Anyone with a child knows just how expensive a college education can be. Unfortunately, tuition, fees, and other costs are so high that millions of students have to borrow extensively in order to pay for college, and the result can be years of financial struggle just to claw their way out of debt.
That's what makes it critical to look for any financial help you can get toward a child's college costs. Fortunately, the IRS offers several tax breaks to help lessen the burden of educational expenses for millions of families. In particular, one lucrative credit can provide as much as $10,000 per child over the four years that a typical college education entails, and millions of families routinely take advantage of that credit every year.
How the American Opportunity Tax Credit makes college more affordable
The American Opportunity Tax Credit is designed to help students who are enrolled at regular undergraduate colleges and universities, as well as the parents who often help subsidize educational expenses. Each year for up to four years of your undergraduate education, you get a 100% credit on all of your qualifying educational expenses, up to a maximum of $2,000. Above $2,000, a more modest 25% credit applies to expenses between $2,000 and $4,000, adding up to another $500. All told, if your college expenses add up to $4,000 or more, the credit maxes out at $2,500 per year.
However, it's important to understand that only a limited set of expenses is eligible for the credit. Tuition, mandatory school fees, and required materials for courses can all figure toward the expenses against which you claim the credit. But key items like transportation as well as room and board don't count.
A student must be enrolled in a program that will end in your getting a degree, certificate, or other educational credential after you've completed your studies. If you don't attend school at least half time, then you're not allowed to claim the credit.
How income affects the credit
The American Opportunity Tax Credit is useful even for low-income earners, who often don't have enough taxable income to owe a big income tax bill. Because up to 40% of the credit amount is available as a refundable credit, even someone with no tax liability could get up to $1,000 annually as a result of the provision.
At the other end of the spectrum, though, there are income limits for claiming the credit. For 2018, if you're single and make more than $90,000 in modified adjusted gross income, you can't claim the credit at all. Those who make $80,000 to $90,000 get to take a partial credit. For joint filers, credit reductions start at $160,000 in income, and the credit is disallowed above $180,000.
Many taxpayers are able to take advantage of the American Opportunity Tax Credit to get help with college costs. In 2016, which is the most recent year for which the IRS has provided information, almost 8.85 million returns included claims for the credit, with almost $19.8 billion in credits getting awarded. That works out to a credit of $2,238 per taxpayer among those claiming the credit.
College tax credits make you smarter
Finally, one thing every family with multiple children should keep in mind is that the American Opportunity Tax Credit applies to each child. There's no limit of one child per family at any given time, so people can receive multiple credits in the same year if they have two or more kids in college simultaneously. In 2016, more than 680,000 taxpayers had two or more children eligible for the credit, while 47,000 had three students.
For those looking for ways to pay for college, it's crucial to look at the American Opportunity Tax Credit. With huge average costs for college, every little bit helps, and $2,238 or more in credits is too significant to pass up.