THE AMERICAN Opportunity Tax Credit is a tax break available to help pay for up to four years of higher education for yourself or your dependents. For those eligible, it can be hugely valuable. Remember, a tax deduction shrinks your taxable income, so that a $1,000 tax deduction might save you $250 in taxes, assuming you’re in the 25% federal income tax bracket. By contrast, American Opportunity is a tax credit, which means it gives you a dollar-for-dollar reduction in your total tax bill.
Each year, the American Opportunity credit could reduce your tax bill by up to $2,500 per student. The credit consists of 100% of the first $2,000 of qualified education expenses, including tuition, fees and course materials, and 25% of the next $2,000. What if your total tax bill is less than the total credit you’re claiming? The American Opportunity credit is partly refundable.
You can’t claim the American Opportunity Tax Credit at higher income levels. The credit phases out if you’re married filing jointly and your income is between $160,000 and $180,000. If you’re single or head of household, the phaseout range is $80,000 to $90,000. These thresholds aren’t indexed for inflation. The credit can’t be claimed if you’re married filing separately.
You also can’t claim the American Opportunity Tax Credit and the Lifetime Learning Credit, discussed next, for the same student in the same tax year. If you’re eligible for both, you’ll probably want to take the American Opportunity credit, which is more valuable. The Lifetime Learning Credit is more likely to be claimed by graduate students, who may have already used up their four years of the American Opportunity credit.
In addition, you can’t claim the American Opportunity Tax Credit for expenses paid for with another tax break, such as a tax-free withdrawal from a 529 college savings plan or Coverdell education savings account. Faced with that choice, you would be better off taking the credit. Thanks to the tax law passed by Congress in December 2015, the American Opportunity Tax Credit—which had been set to sunset at year-end 2017—no longer has an expiration date.
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