American Opportunity Tax Credit

There are a number of tax benefits available to college students. While these benefits tend to be small compared to the cost of full-time enrollment in a private university, they can still account for a pretty big piece of tuition at Maine’s state universities or community college system. This can be especially true for students who attend part time while earning money in another job or business. One of the most generous incentives is the American Opportunity Tax Credit.

The American Opportunity Tax credit was scheduled to expire on December 31, 2013, but has been extended to December 31, 2017. That’s good news for most undergraduate students because this credit is worth up to $2,500 a year for up to four years of undergraduate course work. That is 100% of the first $2,000 in qualifying expenses and 25% of the next $1,000. The American opportunity tax credit is also partially refundable when the credit comes to more than the tax that would otherwise be due.

Taxpayers and preparers sometimes overlook the fact that the education expenses used to figure this credit include the amount spent on books and other required course materials, in addition to the tuition paid. Students who attend school on a part-time basis are especially likely to leave money on the table by forgetting to consider those costs because their their annual tuition is much more likely to fall below the $4,000 limit on qualifying expenses than students who attend school full-time.

This credit is available to taxpayers based on the education expenses they pay for themselves, their spouse, or their dependents, but only one taxpayer can claim the credit for a given student in the same year. Expenses used to claim the American opportunity tax credit cannot also be used to claim the tuition and fees deduction, the lifetime learning credit, or another educational tax benefit.

Taxpayers with an adjusted gross income above $90,000 if single or $180,000 if married cannot claim the credit, and a taxpayer cannot take the credit if they are listed as a dependent on someone else’s return. Higher income taxpayers sometimes don’t realize that they can choose not to claim the exemption for their dependent student, which may make that student eligible to claim the credit, even if their parents’ income is above the limit.

This credit is almost always worth more than the tax savings that would have come from the forgone exemption, but only 40% of the credit is refundable. If the non-refundable piece of the credit comes to more than the federal income tax that would otherwise be due with the return, then the remaining amount of the credit is wasted.

Families with children in college should discuss who will get the most benefit from the American opportunity tax credit before anyone files his or her return each year.


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Albert Bergen

About Albert Bergen

Albert E. Bergen, CPA is a certified public accountant and income tax professional in Auburn, Maine. Albert has been preparing income tax returns for individuals, S-corporations, C-corporations, LLC’s, partnerships, non-profits, and trusts, as well as preparing compiled and reviewed financial statements for businesses and non-profit organizations since 2005. He holds a Bachelor’s of Science in Computer Engineering from the University of Maine and is working on a Master’s of Business Administration from the University of Southern Maine.