If you paid for higher education costs in 2013, be sure to speak with your tax preparer to see if you may benefit from this credit. What is it?
The American Opportunity Tax Credit (AOTC) modifies the Hope Tax Credit. It allows you to take a tax credit for qualified higher education costs including tuition, certain fees and course materials. See IRS Publication 970 for a complete list. It does not include room & board.
How much is it?
The credit amount is 100% on the first $2,000 of expenses and 25% of the next $2,000, so $2,500 max per year.
How long can I use it?
For four years! This is better than the Hope credit that could be used only for two years.
What exactly is a tax credit?
A tax credit reduces your tax liability dollar for dollar. It is preferable to a “deduction” which reduces your taxable income.
Can anyone claim it for higher education costs for themselves or a dependent?
If you are filing singly, your modified Adjusted Gross Income (AGI) has to be less than or equal to $80,000. For married folks filing jointly, the number is $160,000. After these income levels, the credit starts to phase out until it is no longer available.
How do I claim the credit?
Complete form 8863 and attach it to the 1040 when you file your tax return.
What if I only used 529 plan money for education expenses?
You can’t double dip. That is why I recommend that my clients use their own funds for the first $4K to make sure they can take advantage of the credit, then 529 funds after that.