Families paying for college may find assistance from two important education tax benefits: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit.
Generally speaking, if you qualify, it might be a good idea to claim the American Opportunity Tax Credit. It can give you a bigger credit and require you to spend less money to obtain it.
Here’s how the American Opportunity Tax Credit operates and how to find out if you qualify for it. Consult a financial advisor for assistance with all tax-related matters as well as other financial inquiries.
What Is AOTC ?
The American Opportunity Tax Credit offers a tax credit to qualified students enrolled in post-secondary education programmes following high school graduation.
For the first $2,000 in annual educational expenses, you can receive 100% credit, and for each additional $2,000 in expenditures per student, you can receive 25% credit.
For a max of four years, you can only claim the greatest possible credit of $2,500 each year for each student, even if the eligible educational expenses exceed $4,000 annually.
If the credit finally results in a zero tax bill for you, a portion of the credit is additionally refundable. In this instance, you might be eligible for a refund of up to $1,000, or as much as 40% of the amount of the credit.
Check If You Qualify
If a taxpayer or student lists the student as a dependent on their tax return, they are eligible to claim the American Opportunity Tax Credit. Every eligible student can only receive one AOTC per tax year, though.
Additionally, you are only allowed to submit one education tax credit claim each year for every student. The AOTC can only be claimed four times for each dependent student.
You or else your student dependant must be engaged in an appropriate educational programme for at least one period of time throughout the applicable tax year, and at least part-time, in order to be eligible to claim the credit.
A term can refer to a term of study, such as a quarter, semester, or trimester. Recall that colleges and universities are not the only kinds of educational institutions that qualify.
Any postsecondary institution that satisfies the standards to be a part of the financial aid programme offered by the U.S. Dept of Education can be considered an educational institution.
If you get a Form 1098-T Tuition Declaration from your school in January, your programme is probably eligible. In the event that the student has completed four years during college or else another higher education programme, the American Opportunity Tax Credit is no longer applicable.
Furthermore, the student is ineligible for the tax benefit if they were found guilty of a felony drug offense during the relevant tax year. Finally, at the time the tax return is due, the taxpayer plus the student seeking the credit need to have active Social Security or else other taxation identification numbers.
Educational Expenses
The AOTC is available for books, supplies, equipment, compulsory fees, and tuition payments. But the cost of lodging, transportation, and medical treatment doesn’t.
Even if you use credit cards or student loans to pay for the educational programme, those expenses are still considered eligible ones.
Tax-free fellowships and scholarships, employer-provided tuition, federal Pell grants, school refunds, and other non-taxable help aside from gifts and inheritances are not considered eligible expenses.
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