American Opportunity Tax Credit - General Questions

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taxck33
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American Opportunity Tax Credit - General Questions

Post by taxck33 » Fri Apr 07, 2017 9:30 am

I've read the instructions and the publication repeatedly and this $2500 credit seems almost too good to be true, so I just wanted to verify I'm understanding a couple things correctly.

1) My wife (34 years old) is currently enrolled in a two year graphic design program at a community college, after which she'll have her certification. In the past she's attended more than 4 years of school, but never came out of it with a degree or certification. Based on the rules, it seems as if she would qualify for the AOTC, but I just wanted to make sure since there isn't anything in there specifically about 2 year programs (and particularly, ones done after prior schooling not working out).

2) Our 1098-T shows roughly $3800. Between her having to buy the adobe suite, skill share tutorials, a square space, a couple textbooks, and regular art supplies, we definitely pass by a lot the $4000 mark to take the full credit. The only possible catch is many of the receipts may be missing - I only found out about this credit last night, so she wasn't saving receipts for everything she bought. If we somehow don't find any receipts (and only have debit card records of something being purchased), is it advisable just to chalk it up to a learning experience and only file 8863 with $3800?

3) Are there any catches that might not be so obvious?

Thanks!

Katietsu
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Re: American Opportunity Tax Credit - General Questions

Post by Katietsu » Fri Apr 07, 2017 11:04 am

The catch might be that she has attended more than 4 years of school already. Was she full-time during those previous years?

The official IRS answer:
For the American opportunity tax credit, an eligible student is a student For the American opportunity tax credit, an eligible student is a student 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.



The IRS response is a bit vague, in my experience, as to what it means to have previously completed 4 years of schooling. They refer it back to the student's school to decide whether or not the school has classified the student as having completed sufficient credits four years.

One example given by a tax professional:

Example: Jessica is a fifth-year senior in a five-year bachelor's program. She earned four years of college credit before 2015, even though she didn't finish her degree by then. She would answer "Yes" and not be eligible for the American Opportunity Credit.

However, if Jessica were a fifth-year senior in a four-year program and she didn't earn four years of credit before 2015, she would answer "No" (and could be eligible for the American Opportunity Credit).

Topic Author
taxck33
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Re: American Opportunity Tax Credit - General Questions

Post by taxck33 » Fri Apr 07, 2017 11:22 am

Katietsu wrote:The catch might be that she has attended more than 4 years of school already. Was she full-time during those previous years?

The official IRS answer:
(2) has not completed the first four years of post-secondary education as of the beginning of the taxable year
She was full time during those previous years, but she never completed a 4 (or a 2) year program or received a degree. Her initial undergraduate experience was going to one school for 1.5 years before transferring to a different school for the remaining 1.5 years of her sophomore and junior years - no senior year took place. Then several years later she went back for a different degree, beginning at a community college before transferring to and then dropping out of a university. She still didn't have the necessary credits for any degree she was pursuing at the time. Now it's years later and she's found her calling in graphic design, and is starting from scratch at an accelerated 2 year vocational program at an accredited community college.

To me, it seems as if she fits more into the second example you gave and that we can take the credit. Would you agree?

MathWizard
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Re: American Opportunity Tax Credit - General Questions

Post by MathWizard » Fri Apr 07, 2017 4:10 pm

taxck33 wrote:
Katietsu wrote:The catch might be that she has attended more than 4 years of school already. Was she full-time during those previous years?

The official IRS answer:
(2) has not completed the first four years of post-secondary education as of the beginning of the taxable year
She was full time during those previous years, but she never completed a 4 (or a 2) year program or received a degree. Her initial undergraduate experience was going to one school for 1.5 years before transferring to a different school for the remaining 1.5 years of her sophomore and junior years - no senior year took place. Then several years later she went back for a different degree, beginning at a community college before transferring to and then dropping out of a university. She still didn't have the necessary credits for any degree she was pursuing at the time. Now it's years later and she's found her calling in graphic design, and is starting from scratch at an accelerated 2 year vocational program at an accredited community college.

