Table of Contents
For 2011, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. They are the American opportunity credit (this chapter) and the lifetime learning credit ( chapter 3 ).
This chapter explains:
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Who can claim the American opportunity credit,
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What expenses qualify for the credit,
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Who is an eligible student,
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Who can claim a dependent's expenses,
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How to figure the credit,
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How to claim the credit, and
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When the credit must be repaid.
You can choose the education benefit that will give you the lowest tax. You may want to compare the tuition and fees deduction to either of the education credits. See chapter 6, Tuition and Fees Deduction.
Table 2-1.Overview of the American Opportunity Credit
Maximum credit | Up to $2,500 credit per eligible student |
Limit on modified adjusted gross income (MAGI) | $180,000 if married filling jointly; $90,000 if single, head of household, or qualifying widow(er) |
Refundable or nonrefundable | 40% of credit may be refundable; the rest is nonrefundable |
Number of years of postsecondary education | Available ONLY for the first 4 years of postsecondary education |
Number of tax years credit available | Available ONLY for 4 tax years per eligible student (including any year(s) Hope credit was claimed) |
Type of degree required | Student must be pursuing a degree or other recognized education credential |
Number of courses | Student must be enrolled at least half time for at least one academic period that begins during the tax year |
Felony drug conviction | As of the end of 2011, the student had not been convicted of a felony for possessing or distributing a controlled substance |
Qualified expenses | Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance |
Payments for academic periods | Payments made in 2011 for academic periods beginning in 2011 or beginning in the first 3 months of 2012 |
The following rules will help you determine if you are eligible to claim the American opportunity credit on your tax return.
Generally, you can claim the American opportunity credit if all three of the following requirements are met.
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You pay qualified education expenses of higher education.
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You pay the education expenses for an eligible student.
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The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return.
Note.
Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you.
“Qualified education expenses” are defined later under Qualified Education Expenses . “Eligible students” are defined later under Who Is an Eligible Student . A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses .
You may find Figure 2-1, Can You Claim the American Opportunity Credit for 2011 , later, helpful in determining if you can claim an American opportunity credit on your tax return.
You cannot claim the American opportunity credit for 2011 if any of the following apply.
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Your filing status is married filing separately.
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You are listed as a dependent on another person's tax return (such as your parents'). See Who Can Claim a Dependent's Expenses , later.
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Your modified adjusted gross income (MAGI) is $90,000 or more ($180,000 or more in the case of a joint return). MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit .
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You (or your spouse) were a nonresident alien for any part of 2011 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens.
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You claim the lifetime learning credit or a Tuition and Fees Deduction for the same student in 2011.
The American opportunity credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Generally, the credit is allowed for qualified education expenses paid in 2011 for an academic period beginning in 2011 or the first three months of 2012.
For example, if you paid $1,500 in December 2011 for qualified tuition for the spring 2012 semester beginning January 2012, you may be able to use that $1,500 in figuring your 2011 credit.
For purposes of the American opportunity credit, qualified education expenses are tuition and certain related expenses required for enrollment or attendance at an eligible educational institution.
Example 1.
Jefferson is a sophomore in University V's degree program in dentistry. This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Because the equipment rental is needed for his course of study, Jefferson's equipment rental fee is a qualified expense.
Example 2.
Grace and William, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. William bought his books from a friend; Grace bought hers at College W's bookstore. Both are qualified education expenses for the American opportunity credit.
Example 3.
When Kelly enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and the student government. No portion of the fee covers personal expenses. Although labeled as a student activity fee, the fee is required for Kelly's enrollment and attendance at College X and is a qualified expense.
You cannot do any of the following.
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Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an American opportunity credit based on those same expenses.
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Claim an American opportunity credit in the same year that you are claiming a tuition and fees deduction for the same student.
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Claim an American opportunity credit and lifetime learning credit based on the same qualified education expenses.
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Claim an American opportunity credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP). See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program.
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Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. See Adjustments to Qualified Education Expenses, next.
If you pay qualified education expenses with certain tax-free funds, you cannot claim a credit for those amounts. You must reduce the qualified education expenses by the amount of any tax-free educational assistance and refund(s) you received.
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The tax-free parts of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions),
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Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions).
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Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ),
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Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and
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Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.
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Payment for services, such as wages,
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A loan,
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A gift,
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An inheritance, or
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A withdrawal from the student's personal savings.
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The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions.
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The use of the money is not restricted.
Qualified education expenses do not include amounts paid for:
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Insurance,
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Medical expenses (including student health fees),
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Room and board,
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Transportation, or
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Similar personal, living, or family expenses.
This is true even if the amount must be paid to the institution as a condition of enrollment or attendance.
To claim the American opportunity credit, the student for whom you pay qualified education expenses must be an eligible student. This is a student who meets all of the following requirements.
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The student did not have expenses that were used to figure an American opportunity credit in any 4 earlier tax years. This includes any tax year(s) in which you claimed the Hope credit for the same student.
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The student had not completed the first 4 years of postsecondary education (generally, the freshman, sophomore, junior, and senior years of college) before 2011.
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For at least one academic period beginning in 2011, the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.
