The American Opportunity Tax Credit (AOTC), formerly known as the HOPE scholarship credit, can be very beneficial for parents who are funding their kid’s college education.
The AOTC allows you to claim a tax deduction for up to $2,500 per year for each eligible college student for whom you pay qualified tuition expenses. It can be claimed on behalf of an undergraduate for four years — for a total of $10,000 in tax deductions.
According to the IRS, if the credit reduces the amount of tax you owe to zero, you can have 40% of any remaining amount of the credit (up to $1,000) refunded to you.
If you have more than one child in college at the same time, you can claim this deduction for each child enrolled!
Read more: 12 tax breaks for middle class families
How to know if you qualify
In order to qualify for this tax deduction, you must:
- Make less than $80,000 as an individual
- Make less than $160,000 as a married couple
What expenses qualify?
The tax deduction applies to 100% of the first $2,000 in qualified tuition and fees paid, plus 25% of the next $2,000 of qualified education expenses you paid for the student. For taxpayers in a lower income bracket who don’t owe $2,500 in tax, up to $1,000 of the credit is refundable on their tax return only, not on a dependent child’s tax return.
These expenses must be qualified college expenses that you pay for yourself, your spouse or a dependent you claim on your tax return.
Expenses that qualify:
- Tuition at an eligible educational institution (All accredited public, non-profit, and privately owned post-secondary institutions).
- Course-related required books, supplies and equipment.
- Computers, iPads and tablets (This is new under under 529 college savings plan rules).
Read more: Best 529 plans to help pay for college
Benefits that may reduce your ability to claim the AOTC deduction
Qualified educational expenses are reduced if you pay for the expenses with tax-free money.
- Tax-free portions of scholarships and fellowships
- Pell grants
- Employer-provided educational assistance (section 127 tuition reimbursement plan)
- Veterans’ educational assistance
- Any other tax-free payments received as educational assistance
The AOTC provides bigger benefits than other college tax credits, such as Lifetime Learning Credits, and the benefits are also more valuable than the tuition and fees deduction. But, if you have a part-time or graduate student, you should use the Lifetime Learning Credit deduction, since that is available for part-time and graduate study — and the AOTC is not.
What if I make too much money for the credit?
If your household income exceeds $160,000, your child might be able to claim the credit on his or her tax return — if you do not claim that child as an exemption on your tax return.
Be careful your tax credits do not overlap
There are rules associated with the AOTC in conjunction with other tax-free education benefits. For example, you cannot use a 529 college savings plan and also a AOTC tax credit. It is best to consult a tax professional when planning for education expenses and when preparing your taxes to be sure the benefits do not overlap.