Lower College Tuition Expenses With the American Opportunity Tax Credit
Paying for college is something many current and potential students worry about. Student loans and grants are options, but only cover a portion and student loans have to be paid back. While there are several ways to save and get money for college, the American Opportunity Tax Credit or AOTC can put some cash back in the bank at tax time. Here’s how.
The tax credit is aimed at helping parents who pay for their child’s tuition, although students can also claim the credit if they have their own expenses. To be eligible to claim the AOTC credit, it must be used in the first four years after high school graduation. In addition, it can’t be claimed for more than four years in a row.
Students who go to an accredited college or university are eligible. There is an income threshold of $80,000 for singles and $160,000 for married taxpayers filing jointly. This is when the credit starts to phase out.
How Much Is the AOTC Tax Credit Worth?
A four-year college can be pricey. The National Centers for Education Statistics reports the average cost for private undergrad tuition is roughly around $39,000 a year. Saving for college is great, but it’s also nice to get some relief. When incorporating the AOTC in at tax time, taxpayers can expect to see a credit of up to $2,500. This is based on the first $4,000 spent on educational-related expenses, including tuition.
Save All Expenditures and Receipts
It’s important to keep track of all college-related expenditures and receipts to simplify the filing process at tax time. This includes:
- Course materials required for enrollment
- Tuition and fees
- Books, lab supplies
- Computer or electronic devices if needed specifically for a class, not for general courses
For students who live on campus, room and board can’t be counted under the AOTC.
There May Be a Refund Involved
In some cases where the tax credits have already paid down the balance on the tax form, a credit or refund may be issued. Up to 40% of the American Opportunity Tax Credit is refundable, up to a $1,000 cap. This can help reduce or offset the overall tax owed for that return year.
Combining the AOTC With Other Tax Credits
The AOTC can be combined with other tax credits when filing. This includes the Lifetime Learning Credit, and the tuition and fees deduction. Keep in mind that expenses can’t be claimed more than once.
Looking for ways to save and get the most bang for your buck is important when paying for college. There are other options such as a 529 Educational Trust, but you really can’t beat tax credits that save or refund your money. Knowing the facts about the AOTC and other tax credits can help pave a good financial foundation for upcoming grads.
~Here’s to Your Financial Health!