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Sunday, March 17, 2024

American Opportunity Tax Credit Issues

Over the years, I have heard individuals and tax professionals raise various questions on the operation of the American Opportunity Tax Credit (AOTC at IRC 25A). This is the credit that for the past many years provides up to a $2,500 credit for each of the first four years of higher education at a college or university.  It started in the early 1990s as the Hope Scholarship credit for a lower amount and only the first two years of college.

There are numerous other tax breaks for higher education including an exclusion for scholarships, a limited above-the-line deduction for student loan interest, the Lifetime Learning Credit, an exclusion for interest on education savings bonds, 529 accounts, and more.

Some of the issues I have heard for the AOTC include:

  • Do years at a community college count as part of the four years? I believe they do, but what if the student isn't, at least at first, pursuing a degree?
  • What are all of the expenses that qualify?
  • What if the 1098-T received (and required to claim the credit) is incorrect in terms of the year or amount?
  • Why does it only cover college or university programs rather than also trade schools and similar?
I'm working on a paper of these and a few other administrative and legislative issues about the AOTC. If you have questions or issues you've encountered or wondered about, I would greatly appreciate you posting them in a comment here.  Thank you!


Winston said...

Hi Annette!

Some common situations/debates we have as VITA volunteers:

1a. When does the first 4 years for AOTC start when they start at a JC/CC then transfer to a 4 year university?

1b. If the student starts off as part-time for several years (3+ years), then goes to school full-time. Can they still claim AOTC if they only claimed LLC for the first 3+ years as a part-time student?

2. A 20 year old student has a paying internship that requires them to file a tax return and support themselves in cost of living and cost of housing. Both parents are still alive and are not claiming the student as a dependent. Can the student file and claim the refundable portion of the AOTC?

3. When can a student claim a computer as an education expense?

Thanks in advance!

21st century taxation (Annette Nellen) said...

Thanks Winston!

Winston said...

Another common and frustrating situation that we see at VITA sites:
When the student is being claimed as a dependent, 1098-T Box 5 amount exceeds Box 1 or works part-time that triggers a requirement to file and getting caught up in Kiddie Tax.