In 2009, as part of the economic stimulus package, President Barack Obama created the American Opportunity Tax Credit, which increased the amount of money that can be claimed for a college tuition tax credit. The American Opportunity Tax Credit is a newer, more generous version of older tuition tax credits such as the Hope Credit or Lifetime Learning Credit. It was originally going to expire in 2017, but recently it was made into permanent law with no expiration date, so parents and students can continue to apply for it.
What Is the College Tuition Tax Credit?
This tax credit program provides parents (or students, if they are not claimed as dependents) with up to $2,500 in tax credits per year for the first four years of post-secondary education. It is calculated as a $2,000 credit based on the first $2,000 spent on qualified expenses plus a credit for 25% of the next $2,000 of qualified expenses.
Qualified expenses for which the tax credit can be used include tuition, books, required fees and even a new computer, if it is required by the academic institution; however, it cannot be used for room and board. This means that four years of college tuition can be offset by up to $10,000 – a significant savings on your child’s or your own education. If you have no tax liability, you can still received 40% of the potential credit (up to $1,000) per year as a refund.
Here are the rules that determine who can (and who cannot) claim this tax credit.
- Students must be enrolled at least half time in a post-secondary program in an accredited school.
- The credit can be claimed for up to four years (additional years of schooling do not qualify, even if they are for the original degree).
- High school students who are enrolled in college classes do not qualify.
- Single taxpayers whose modified adjusted gross income (MAGI) is $80,000 ($160,000 if filing jointly) or less each year qualify for the full credit. A reduced one is available for single taxpayers whose MAGI is more than $80,000 but less than $90,000 (more than $160k but less than $180k if filing jointly). The tax credit phases out for single taxpayers who make more than $90k or joint filers making more than $180k.
- Parents who don’t qualify for this refund may want to consider not listing the student as a dependent so that he or she can receive the credit instead.
- Students cannot have been convicted of a felony or drug-related offense.
Read the Fine Print
Tuition paid from tax-free sources – such as 529 accounts, scholarships or Pell grants, employer-provided tuition or veteran’s educational assistance – does not qualify for this tax credit. Therefore, if you have the option to hold onto some of your tax-free tuition source for future years, it is a better idea to pay up to $2,500 out of pocket each year (depending on your tax liability) so that you can claim this credit. (See also The Top 3 Alternatives to Students Loans.)
Families who have more than one child in college during the same year can claim this credit for each individual kid (a blessing for large families and parents of twins, triplets and more).
If your child has been in college for more than four years, or if his or her course load is less than half-time, you won’t qualify for the American Opportunity Tax Credit, but you can take advantage of the Lifetime Learning Credit instead. It provides an annual tax credit of 20% of qualified educational expenses up to $10,000, which means the maximum amount of credit that can be claimed is $2,000 per student per year.
The Lifetime Learning Credit has similar but slightly stricter rules about qualified expenses – books and materials are not covered unless they are required by – and purchased from – a school. Additionally, unlike under the American Opportunity Tax Credit, students convicted of a drug-related felony are eligible to receive this credit.
Keep in mind that the Lifetime Learning Credit cannot be claimed in conjunction with the American Opportunity Tax Credit.
The Bottom Line
In a time when tuition expenses are daunting and student loans are piling up, the college tuition tax credit can help address some of the financial strain of paying for post-secondary education. And now that the American Opportunity Tax Credit has been extended beyond 2017, qualified taxpayers can continue to apply for it to help cover qualifying educational expenses. Learn more about the tax credit (and find a link to Form 8863 to apply for it) here .
You may also be interested in Tax Credits That Can Get You a Refund.