Even though most students have just started summer break, the fall semester will be here before we know it. Today I want to talk about the American Opportunity Tax Credit which can help offset some of the expenses of college for the first four years.
How much can a family save by using this credit?
- The credit can save as much as $2,500 per year depending on your income for the first four years of college.
How is the credit calculated?
- Calculated based on 100% of the first $2,000 of expense and 25% of the next $2,000 – Total $2,500 if you have $4,000 in expenses.
- The credit is used to offset tax for the most part, but 40% up to $1,000 is refundable.
What expenses count?
- Tuition, fees and course materials such as books and equipment
- Not room and board, or other living expenses.
- EdVest or other 529 plans – Room and board and technology items
You mentioned income limits earlier, what are those limits?
- 2021 – begins at $80k single and phased out at $90k
- $160k for MFJ – total phase out at $180k.
And it’s only available for the first four years?
- Student must not have completed the first four years of school.
- Even if they did not take the credit all four years.
- Also – must be attending a qualified college or tech school – pursuing a degree and attending at least half time.
Can the credit be taken even if a student has an Education Savings Account (529 Plan) (EdVest for Wisconsin?)
- Yes, but you cannot use the same tuition dollar for the credit and be reimbursed through the 529 plan.
- One tip here is to pay for the first $4,000 with non 529 plan funds to get the full credit and use the 529 plan funds to fund the rest, along with room and board and the food plan.
Next week we will talk about some important planning items relating to the credit. Be sure to talk to a tax professional if you have any questions about the American Opportunity Tax Credit or would like further assistance.