American Opportunity Tax Credit (AOTC)

[itsanss88]

Hey, everyone.  Went back to college this year (2020) and this will be the first time that I've been in college that I've been doing my own taxes and I have a question or two or ten.  lol

I got my invoice a month or so ago for the Spring 2021 semester.  I'm met with the conundrum of whether I should pay those fees now, in December 2020, or wait until January 2021 when they are officially due.

The reason I'm asking myself, and now you guys, is for tax purposes.  I've got the money to pay it, but I just want to maximize my tax return.

If I understand the criteria for the AOTC correctly, it looks like it takes $4,000+ of "qualified expenses" (tuition, required enrollment fees and course materials needed for course of study) to get the maximum $2,500 credit.  I just tallied up my expenses and it's at $5,067.19 WITHOUT paying the Spring '21 semester.  So, is that basically all there is to it to get the $2,500 credit?  I meet all the other criteria (valid SSN, not a convicted drug felon, etc. etc. etc.)  Next semester's tuition is just over $3k....there wouldn't be any tax benefit to pay that this calendar year, right? Or would there be?

I should probably note that I work for the Oklahoma state government full time, work for my church part time, and also have rental property that I operate under an active LLC as a sole-proprietorship.  I am single, not a dependent, and do not have any dependents.

Thanks!!!

[Hal_Al]

Yes, you understand it  correctly.   All there is to get  is the $2,500 credit, and that only takes $4000 of expenses. In 2020 pay only up to $4000 (or the minimum the school requires, apparently $5067?). 

There are a few caveats: 1. To be eligible for the AOTC (the most generous education tax benefit) you must not have already completed 4 years of post secondary education. Basically, you must still be an undergrad.  You say "the first time that I've been in college that I've been doing my own taxes".  Caveat #2. There is a four time limit to claiming the AOTC.  Any AOTC claimed by your parents, on their tax returns,  while you were a student-dependent counts toward your four times. 3. You must be half time or more to qualify for the AOTC.

The next best tuition tax credit, the Lifetime Learning credit (LLC) takes $10,000 of expenses to get the maximum $2000 credit (it's a straight 20% up to $10K). The LLC is non-refundable. That is, it can only reduce your tax liability.  There is no half time or more requirement for the LLC.

[itsanss88]

Hal_Al,

Thanks for the reply!  And thanks for clarifying.  I actually did some reconciling after my post and it turns out that I've spent $5,278 in 2020 on college expenses.

I am still an undergrad.  I went full throttle after high school and got my associate's degree in one year and got burned out and " took a semester off"....which turned into 13 years.  lol  AOTC came into existence in 2009 and I haven't been in college since that time, so I should be good on that.  If all goes to plan, I will have a bachelors degree in May 2022.  So hopefully I can claim this $2,500 for 2020, 2021, and 2022.  That would be awesome!!!  That would pay approximately 3/4 of one semester; every little bit helps.  That's crazy, though, that if my parents had claimed that on THEIR tax return that it would affect MY tax return years later.  Oh well, since it doesn't affect me I guess I won't stew on it too long.  Also, I was full time in the Summer and Fall semesters this calendar year.

I will wait a few weeks to pay Spring tuition in this case.  Thanks again and Merry Christmas!

[itsanss88]

Truth be told, since this calendar year is quickly drawing to a close, when I posted my original question to these forums I also posted to another set of forums just in case I didn't get a reply right away.  I didn't want to miss out on an advantageous tax opportunity.  Anyway.....

Well, I did get a reply on the other forums, one that backed up others' thoughts.  However there was an interesting idea brought up that, perhaps, if my schooling related to my business in some way, that the money spent beyond the $4k ($1,278) could perhaps be deducted as a business expense.

I'm all for deducting legitimate business expenses in an effort to lower my taxable income!  What is your opinion on doing that?  The degree I'm trying to obtain is a Bachelor of Science with a major in Organizational Leadership and a concentration in Business.  So, the degree will undoubtedly benefit my personal, small business.  Could I [safely] claim $4k as education expense to get the AOTC and then deduct the remaining $1,278 as a business expense?  If not, hey, I'm going to school either way and I won't lose any sleep over not being able to deduct it.  Haha

Thanks!

[Hal_Al]

The general rule is: Educational expenses to improve your current job skills are deductible. But learning a new job is not. From JK Lasser’s Your Income Tax 2013, pg 580: "For a deduction, the courses must be related to your existing job responsibilities and not lead to qualification for a new business. The tax court has allowed deductions for MBA expenses where individuals with some managerial or administrative experience took the courses to improve skills needed for their existing jobs."

If you meet that criteria, you can deduct the remaining $1,278 as a business expense.  Only the self employed can do this, since 2018.  W-2 employees are no longer allowed to deduct job expenses, including  educational courses.

[itsanss88]

I think I pretty easily can say that my education maintains and improves my necessary skills for running the business!  That being said, I'm super tempted to go ahead and pay for spring '21 now and be able to add those costs to my 2020 return.  It would only mean paying for the semester a few weeks sooner than I have to anyway....

Thanks