To me, it seems as if she fits more into the second example you gave and that we can take the credit. Would you agree?
From what you say, I suspect not.

Try this in TurboTax.

Fortunately, you can use the LifeTime Learning Credit.
If you are spending $10K, then this credit is only $500 less than the AOC.

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taxck33
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Re: American Opportunity Tax Credit - General Questions

Post by taxck33 » Sat Apr 08, 2017 12:15 pm

MathWizard wrote:
taxck33 wrote:
Katietsu wrote:The catch might be that she has attended more than 4 years of school already. Was she full-time during those previous years?
Fortunately, you can use the LifeTime Learning Credit.
If you are spending $10K, then this credit is only $500 less than the AOC.
Unfortunately, we're not eligible for the Lifetime Learning Credit due to income (and we don't have turbotax, I've been doing everything by hand).

But, I was able to get some more details about my wife's education history. She had rolled all of her credits over to the last university she had attended - she's 40 short for a degree. Based on that, I'd say she definitely hasn't "finished the first four years of higher education at the beginning of the tax year" (the condition in the IRS publications). Furthermore, after her initial 3 years, she never spent a full year in school at one time, which further supports this I think.

Based on this, it seems as if she fits into that second example previously given (the 5th year senior in a 4 year program one, only now she's in a different program). To me at least. I'll keep digging around meanwhile, there's still some time before we need to file.

clemrick
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Re: American Opportunity Tax Credit - General Questions

Post by clemrick » Sat Apr 08, 2017 2:03 pm

In her previous education, did she take the Hope Credit in any of those years? That will count against the four years of AOC.

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taxck33
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Re: American Opportunity Tax Credit - General Questions

Post by taxck33 » Sat Apr 08, 2017 2:40 pm

clemrick wrote:In her previous education, did she take the Hope Credit in any of those years? That will count against the four years of AOC.
Nope, she's never taken any credits for her prior education. The only two concerns I have are 1) the ambiguity of the 4 year thing and 2) the program being a 2 year one rather than 4. But since we received a 1098-t and it's an undergraduate program at an accredited school, I'm 99% sure we're ok on the 2nd one.

MathWizard
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Re: American Opportunity Tax Credit - General Questions

Post by MathWizard » Sat Apr 08, 2017 3:58 pm

taxck33 wrote:
MathWizard wrote:
taxck33 wrote:
Katietsu wrote:The catch might be that she has attended more than 4 years of school already. Was she full-time during those previous years?
Fortunately, you can use the LifeTime Learning Credit.
If you are spending $10K, then this credit is only $500 less than the AOC.
Unfortunately, we're not eligible for the Lifetime Learning Credit due to income (and we don't have turbotax, I've been doing everything by hand).

But, I was able to get some more details about my wife's education history. She had rolled all of her credits over to the last university she had attended - she's 40 short for a degree. Based on that, I'd say she definitely hasn't "finished the first four years of higher education at the beginning of the tax year" (the condition in the IRS publications). Furthermore, after her initial 3 years, she never spent a full year in school at one time, which further supports this I think.

Based on this, it seems as if she fits into that second example previously given (the 5th year senior in a 4 year program one, only now she's in a different program). To me at least. I'll keep digging around meanwhile, there's still some time before we need to file.
The AOC may very well work if she only spent 3 years as a full-time student.

I assume that the reason you cannot take the LLC is the MAGI limit. The tuition and fees deduction may help you there next year, when you won't be able to use the AOC (3 years full-time previously + this last year claiming AOC.
If income is the reason you cannot use the LLC, but you still can use the AOC, then your MAGI is between $128K and $180K, which would suggest you are in the 25% federal tax bracket. If your MAGI is below $160K, and you itemize, then the tuition and feed tax deduction may help next year. This is not as lucrative as the AOC or LLC. Note that your MAGI is affected by IRA contributions, but not by 401K contributions. You may be able to lower your AGI by maxing out 401K contributions to allow you to take the LLC. Just as suggestion.

