- The American Opportunity Education Credit (AOTC) does the following:
- Allows a tax credit to $2,500.
- The tax credit covers tuition, student activity fees, text books, and supplies necessary for coursework;
- Allows a refund of up to $1,000 for individuals and families who owe little or no federal taxes.
Here’s how the AOTC works: Taxpayers receive a tax credit dollar-for-dollar up to the first $2,000 of eligible expenses, and a credit for 25 percent of the next $2,000 (up to $500). This means if you spend more than $4,000 on eligible expenses, you are entitled to the full $2,500 credit.
Taxpayers still have the option of opting for the $4,000 tax deduction, but they cannot claim the tuition tax deduction and the AOTC in the same tax year. It is generally beneficial to take the tax credit since it is a dollar-for-dollar swap for a potential savings of $2,500, while a deduction just reduces the amount of income subject to federal taxes. It’s important to have a tax expert help you weigh your options to make sure you’re getting the full value of available deductions or tax credits.
Taking advantage of the education tax credit requires full knowledge of the ever-changing opportunities under federal tax laws. We have advised hundreds of clients facing high college expenses. If you need help understanding how to claim the AOTC, please contact our office at (847) 426-0200.