Does higher education really pay off? Yes!

April 18, 2018 by Selena Quintanilla
Graduation Hats

Sarah just experienced the best six months of her life! She was granted the opportunity to travel and study abroad in Puerto Rico. Excitement and nostalgia fill her as she sorts through what seems like a hundred polaroids. Eager to share her experience, she logs into her Facebook account and begins to update her status when a post from a friend snaps her back into reality. 

The update reads:

"Yes! I just received my W-2's and my 1098-T from school! Hello, tax refund!" Sarah feels her face flush at the realization that tax season has arrived! Frantic, she begins gathering documents in preparation for filing, but it never crossed her mind that taking classes could entitle her to a more substantial refund. Oh, what a time to be alive! 

She starts sifting through her college papers, searching for a 1098-T. Her mind is racing! She has never qualified for so many tax credits before −  from the Earned Income Tax Credit to the Child Tax Credit, and now a possible credit for education! She's holding out hope that her refund will be large enough for her to head back to Puerto Rico next summer!

Not so fast! In order to claim an education credit, specific criteria need to be met. Curious, Sarah visits the IRS website and mulls over the different credits available to students. Skimming over the list, she begins to check off credits that she knows she won't qualify to claim and is about ready to give up when – voilà! The American Opportunity Credit catches her eye.
 
What is the American Opportunity Credit (AOTC)?

The AOTC is a credit designed to assist eligible students during their first four years of higher education. This means freshman, sophomore, junior and senior years, and you can only claim the credit four times even if you are a freshman for 6 years. The credit allows up to $2,500 per eligible student, for qualified education expenses, per year. The AOTC is partially refundable, meaning that if the credit brings the amount of tax owed to zero, 40% of the remaining amount of the credit (up to $1,000) is refunded to you.

Now that Sarah understands what the credit is she moves on to the qualifications.

To be eligible for American Opportunity Credit:

The student is required to be in pursuit of a degree or another recognized education credential and must be enrolled at least half-time at the start of the tax year. The student must not have completed the first four years of higher education, and the student's criminal record must be clear of any felony drug convictions. Additionally, the American Opportunity Credit cannot be claimed in excess of four years.

Sarah just wrapped up her first semester of college and is looking forward to returning next year. Though her major remains undecided, the reason behind her spur of the moment enrollment was to obtain a certification that would help her land a stable career and lead to a better quality of life for herself and her son, Mason. Sarah has never claimed the AOTC, or any other education credit, before this year. And though her lack of responsibility is usually the topic of family discussions, Sarah abides by the law, and her record is clean of felonies. 

Sarah has met these requirements, but she isn't out of the woods quite yet. As with most credits, a taxpayer must meet certain income restrictions:

To claim the American Opportunity Credit, the taxpayer must make under $80,000 (or $160,000 if married filing joint). If the taxpayer earns a salary over $80,000 but under $90,000 (over $160,000 but under $180,000 if married filing joint) a reduced amount of the credit will be allotted. Income exceeding $90,000 ($180,000 for joint filers) disqualifies the taxpayer from claiming the credit altogether.

Sarah worked part-time, and her salary was significantly less than the amounts specified by the IRS. She smiles at the realization that she officially qualifies to claim the credit, and begins to do a happy shuffle when bold print on the IRS website catches her eye! 

The print reads: 

Be careful claiming the AOTC

Make sure you are qualified before claiming the credit. And, make sure you keep copies of all the documents you used to find out if you qualify and determine the amount of your credit. If the IRS audits your return and finds your AOTC claim is incorrect, and you don’t have the documents to show you qualify, you must pay back the amount of the AOTC you received in error with interest. The IRS may also charge you an accuracy or a fraud penalty. Or, you can be banned from claiming the AOTC for two to ten years.

When it comes to claiming credits, especially education credits, the requirements are worth triple checking. Penalties related to inaccuracy or fraud can end up costing a lot more in the end.

After carefully reviewing each requirement three times, Sarah feels confident in her entitlement to the American Opportunity Credit. She gathers her documents and logs into her TurboTax account, ready to enter the information needed claim the credit and, more importantly, to find out her new refund amount.

NOTE: To claim the AOTC,  Form 8863 must be completed and attached to the taxpayer's completed tax return.

Students usually receive a Form 1098-T Tuition Statement, from their institution by January 31 of the following year. This form should be reviewed for accuracy, and discrepancies on the 1098-T should be presented to the school for correction before submission. The amount listed in either box 1 or 2 to show the amounts received or billed during the year and will assist you in calculating your credit. But do not ignore box 5 if you received any tax free scholarships.
 

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Selena Quintanilla, CTEC
Communications Associate

 

Selena Quintanilla is a Communications Associate at TaxAudit, and a California Tax Education Council (CTEC) registered tax professional. She is now on a mission to bring clarity and comprehensibility to a topic that keeps us all up at night at least once a year-TAXES! Please, send coffee! 


 

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