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Going to School? Get a Break with the American Opportunity Tax Credit

Sending a child to school is expensive. Really expensive. I have 2 sons in college and the costs of tuition, books, and extracurricular activities add up quickly. Fortunately, there are tax credits you can take advantage of to help offset the rising cost of education.

If you, your spouse, or dependents are currently attending or planning to attend college, you may be able to claim the American Opportunity Tax Credit.

The American Opportunity Tax Credit for “qualified tuition and related expenses” is available through 2017 for the first four years of undergraduate education.

Eligible institutions. Accredited schools offering credit towards a bachelor’s or associate’s degree and certain vocational schools are eligible.

Eligible students. The student must be enrolled in a degree or certification program on at least a half-time basis. The student also must never have been convicted of a federal or state felony drug offense.

Qualified tuition and related expenses. This includes tuition, books, and academic fees required for enrollment or attendance. Student activity fees, athletic fees, insurance, room and board, transportation costs or other personal living expenses do not qualify. The cost of a course or education involving sports, games or hobbies doesn’t qualify unless it’s part of the student’s degree program.

Maximum credit. You can claim up to $2,500 per student. Since the limit is per student and not per taxpayer, qualifying expenses for you and two children, for example, may be as high as $7,500.

Who can claim the credit? If the student is claimed as a dependent, only the parent may claim the credit. It would be based on qualified expenses paid by both the parent and child. If the parent is eligible to, but does not claim the student as a dependent, only the student can claim the credit. If the student is not claimed as a dependent, then qualifying expenses paid by a parent can be claimed by the child. The child may also claim payments made directly to the school by a third party, such as grandparents.

Phase-out ranges for modified adjusted gross income (AGI). In tax year 2014, for married couples filing jointly: $160,000 and $180,000, and it’s unavailable if AGI is $180,000 or more. For individual taxpayers or heads of household: $80,000 to $90,000. No credit is available for married couples filing separately.

Payments with borrowed funds. The credit can be claimed for qualified tuition and related expenses paid by a loan.

The credit is 40% refundable. Not only can it reduce your regular tax bill to zero, you may also receive a refund. For example, someone who has at least $4,000 in qualified expenses, but no tax liability to offset the credit against, would qualify for a $1,000 (40% of maximum credit of $2,500) refund. One caution: Credits that are claimed by dependents are often NOT refundable and can only be used to offset tax.

By Melinda Nelson, CPA