Claiming The American Opportunity Tax Credit
Updated: Dec 4, 2020
How do you claim the tax credit when your scholarships and grants for the year were more than the payments for qualified education and related payments?
In the reverse scenario where the amount in box 1 of the 1098-T form and other qualified expenses not included on 1098-T such as the purchase of a computer, software and books etc. out of pocket exceed the figure in box 5, you will be able to claim tax credit based on the difference. Let's now define a few terms: What is Form 1098-T? This is the form which you receive from your educational institution( or print from their website) which shows qualified educational expenses you incurred at the institution for the year in Box 1 as well as scholarships and/or grants you received in Box 5, among others. This information is reported to the Internal Revenue Service(the IRS). It is the source of information for completing your claim for tax credit on the IRS form 8863, Education Credits(American Opportunity and Lifetime Learning Credits). You can claim tax credit for that part of total qualified expenses which your scholarships and grants did not cover without any hassles from the IRS. Remember also to claim the credit from your state as well if credit is offered by the state.
However, if unfortunately your scholarships and grants(box 5) exceed your tuition and all your qualified expenses(box 1 plus out of pocket qualified expenses) it would appear that you have no basis to claim tax credit. You don't have to worry because there is a work around that which the IRS allows for you to claim your tax credit. You need to show part of the scholarships and grants as income to reduce the box 5 amount accordingly. By showing income and reducing box 5 amount you are able to claim the credit whereas this will not have been feasible without drawing the IRS's attention. There are some factors to consider to establish how much income to show and the net expense to claim to maximize your tax credit and therefore increase your refund or reduce your total tax liability. These factors depend on your tax bracket, total tax liability, and other factors beyond the scope of this article.
The American Opportunity Tax Credit can be claimed for the first four years of undergraduate college education. The tax credit amount is dollar for dollar up to the first $2,000.00 of qualified expenses claimed and $500.00 for the next $2,000.00 claimed, for a total credit of up to $2,500.00 maximum tax credit per student. Up to $1,000.00 of the American Opportunity Tax Credit is refundable and you don't need to earn income to qualify for the refund.
In order to be eligible, some conditions have to be met(the conditions listed are not exhaustive so check with your accountant if necessary or contact us). These include:
being enrolled in at at a qualified educational institution at least half time for at least one academic period beginning in the tax year
not having completed the first four years in college
not having a felony drug conviction at the end of the tax year
you must be pursuing an undergraduate degree or other recognized educational credential.
You cannot claim the American Opportunity Credit if your filing status is Single and your Modified Adjusted Gross Income(MAGI) is more than $90,000 per year or $180,000 for Married Filing Jointly filing status. To get the full credit the incomes(MAGI) must not exceed $80,000 and $160,000, respectively. The tax credit cannot be claimed if your filing status is Married Filing Separately. While this article does not exhaust all the possible information concerning the American Opportunity Credit its focus is adequately covered for the benefit of anyone who deserved the tax credit but put off inclusion in already filed return(s) because the scholarships and grants more than covered the qualified tuition and related expenses incurred. In such situations, I encourage you to file amendments for the missed years to include form 8863 for refunds of tax credit where applicable. The refunds could be up to $2,500.00 per student claimed on the Federal return, depending on the taxpayer's total tax paid. Don't forget to amend the state's filed tax return(s) also where applicable. You have a two-year window to claim cash refund from the next April 15th after the year it was due, assuming it filed by the due date(April 15th is when it is considered paid). You may contact us for a free consultation if there are any concerns.