I would consider a tax package:
I quit doing tax forms by hand several years back. I would do several forms trying itemized versus standard deduction, MFJ versus MFS (strangely the best option is MFJ on the federal and MFS for the state.) TurboTax allows you to try lots of options. I believe I pay $59 for TT deluxe, and it just makes taxes easier. TT allows up to 5 returns. I let my son use it as well, so I can think of it as if I had paid $30 for me and $30 or him.
I also do some tax planning with it, making up a fake returns for next year, for my 65 year old self and my 70 year old self, just to see
what my tax liabilities would be under current law as a suggestion for how much of a tax burden I may have.

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dodecahedron
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Re: American Opportunity Tax Credit - General Questions

Post by dodecahedron » Sat Apr 08, 2017 4:12 pm

MathWizard wrote:
I assume that the reason you cannot take the LLC is the MAGI limit. The tuition and fees deduction may help you there next year, when you won't be able to use the AOC (3 years full-time previously + this last year claiming AOC.
The tuition and fees deduction expired on 12/31/2016. It was one of the few perennial "extenders" that was NOT permanently extended in the PATH Act of 2015. Under current law, there is no basis to expect it to be reinstated.

http://time.com/money/4622625/tuition-f ... tion-ends/

Katietsu
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Re: American Opportunity Tax Credit - General Questions

Post by Katietsu » Sat Apr 08, 2017 4:53 pm

If, as you said, she was still 40 credits short of a four year degree before she started the graphics design program, then I would feel comfortable claiming the AOC for 2016 anyway.

guitarguy
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Re: American Opportunity Tax Credit - General Questions

Post by guitarguy » Sat Apr 08, 2017 5:51 pm

You need to add up the number of credits she's attained and then evaluate that against where she sits in terms of her class standing at her current institution. If she's within the range of completed credits at the start of the year to be considered still a junior or senior, i.e. has not completed enough credits that she would have completed 4 full years of school already, then she can take the credit.

Previous schooling full time, part time, and/or whether or not she came away with a degree...none of that makes any difference.

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taxck33
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Re: American Opportunity Tax Credit - General Questions

Post by taxck33 » Sat Apr 08, 2017 6:04 pm

guitarguy wrote:You need to add up the number of credits she's attained and then evaluate that against where she sits in terms of her class standing at her current institution. If she's within the range of completed credits at the start of the year to be considered still a junior or senior, i.e. has not completed enough credits that she would have completed 4 full years of school already, then she can take the credit.

Previous schooling full time, part time, and/or whether or not she came away with a degree...none of that makes any difference.
I guess my confusion here is that her current program is a 2 year vocational program that will get her an associate of applied science technical degree and is unrelated to anything she's done prior. None of her prior credits transfer over - it's a complete "start from scratch" scenario.

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desertbandit442
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Re: American Opportunity Tax Credit - General Questions

Post by desertbandit442 » Sat Apr 08, 2017 7:07 pm

You should be good. It is not how many years you attended college, it is if you have completed a four year college undergraduate program; then you can't claim it. The limit on the AOC is that you can only claim it for a total of 4 tax years. Two year community or vocational college is fine as long as it is an eligible education institution and student is at least a 1/2 time student. Most that issue a 1098-T are, and if there is any doubt you can ask the institution.

Definition of eligible institution from IRS Pub: Eligible educational institution. An eligible educational institution is generally any accredited public, nonprofit, or proprietary (privately owned profit-making) college, university, vocational school, or other postsecondary educational institution. Also, the institution must be eligible to participate in a student aid program administered by the U.S. Department of Education. Virtually all accredited postsecondary institutions meet this definition.

BOTTOM LINE: Sounds like your situation is good for the claim.

