“An investment in knowledge always pays the best interest.” —Benjamin Franklin
If your plans for this summer include helping your teen pick out dorm supplies or watching your recent college graduate start their very first “real” job, congratulations!
You (and notably, your wallet) are going through a big transition. And the IRS actually offers you a hand in it.
The American Opportunity Tax Credit (AOTC) can put up to 2.5K per year back in your pocket for each eligible student in your household.
And even if your tax liability is reduced to zero, you can still receive up to 40 percent of the value (up to 1K) back as a refund.
To unlock the full credit, you must show 4K in qualified education expenses during the tax year. The IRS calculates the credit using a two-tiered formula:
100 percent of the first 2K in qualified expenses, then 25 percent of the next 2K in qualified expenses.
What qualifies: Tuition, mandatory enrollment fees, and required books, supplies, and equipment (including laptops or software required for class, even if purchased outside the university bookstore) all qualify.
What does NOT qualify: Room and board, meal plans, transportation, parking passes, and medical insurance.
The right to claim the AOTC belongs to whoever legally claims the student as a dependent on their federal tax return. Both you and your student can’t claim the credit for the same academic expenses in the same tax year.
For most traditional undergraduate households, the parent claims the student as a dependent. Here’s how that plays out in real time:
- If the parent claims the student, the parent gets the tax credit. It doesn’t matter if the student paid for their own tuition using a summer job or student loans; because the parent holds the dependency claim, the credit moves to the parent’s tax return.
- If the student pays for more than half of their own support and files as an independent taxpayer, the student claims the credit on their own tax return.
This is where graduation gets tricky. The rule is, if a recent graduate earns enough money between June and December to provide more than half of their own total financial support for the calendar year (including housing, food, and insurance), you can no longer legally claim them as a dependent.
If this happens, the graduate claims the final AOTC for those spring tuition bills.
Fortunately, a lot of our clients are in higher tax brackets. Unfortunately, if you earn more than $80,000 and are single, or $160,000 as a married couple, this credit starts to phase out, so this credit may not apply to you. If you are interested in seriously managing assets to potentially pay less for college, let us know. We have an expert in the field we work with to help.
Figuring out the intersection of qualifying expenses, income limits, and recent graduations gets hairy fast. Instead of guessing your way through the complex rules, let’s map out your college funding strategy together.
Book an appointment on my calendar today so we can determine your dependency status and secure every dollar your family is legally owed:
