Federal Tax Credits for College
The American Opportunity Tax Credit (AOTC) is a maximum $2,500 tax credit reducing your federal taxes or up to $1,000 extra tax refund. A parent can claim the AOTC credit by claiming their college student as a dependent on the parents return. Before claiming the AOTC credit make sure none of these 17 questions keep you from claiming the AOTC credit.
1. Did you receive a 1098-T from the college where your student attends?
A student must attend a qualified education institution which issues the student a form 1098-T. This is important document for receiving and keeping the AOTC tax credit. Here is a list of colleges if you don’t receive a 1098-T and aren’t sure if your college qualify.
2. Did you claim your college student child on your tax return?
Make sure your child does not file a tax return claiming themselves. If your child files a tax return they can list they are being claimed by someone else by checking a box on their federal tax return.
3. Did you pay for your child’s tuition?
No problem - a loan can pay the tuition, a grandparent can pay the tuition. Anyone can pay the tuition. The payment by others is considered an exempt education gift and a payment by the parent claiming the dependent college student.
4. Did a grant cover the tuition and qualified education costs?
Review your form 1098-T as Box 1 (payments) of 1098-T must be reduced by box 5 (scholarships and grants) of 1098-T. You should get a calendar year payment transcript from the college as proof of payments as 1098-T can incorrectly only list charges instead of payments. You need proof of payments and if ever questioned by the IRS. The AOTC tax credit requires $4,000 in net tuition 1098-T line 1-5 to maximize the credit for the tax year. The AOTC tax credit allows qualified education expenses required by the college to enroll and attend the school to be added to 1098-T box 1. These qualified expenses would be required books, required supplies like computers or calculators. These expenses would not include room, board, recreation or food would not be qualified education expenses for the AOTC tax credit. Grants and scholarships reduce qualified expenses first unless you elect to allocate them to room and board. If so you would increase your net qualified education expenses and claim more credit but you would also need to report these grants as taxable income on your return. Maximizing your $4000 amount to maximize your tax credit and refund amount is a legitimate way to legally avoid and minimize your taxes and increase your refund.
5. Did your student payment transcript show a refund from a classed dropped last tax year?
A refund from dropped classes in a current year would lower current year qualified education expenses. A tuition refund for a prior year may require you to calculate and repay part of last years AOTC credit this year. Another good reason to have an annual school payment transcript.
6. Was your college student full time?
1098-T has a box checked full time that allows the AOTC tax credit to be taken. A part time student or a high school student can not take the AOTC tax credit. If this box is checked wrong by your college you need to get the 1098-T amended in order to take the tax credit. The college determines whether a student is completing at least one half of a normal student workload for at least one academic period that begins during the tax year and is reflected on the form 1098-T.
7. Was your college student in the first 4 years of an academic degree program?
The AOTC can only be taken as a tax credit for 4 tax years per person. You should document how many years has been taken for your dependent. Since college is on a fiscal year many second semester seniors can’t take an AOTC credit because they are in the 5th tax year and have already received Hope or AOTC tax credits for 4 years. A form 1098-T with a box 9 graduate student will alert the IRS the student is not eligible for AOTC. If this is incorrect then the form may need amended. A dependent who has a degree previously does not qualify for AOTC. The IRS is actively taking keeping track of very young people or very old people who normally would not qualify for AOTC so make sure to document your proof if your student is in these catagories of under 14 or over 65 years old. The lifetime learning credit may be available for dependents that don’t qualify for the AOTC.
8. Was the college student a convicted drug felon?
AOTC is not allowed for a convicted drug felon but the lifetime learning credit is available.
9. Is your income below the AOTC limits for 2018?
$160,000 to $180,000 is the AOTC phase out for joint filers. $80,000 to $90,000 for other filers including single, head of household and qualified widower. Married filed separately do not qualify for the AOTC. Separated parents may qualified for head of household status under the IRS rules and claiming AOTC would be a benefit of qualifying for this status.
