Maximize Your American Opportunity for Education Tax Benefits

Tax Attorneys at Ainer & Fraker, LLP Discuss how to Maximize Your American Opportunity for Education Tax Benefits.

  • American Opportunity Credit provides up to $2,500 of tax credit for the cost of post-secondary tuition in each of the first four years of attendance.
  • The credit may be partially refundable.
  • Credit is claimed on the tax return of the individual claiming the student’s tax exemption.
  • The $2,500 credit is a per-student limitation, so the credit can be higher for multiple students in a family.
  • Credit phases out for higher-income taxpayers.

The tax code provides tax credits for post-secondary (college) education tuition paid during the year for a taxpayer, spouse, or dependents. Taxpayers should make every attempt to take advantage of these benefits. The most lucrative of the credits is the American Opportunity Credit (AOTC) that provides a partially refundable tax credit for the first four years of post-secondary education.

The credit is 100% of the first $2,000 spent on post-secondary education, not including room and board, during the year and 25% of the next $2,000 for a maximum credit of $2,500. The credit does phase-out for joint filers with incomes between $160,000 and $180,000. For single taxpayers, the phase-out is between $80,000 and $90,000.

There are some interesting quirks to this credit that give rise to some tax planning options. For starters, the credit is claimed on the tax return where the student’s exemption is claimed. For example, suppose parents are divorced, the mother claims the child as a dependent on her return, and the father pays the child’s college tuition. The mother would actually be the one who gets the credit. However, don’t forget the credit phases out at higher incomes, and should the higher-income parent be claiming the student’s dependency exemption, there may not be any credit at all. Any planning strategy must take into consideration the income of the one who is qualified to claim the exemption.

Another example is grandparents paying the tuition for a grandchild. They would have no gift tax issues if the tuition is paid directly to the school, since educational gifts are exempt from the gift tax. In addition, the one who claims the child, generally the grandchild’s parents, gets the credit also free of any gift tax liability.

Another provision allows the tuition pre-paid for sessions starting in the first three months of the next year to be eligible for the credit in the year paid. This provides an opportunity to maximize the credit by pre-paying a portion of next year’s tuition. Typically, the first year of college begins in the fall. Thus, for the first year the tuition expenses might not be enough to produce the maximum credit. Pre-paying some of the expenses for the academic period starting in the first quarter of the next year could produce a higher credit the first year without reducing the credit in the second year.

If you have multiple students in the family, the AOTC is a per-student credit so you can claim up to $2,500 for each student who meets the requirements, including the half-time enrollment requirement. Up to 40% of the credit may be refundable, but the balance can only be used to offset the current year’s tax and any excess is lost.

There is also another less beneficial credit – the Lifetime Learning credit – that can be claimed when the AOTC no longer applies; rather than a per-student limitation, it has a per-family limitation and lower income levels at which phase-out of the credit starts.

Please Contact a Tax Attorney at Ainer & Fraker, LLP if you would like to learn more about the American Opportunity Credit, and other education tax benefits that can help you defray the cost of post-secondary education for yourself or your family.