04
AugustDo You Know About the American Opportunity Tax Credit for College Education?
Some of you are experiencing mixed emotions as your children have graduated high school and are about to leave for college. Yes, empty nest syndrome is a thing — although not a clinical diagnosis, it is a phenomenon.
If this is your first high school graduate entering college, you will quickly learn there may be a credit available to you this next tax filing season. For those of you who have a sophomore, junior, or senior in college, the following information may be a refresher.
AMERICAN OPPORTUNITY CREDIT
The American Opportunity Credit is a tax credit available for the first four years of your child’s undergraduate education if your child is attending school at least half-time in a program leading to a degree or certificate. The credit is worth up to $2,500 in 2022. The credit must be taken for the tax year that the expenses are paid, and you as parents must claim your child as a dependent on your tax return to take the credit. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces tax liability.
To be eligible for the credit, your income must fall below certain limits. In 2022, a full credit is available to single filers with a modified adjusted gross income (MAGI) below $80,000 (with a partial credit for MAGI between $80,000 and $90,000) and married filing jointly with a MAGI below $160,000 (with a partial credit for MAGI between $160,000 and $180,000).
The American opportunity credit is calculated per student, not per tax return, meaning parents with more than one qualifying child in a given year can claim a separate credit for each child. If you paid tuition and related expenses to an eligible educational institution during the year, the college should send you a Form 1098-T (Tuition Statement) by February 1 of the following year.
According to the IRS, qualified expenses include “tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance.” Also, an eligible education institution is “generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, university, vocational school, or other postsecondary educational institution.”
Claiming the credit should be relatively straightforward by filing Form 8863 [Education Credits (American Opportunity and Lifetime Learning Credits)] with your federal tax return. Please review and talk to your tax preparer for further information.
Written by: Kenneth Price, CFP®, CFA®, ChFC®, CLU®, AEP®