10. Has your AOTC credit been removed in the past from your tax return?
You need to file IRS form 8862 to verify you are eligible to file for AOTC benefits this tax year.
11. Should your dependent student claim the AOTC instead of you?
Under 2018 tax law you may be giving up a qualified relative tax credit of $500 depending on your adjusted gross income plus a student can not receive a refundable AOTC unless their earned income provides more than half their support or they are married or over 23 or have no living parents. Electing to forgo a dependent deduction and allow your college student to claim the AOTC may still be beneficial in certain circumstances.
12. Are you sure no one else claimed your dependent student?
If you efile the IRS should reject your return if someone else claimed your dependent child. In separation or divorce situations you would need to agree with your spouse or win the tiebreaker rules provided by the IRS. If you are not the child’s parent you would need to make sure the parents aren’t claiming the child. If the student is 24 years old with taxable income of less than $4,050 or permanently disabled you can’t claim your child as a dependent and thus can’t claim the AOTC tax credit.
13. I’m a foreign student with foreign parents not filing US taxes?
A nonresident alien student is not eligible for AOTC. A nonresident alien student is required by the IRS to file form 8843 annually with the IRS.
14. Wow you completed all these questions so what other education tax planning do I need to consider?
Because tuition is on a fiscal year payment of tuition in December or January can really effect your AOTC or lifetime learning tax credit so plan carefully which tax year to make your tuition payment and when grants and scholarships are credited especially in the first freshman year (Fall) and last senior year (Spring) semester of a student's college career. Net spending on tuition in excess of $4,000 per student for AOTC per tax year and $10,000 for lifetime learning per year provide no tax credit benefit. Likewise time your 529 withdrawals and savings bond withdrawals so they are in the correct tax year so your not paying tax on the deferred earnings on these accounts as they are cashed in. Be sure to include your AOTC benefit from the prior year on the Fasfa worksheet so your Fasfa benefits are accurate.
15. Should I use a tax professional to help me claim the AOTC tax credit benefit?
As you can see the AOTC tax credit is complicated and the most important job is for you to coordinate who is going to claim the tax credit (one credit per student only on return where student is claimed properly) and that all your proof from current and past years are complete. A tax professional can verify you claimed the AOTC correctly or answer any questions not clearly explained in this article but will need you or your student to coordinate the proof, paperwork and family communication for claiming the AOTC tax credit correctly. A tax professional can do your tax return with proper documentation. You can ask a tax professional to verify your TurboTax or self prepared AOTC claim is correct. A tax professional can amend returns that are wrong for prior years or student returns that claim student incorrectly in current year.
16. Was AOTC tax credit extended for 2018?
Yes AOTC and Lifetime Learning tax credits were extended to 2018 and are currently permanently in the tax law.
17. What about the Lifetime Learning Tax Credit?
I will cover this complimentary tax credit in a separate article. One credit per year per student so if you got disqualified for AOTC tax credit make sure to utilize the Lifetime learning tax credit instead.
Do you have any IRS statistics on the AOTC credit?
The IRS received 25,989,664 1098Ts in 2017. Only 11,090,423 IRS form 8863’s were filed in 2016 so apparently many people did not bother to claim their education tax credit. The IRS via 1098-T matching has identified a significant amount of returns that claimed AOTC but did not have 1098-T’s filed or students were not full time or were graduate students. With a 2017 total of 2,354,418 returns without a 1098-T match the IRS will continue to monitor claims closely and issue notices for returns without an accurately matched 1098-T or other matching errors mentioned above like graduate student box checked on the 1098 or full time student box not checked. Either of these matching errors can generate an IRS tax notice questioning the correctness of your AOTC tax credit.
I didn’t want to read all this technical stuff - how about giving me a checklist?
Checklist for AOTC credit
All 1098Ts for student for the current tax year
Tax year payment, charges and credits for student from college
Students academic year in college? Freshman, Sophmore, Junior or Senior?
Who is claiming student on their taxes?
Is student a convicted drug felon?
Students tax return if one has already been filed?
Questions? Comments? Post below or contact me.