Our NYC CPA firm provides expert tax and accounting guidance to individuals, self-employed and freelance business owners and international clients. This article describes the modified and enhanced Hope Scholarship Credit known as the American Opportunity Tax Credit (AOTC). The PATH Act extends the above-the-line deduction for qualified tuition and related expenses for two years to apply through 2016.
In addition to expanding these tax benefits, the PATH Act also includes provisions to prevent improper and fraudulent claims. Due to the refundable nature of a portion of the AOTC, additional criteria must be satisfied to be able to claim the credit. A due diligence requirement has been added and the penalties related to improper and fraudulent claims have been imposed.
Compliance Note. An important compliance change included in other legislation requires an individual to possess a valid Form 1098-T, Tuition Statement, to claim the AOTC or the tuition and fees deduction. Please contact MEDOWS CPA, PLLC, our lower Manhattan tax and accounting firm for more information.
American Opportunity Tax Credit
The American Opportunity Tax Credit (AOTC) allows qualified taxpayers a credit of 100 percent of the first $2,000 of qualified tuition and related expenses and 25 percent of the next $2,000, for a total maximum credit of $2,500 per eligible student. Additionally, the AOTC applies to the first four years of a student’s post-secondary education. The AOTC was an enhanced, but temporary version of the permanent HOPE credit due to expire after 2017.
Up to 40 percent of the credit amount is refundable. The credit amount phases out ratable for taxpayers with a modified adjusted gross income (MAGI) between $80,000 and $90,000 (between $160,000 and $180,000, if filing jointly). MAGI is defined as AGI determined without regard to the exclusions for foreign income, foreign housing expenses, and U.S. possessions income.
To prevent retroactive credit claims, the identification requirements have been made stricter. No credit will be allowed if the taxpayer fails to include the qualifying individual’s name and tax identification number. Additionally, no credit will be allowed to students unless the tax identification number was issued on or before the due date for the filing of the return for the tax year.
As an additional deterrent to filing improper and fraudulent claims, a restriction on claiming the credit has been added for those taxpayers found to have made an improper or fraudulent claim on a previous year return. A claim for credit will be denied for 10 tax years after the tax year for which a final determination was made that the taxpayer’s claim for credit was due to fraud and two tax years after the tax year in which there was a final determination made that the taxpayer’s credit claim was due to a reckless and intentional disregard of the rules.
One final restriction has been added to be able to claim the AOTC. The taxpayer must include the employer identification number (EIN) for any institution to which qualified tuition and related expenses have been paid for him or herself. As a further measure to prevent improper and fraudulent claims, the amount listed on the informational returns will only be the amount actually paid for tuition and related expenses, not the aggregate amount billed.
Deduction for Qualified Tuition and Related Expenses
The PATH Act extends the above-the-line deduction for qualified tuition and related expenses through 2016. The higher education tuition deduction was created in 2001 and extended by subsequent laws through the end of 2014. The maximum amount of the tuition and fees deduction is $4,000 for an individual whose AGI for the tax year does not exceed $65,000 ($130,000 in the case of a joint return), or $2,000 for other individuals whose AGI does not exceed $80,000 ($160,000 in the case of a joint return). No deduction is allowed for an individual whose AGI exceeds these thresholds; a married individual filing a separate return; or an individual with respect to whom a dependency exemption may be claimed by another taxpayer.
Taxpayers cannot claim the higher education tuition deduction in the same tax year that they claim the AOTC or the Lifetime Learning credit. A taxpayer also cannot claim the education tuition deduction if anyone else claims the AOTC or the Lifetime Learning credit for the student in the same tax year.
The tuition and fees deduction is calculated on Form 8917 and reported on the taxpayer’s return. However, similar to the compliance rules for the AOTC, no deduction is allowed for the qualified education expenses of an eligible student unless the taxpayer includes the name and taxpayer identification number (TIN) of the student on his or her tax return.
If you have any questions related to these education incentives please call our NYC CPA office for an appointment. We will be happy to assist you.