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How to Take the American Opportunity Credit

American Opportunity Credit

If you are a student or claim one as your dependent, you should evaluate whether you are eligible to take the American opportunity credit on your tax return. The credit can reduce your tax bill by up to $2,500–but there are a number of requirements that you should insure your satisfy before calculating your credit on Form 8863.

The American opportunity credit is only available for students who are in one of their first four years of post-secondary education. Therefore, if you are pursuing a graduate degree, you are not eligible for the American opportunity credit—though you should consider whether taking the lifetime learning credit or the tuition and fees deduction is possible. The credit not only covers students who enroll in a college or university, but is also available for those who are learning a trade at a vocational school. However, regardless of the type of education, the IRS requires that the school be authorized by the U.S. Department of Education to offer students federal financial aid—though there is no requirement that you take advantage of it. Moreover, the student must enroll in a sufficient number of courses to meet half-time enrollment status (as determined by the school) for at least one academic semester during the tax year. And lastly, students who have a felony drug conviction on their record are ineligible for the American opportunity credit.

Report American Opportunity Credit on Form 8863

When you begin to fill out your IRS Form 8863, the most important information you need is the student’s qualified expenses. The credit will include the amount you or the student pays for tuition and fees, plus the cost of books, supplies and equipment necessary for the courses. However, the American opportunity credit doesn’t include the cost of room and board when the student goes away to school. Once you total up your qualified expenses, which may also be reported to you on a 1098-T from the school, Form 8863 calculates your American opportunity credit as 100% of the first $2,000 and 25% of the next $2,000 for a maximum credit of $2,500.

The American Opportunity Credit is 40% Refundable

The best part about the American opportunity credit is that up to 40% of it is refundable. For example, if you’re eligible for the maximum credit of $2,500 but expect a tax refund on your income tax return without having to take the American opportunity credit—you can increase your refund by $1,000 (40% of $2,500) just by taking the credit. Essentially, the IRS treats part of your credit as a prior tax payment that will be refunded to you. One thing you should also be aware of before preparing Form 8863 is that your American opportunity credit begins to be phased out if your modified adjusted gross income (MAGI) is more than $80,000 or more than $160,000 when filing a joint return. For most taxpayers, MAGI is the same as adjusted gross income (AGI).

Reference: IRS Publication 970-Tax Benefits for Education