P.S. I do taxes, and I did sleep at a Holiday Inn Express. :D

MathWizard
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Re: American Opportunity Tax Credit - General Questions

Post by MathWizard » Sat Apr 08, 2017 9:41 pm

dodecahedron wrote:
MathWizard wrote:
I assume that the reason you cannot take the LLC is the MAGI limit. The tuition and fees deduction may help you there next year, when you won't be able to use the AOC (3 years full-time previously + this last year claiming AOC.
The tuition and fees deduction expired on 12/31/2016. It was one of the few perennial "extenders" that was NOT permanently extended in the PATH Act of 2015. Under current law, there is no basis to expect it to be reinstated.

http://time.com/money/4622625/tuition-f ... tion-ends/
I was not aware of that change. It is still in effect for 2016 returns per IRS Pub 970, which is what I was going by.

Thanks for the heads-up.

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tdhg566
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Re: American Opportunity Tax Credit - General Questions

Post by tdhg566 » Sun Apr 09, 2017 7:27 am

desertbandit442 wrote:You should be good. It is not how many years you attended college, it is if you have completed a four year college undergraduate program; then you can't claim it. The limit on the AOC is that you can only claim it for a total of 4 tax years. Two year community or vocational college is fine as long as it is an eligible education institution and student is at least a 1/2 time student...
Absolutely correct. I probe my tax clients if their kids begin at a local community college. On many occasions it's clear the child may take 5 years to complete a course of study. If that's likely, then it may be best to pay the relatively minimal first year cost for community college out of pocket, and save the four AOTC credits for the last four years.
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Wagnerjb
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Re: American Opportunity Tax Credit - General Questions

Post by Wagnerjb » Sun Apr 09, 2017 1:53 pm

tdhg566 wrote:On many occasions it's clear the child may take 5 years to complete a course of study. If that's likely, then it may be best to pay the relatively minimal first year cost for community college out of pocket, and save the four AOTC credits for the last four years.
The best strategy isn't always that clear up front. First of all, if the child doesn't stay in college and complete his/her degree then you have lost the opportunity to use the AOTC in year one. Second, for several years it appeared that the AOTC would not be extended....so using it in year one would have made sense if you had concerns that it wouldn't be available for the full four years.

I suppose you can go back and amend the tax return for year one (to either add or remove the AOTC) as you get further into the child's education, but it takes some guesswork if you attempt to optimize the AOTC usage.

Best wishes.
Andy

guitarguy
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Re: American Opportunity Tax Credit - General Questions

Post by guitarguy » Mon Apr 10, 2017 5:54 am

taxck33 wrote:
guitarguy wrote:You need to add up the number of credits she's attained and then evaluate that against where she sits in terms of her class standing at her current institution. If she's within the range of completed credits at the start of the year to be considered still a junior or senior, i.e. has not completed enough credits that she would have completed 4 full years of school already, then she can take the credit.

Previous schooling full time, part time, and/or whether or not she came away with a degree...none of that makes any difference.
I guess my confusion here is that her current program is a 2 year vocational program that will get her an associate of applied science technical degree and is unrelated to anything she's done prior. None of her prior credits transfer over - it's a complete "start from scratch" scenario.
Yeah, I understand. Just show me on the IRS website where it says "must have completed less than 4 years of college unless the student is starting something totally different then it doesn't matter what they've completed in the past." It doesn't matter if the credits she's attained are being transferred over or applied to her current degree or not. At least as far as I understand it. Not trying to be a jerk. But the IRS doesn't care.

FYI we are in the exact same situation. Wife has completed several credits in the past, never got a degree, went back to a 2-yr college last fall for something totally unrelated. We added up her completed credits from the past and deemed her eligible based on how many earned credits she had. My CPA agreed this is the proper way to determine eligibility.

guitarguy
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Re: American Opportunity Tax Credit - General Questions

Post by guitarguy » Mon Apr 10, 2017 6:05 am

desertbandit442 wrote:You should be good. It is not how many years you attended college, it is if you have completed a four year college undergraduate program; then you can't claim it.
I disagree. The IRS pub says "completed 4 years of school." So it in fact it's spelled out in plain English that it IS exactly based on how many years you attend college. It says nothing about the completion of a program or attaining a degree.

dbltrbl
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Re: American Opportunity Tax Credit - General Questions

Post by dbltrbl » Mon Apr 10, 2017 6:38 am

Even if you are doing everything by hand, you can try Freetax USA or credit karma so you can play if scenario lot easier.

bretb
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Re: American Opportunity Tax Credit - General Questions

Post by bretb » Sun Mar 18, 2018 6:44 pm

Sounds like she qualifies to me. I see nothing about age or number of years previously attended. I read this is for undergrad's and can be claimed for only 4 years total.

