The American Opportunity Tax Credit (AOTC) replaced the ‘Hope Credit’ in 2009. It is for expenses related to post-secondary education for the first four years. American Opportunity Tax Credit can be claimed as a tax return.
Either by the student or by the person the student is dependent upon. It may also include the spouse of the student who is contributing to their education funds. However, many have come up with this question that ‘what happens if I claim the American opportunity credit for more than 4 years?
While the AOTC has its limitations, it can be beneficial for the student who files for these returns. All a student has to do is fill the form required for the AOTC tax return.
Understanding the AOTC
- American Opportunity Tax Credit pays for a student’s course-related payments. These include college supplies, tuition costs as well as other costs related to the course.
- Accommodation, Medicare, and insurance do not get included in the AOTC. The set limit for the AOTC tax return is $2,500 annually.
- Eligible students can claim the full amount of $2,000 in their first year. In the following year, they can claim 25%.
- Calculating the costs: (2000 x 100%) + ($2000 x 25%) = $2,500.
- In short, we can surmise that one can claim up to $2,500 from their $4,000 cost of education.
- American Opportunity Tax Credit is partially refundable. Other tax credits, but are either refundable or non-refundable.
- You can take 40% of your credit back if your taxes have gone down to 0. Implying, that if you do not have any tax debt, you will still receive your 40% credit as a refund.
How do I know I am eligible for American Opportunity Tax Credit?
- You have to be pursuing a degree from a recognized educational institution
- You have to be enrolled for an academic period for at least half time. (That is, the beginning of the tax year)
- Ensure that you have not finished the first 4 years of higher education at the starting of the tax year.
- You have not claimed AOTC or Hope Credit for more than 4 years.
- Finally, you should not have a felony drug conviction at the ending of the tax year.
How many times can one claim the AOTC Tax return?
AOTC can be claimed by an eligible student four times. This number includes the time you have claimed the Hope Credit as well.
Taking an example, if you have filed for Hope Education Credit return in the year 2015, and then claimed tax returns from AOTC in 2016, 2017, and 2018, you cannot apply for the American Opportunity Tax Credit in 2019 for tax return.
The other options that you can explore are the Lifetime Learning Credit. If you have used that up as well, then go for the Tuition and Fees Deduction for further studies.
It is important to note that you cannot claim AOTC tax credit for more than 4 years. You will not be considered eligible for it. That way, you won’t be able to apply for the return, to begin with. Also, you cannot apply for an AOTC tax return more than once a year.
It does not matter how long it takes you to pursue your degree, if you have claimed it for 4 years, you cannot claim it any further.
Let’s say that you have been able to claim the AOTC tax return for the 5th year due to a data error. Reach out to the IRS immediately and get it resolved. You will be required to pay back the due amount to the IRS.
But this will ensure that you are not charged with fraud or other penalties. In such cases, the IRS can ban you from claiming any other educational tax return or even ban you from other returns offered by the IRS.
It is suggested to clear this up before this shows up in your records. And tax frauds are not taken lightly in the United States. It can reflect for a long time. Companies, tax agencies, etc may be more hesitant to trust you and offer you jobs, etc.
Claims of American Opportunity Tax Credit should be done carefully
Ensure that before applying, you are qualified for an AOTC tax return. Following this, keep documentation of all the data you have provided and received while filing the returns. You never know when you might need it. This data can also be used for auditing and checking if you are filing the right amount of return.
Keeping the data documented makes it easier for all the parties involved. If you do not have the data about your tax returns, and the IRS audits you, then you will be required to pay back all the amount to the IRS. This will be considered as an error with interest. Additionally, you can be charged with fraud and other penalties.
Not only that, but the IRS can also ban you from filing for an AOTC tax return. For 2 to 10 years depending upon the severity of the data unavailable or forged.
Other educational tax to consider
The government has several plans for students who wish to pursue higher education and receive tax rebates. These plans reduce income tax liabilities.
State and Federal governments offer LLC, student loans, deduction, and 529 savings plans for students. There are other plans such as business reductions and self-employed worker tax rebates etc.
American Opportunity Tax Credit is an excellent opportunity for all students looking to pursue higher education and seek financial support. One can only claim it for four years. Following the AOTC, they can seek out other financial aid for further assistance.
If by some accident, you can claim it in your 5th year, inform the IRS. Because if you get audited and this shows up in the documentation, it is not going to look good on your records. Some companies seek out your tax records to see if you are a responsible worker, so keep it clear. Auditing is nothing to worry about, however.