But at $2,500, the wait for the AOTC is worth it for many parents of college students, or the students themselves. The tax credit, which reduces your tax liability dollar for dollar, was renewed for five years in last month’s “fiscal cliff” extension of tax breaks by Congress.
A taxpayer whose modified adjusted gross income is $80,000 or less ($160,000 or less for joint filers) can claim the credit for the qualified expenses of an eligible student.
The credit is reduced if a taxpayer’s modified adjusted gross income exceeds those amounts. A taxpayer whose modified adjusted gross income is greater than $90,000 ($180,000 for joint filers) cannot claim the credit.
Taxpayers who use Form 8863, Education Credits, can begin filing their tax returns after the IRS updates its processing systems. Form 8863 is used to claim the AOTC and the Lifetime Learning Credit. The IRS said the delay is due to programming modifications that are needed to accurately process Forms 8863.
The AOTC is a tax credit of up to $2,500 of the cost of tuition, fees and course materials paid during the taxable year. Forty percent of the credit (up to $1,000) is refundable. This means you can get it even if you owe no tax.
Qualified expenses include tuition and required fees for the enrollment or attendance at an eligible post-secondary educational institution. The expenses must be for an academic period that begins in the same taxable year; or an academic period that begins in the first three months of the following taxable year.
“Course materials” also qualify, meaning books, supplies and equipment needed for a course of study — whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance.
The following expenses do not qualify: room and board; transportation; insurance; medical expenses; student fees, unless required as a condition of enrollment or attendance; same expenses paid with tax-free educational assistance; and same expenses used for any other tax deduction, credit or educational benefit.
Some of these expenses should be recorded on Form 1098-T, “Tuition Statement.” Students should receive a Form 1098-T from their educational institution. The IRS recommends that students contact their college or university if they don’t receive the form, and request the form.
For the purpose of the AOTC, the IRS defines an eligible student as one who:
(1) is enrolled in a program leading toward a degree, certificate or other recognized post-secondary educational credential;
(2) has not completed the first four years of post-secondary education as of the beginning of the taxable year;
(3) for at least one academic period is carrying at least ½ of the normal full-time work load for the course of study the student is pursuing; and
(4) has not been convicted of a felony drug offense.