for the first four years of post-secondary schooling, graduate and doctoral students are unable to use this credit. So, if your student has finished less than four years of college as of January 1st, 2016, you can claim the credit on your return.
You are only able to claim the credit if the student has at least a half-time course load, for a minimum of one semester beginning that school year. The student must also be enrolled in a program that leads to an associate’s degree, bachelor’s degree or other recognized certification.
What costs are covered?
The American Opportunity Tax Credit covers expenses such as tuition and enrollment fees as well as the cost of books and course materials. Things that are not cover by the credit include: Room and Board, student health insurance, athletics and other activities.
To qualify for the credit, the student must attend an eligible institution. Most all accredited public, nonprofit and for-profit schools, including trade schools, fit eligibility requirements. To verify that your school qualifies, please visit fafsa.gov and make sure it has a Federal School Code.
Rules for Phasing out Income
If your Modified Adjusted Gross Income (MAGI) exceeds a certain level, the American Opportunity Tax credit will be phased out. (MAGI is adjusted gross income plus certain tax-free income from sources outside the United States.)
In 2016, the MAGI phase-out for persons filing single is $80,000 to $90,000.
For couples filing Married Filing Jointly the phase-out is $160,000 to $180,000.
If you file as Married Filing Separately you are not eligible for the tax credit regardless of income.
The credit is partially Refundable.
Up to 40% of the American Opportunity Tax credit refundable, meaning that you will receive a portion of the credit as a refund even if you don’t owe any federal income tax.
An example of how this works, if your American Opportunity Tax Credit is $2,500. The portion due back to you in a refund is $1,000 ($2,500 x 40%). This is treated as a payment on your tax return, as if you had $1,000 withheld from your wages.
The remaining balance of $1,500 is a nonrefundable credit that provides a benefit only if you owe federal income tax. If you do not owe any federal income tax, because of other credits and deductions the entire $1,000 refundable credit will count as an overpayment of federal income tax and be refunded back to you.
If you were to owe $1,900 in taxes, first the nonrefundable portion of the credit would be applied to bring your tax bill down to $400. The $400 from the refundable portion of the credit would be used to further pay down the rest of your tax bill resulting in a $600 payable credit to you in the form of a tax return.
If you owe more than the entire credit amount it will use the full amount to pay down any outstanding tax bill, such as if you owe $4,500 in federal income tax, the nonrefundable portion will bring your bill down to $3,000 with the additional $1,000 being applied to the tax bill bringing down what you owe to $2,000.