To be eligible for AOTC, the student must:
Be pursuing a degree or other recognized education credential
Be enrolled at least half time for at least one academic period* beginning in the tax year
Not have finished the first four years of higher education at the beginning of the tax year
Not have claimed the AOTC or the former Hope credit for more than four tax years
Not have a felony drug conviction at the end of the tax year

jrbdmb
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Re: American Opportunity Tax Credit - General Questions

Post by jrbdmb » Mon Jul 02, 2018 4:04 pm

bretb wrote:
Sun Mar 18, 2018 6:44 pm
Sounds like she qualifies to me. I see nothing about age or number of years previously attended. I read this is for undergrad's and can be claimed for only 4 years total.

To be eligible for AOTC, the student must:
Be pursuing a degree or other recognized education credential
Be enrolled at least half time for at least one academic period* beginning in the tax year
Not have finished the first four years of higher education at the beginning of the tax year
Not have claimed the AOTC or the former Hope credit for more than four tax years
Not have a felony drug conviction at the end of the tax year
I am a bit confused here. By a literal reading of the rules above, a student (or parent with a student) who starts college in the fall of 2018 and expects to graduate in the spring of 2022 can claim the AOTC *five* times, since the qualifications will be met in 2018, 2019, 2020, 2021, and 2022.

Am I reading this incorrectly? (Note that the 4th line says "for more than four tax years" rather than "for four tax years.")

DIFAR31
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Re: American Opportunity Tax Credit - General Questions

Post by DIFAR31 » Mon Jul 02, 2018 4:13 pm

jrbdmb wrote:
Mon Jul 02, 2018 4:04 pm
Am I reading this incorrectly? (Note that the 4th line says "for more than four tax years" rather than "for four tax years.")
At best, it's not as clear as it could be. The AOTC can only be taken for any one student for a maximum of four years. See IRS pub 970, pages 10 and 11.

https://www.irs.gov/pub/irs-pdf/p970.pdf

livesoft
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Re: American Opportunity Tax Credit - General Questions

Post by livesoft » Mon Jul 02, 2018 4:18 pm

jrbdmb wrote:
Mon Jul 02, 2018 4:04 pm
(Note that the 4th line says "for more than four tax years" rather than "for four tax years.")
So is 5 "more than four"? It is for even for small values of 5 and large values of 4.
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jrbdmb
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Re: American Opportunity Tax Credit - General Questions

Post by jrbdmb » Tue Jul 03, 2018 9:04 am

DIFAR31 wrote:
Mon Jul 02, 2018 4:13 pm
jrbdmb wrote:
Mon Jul 02, 2018 4:04 pm
Am I reading this incorrectly? (Note that the 4th line says "for more than four tax years" rather than "for four tax years.")
At best, it's not as clear as it could be. The AOTC can only be taken for any one student for a maximum of four years. See IRS pub 970, pages 10 and 11.

https://www.irs.gov/pub/irs-pdf/p970.pdf
Thanks for the link. The info posted further up seems to be based on

https://www.irs.gov/newsroom/american-o ... nd-answers

and as you say is unclear at best if not outright incorrect.
Q12. Who is an eligible student for the American opportunity tax credit?

A. For the American opportunity tax credit, an eligible student is a student 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.

Q13. If a student was an undergraduate during the first part of the taxable year and became a graduate student that same year, will the student qualify for the American opportunity tax credit?

A. If a student has not completed the first four years of post-secondary education as of the beginning of the taxable year, and has not claimed the Hope scholarship credit and/or the American opportunity tax credit for more than four taxable years, the student can claim the American opportunity tax credit for qualified expenses paid during the entire taxable year.

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