Many college students are eligible for one or more tax benefits based on costs paid for tuition and books. The American opportunity credit is generally acknowledged as the most valuable deduction for undergraduate education costs. Eligible students should be aware of a few legislative changes made to the American opportunity credit that affect tax returns in 2016 and beyond.
The most obvious change is that the American opportunity credit (AOC) is now a permanent part of the tax code. Until legislation passed in late 2015 to extend it, the AOC was scheduled to revert back to its precursor called the hope credit. The tax benefit of the AOC remains the same, but certain requirements to claim the credit have been made more stringent.
Form 1098-T
The most important new requirement is that you must receive an IRS Form 1098-T from your college or university. Form 1098-T is a summary of educational costs incurred and paid. The form has been in use for years, but it was not an absolute requirement for claiming the AOC. There are a few exceptions, but you generally must have Form 1098-T to claim the AOC now.
Form 1098-T is essentially an official receipt from your school and provides a breakdown of education expenses into various categories. It also summarizes where the funds came from to pay those expenses. Educational institutions will now be required to present the information in a more consistent format.
Improved 1098-T format
Due to the legislative change, you are likely to have less difficulty deciphering the difference between how much you were billed and how much you actually paid. The difference is important, because only expenses you pay out of pocket qualify for the AOC.
Net education cost
Grants and scholarships are typically tax-free, but they also affect the amount of your own funding that qualifies for the AOC. Your total out-of-pocket expense must be reduced by any income on which you did not pay tax. Only that net amount qualifies for the AOC. Also, don't forget that school loans that you take out are the equivalent of current out-of-pocket costs, so the debt incurred is eligible for the AOC.
The AOC is typically claimed on the tax return of the parent of an eligible student. However, the student can take the credit in some instances. A noteworthy aspect of the AOC is that up to $1,000 of it is refundable, meaning that you may receive as much as $1,000, even if there is no tax for it to offset.
Contact an accountant or firm such as Johnson & Associates, CPAs, P.S. for more information about claiming the American opportunity credit.
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