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The student has not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of 2011.
These requirements are also shown in Figure 2-2, Who is an Eligible Student for the American Opportunity Credit , later.
Example 1.
Mack graduated from high school in June 2010. In September, he enrolled in an undergraduate degree program at College U, and attended full-time for both the 2010 fall and 2011 spring semesters. For the 2011 fall semester, Mack was enrolled less than half-time. Because Mack was enrolled in an undergraduate degree program on at least a half-time basis for at least one academic period that began during 2010 and at least one academic period that began during 2011, he is an eligible student for tax years 2010 and 2011 (including the 2011 fall semester when he enrolled at College U on less than a half-time basis).
Example 2.
After taking classes at College V on a part-time basis for a few years, Shelly became a full-time student for the 2011 spring semester. College V classified Shelly as a second-semester senior (fourth year) for the 2011 spring semester and as a first-semester graduate student (fifth year) for the 2011 fall semester. Because College V did not classify Shelly as having completed the first 4 years of postsecondary education as of the beginning of 2011, Shelly is an eligible student for tax year 2011. Therefore, the qualified education expenses paid for the 2011 spring semester and the 2011 fall semester are taken into account in calculating the American opportunity credit for 2011.
Example 3.
During the 2010 fall semester, Larry was a high school student who took classes on a half-time basis at College X. Larry was not enrolled as part of a degree program at College X because College X only admits students to a degree program if they have a high school diploma or equivalent. Because Larry was not enrolled in a degree program at College X during 2010, Larry was not an eligible student for tax year 2010.
Example 4.
The facts are the same as in Example 3. During the 2011 spring semester, Larry again attended College X but not as part of a degree program. Larry graduated from high school in June 2011. For the 2011 fall semester, Larry enrolled as a full-time student in College X as part of a degree program, and College X awarded Larry credit for his prior coursework at College X. Because Larry was enrolled in a degree program at College X for the 2011 fall term on at least a half-time basis, Larry is an eligible student for all of tax year 2011. Therefore, the qualified education expenses paid for classes taken at College X during both the 2011 spring semester (during which Larry was not enrolled in a degree program) and the 2011 fall semester are taken into account in computing any American opportunity credit.
Example 5.
Dee graduated from high school in June 2010. In January 2011, Dee enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a travel agent. Dee completed the program in December 2011, and was awarded a certificate. In January 2012, she enrolled in a 1-year postsecondary certificate program on a full-time basis to obtain a certificate as a computer programmer. Dee is an eligible student for both tax years 2011 and 2012 because she meets the degree requirement, the work load requirement, and the year of study requirement for those years.
If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim an American opportunity credit for your dependent's expenses for that year.
For you to claim an American opportunity credit for your dependent's expenses, you must also claim an exemption for your dependent. You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c.
IF you... | THEN only... |
claim an exemption on your tax return for a dependent who is an eligible student |
you can claim the American opportunity credit based on that dependent's expenses. The dependent cannot claim the credit. |
do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) | the dependent can claim the American opportunity credit. You cannot claim the credit based on this dependent's expenses. |
Example.
In 2011, Ms. Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. For purposes of claiming an American opportunity credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself.
Unless an exemption for Todd is claimed on someone else's 2011 tax return, only Todd can use the payment to claim an American opportunity credit.
If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2011 tax return, whoever claims the exemption may be able to use the expenses to claim an American opportunity credit. If anyone else claims an exemption for Todd, Todd cannot claim an American opportunity credit.
The amount of the American opportunity credit (per eligible student) is the sum of:
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100% of the first $2,000 of qualified education expenses you paid for the eligible student, and
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25% of the next $2,000 of qualified education expenses you paid for that student.
The maximum amount of American opportunity credit you can claim in 2011 is $2,500 times the number of eligible students. You can claim the full $2,500 for each eligible student for whom you paid at least $4,000 of qualified education expenses. However, the credit may be reduced based on your MAGI. See Effect of the Amount of Your Income on the Amount of Your Credit , later.
Example.
Jack and Kay Ford are married and file a joint tax return. For 2011, they claim an exemption for their dependent daughter on their tax return. Their MAGI is $70,000. Their daughter is in her junior (third) year of studies at the local university. Jack and Kay paid qualified education expenses of $4,300 in 2011.
Jack and Kay, their daughter, and the local university meet all of the requirements for the American opportunity credit. Jack and Kay can claim a $2,500 American opportunity credit in 2011. This is 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000.
The amount of your American opportunity credit is phased out (gradually reduced) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). You cannot claim an American opportunity credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return).
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Foreign earned income exclusion,
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Foreign housing exclusion,
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Foreign housing deduction,
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Exclusion of income by bona fide residents of American Samoa, and
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Exclusion of income by bona fide residents of Puerto Rico.
Worksheet 2-1.MAGI for the American Opportunity Credit
1. | Enter your adjusted gross income (Form 1040, line 38) |
1. | |||||
2. | Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18) | 2. | |||||
3. | Enter your foreign housing deduction (Form 2555, line 50) | 3. | |||||
4. | Enter the amount of income from Puerto Rico you are excluding | 4. | |||||
5. | Enter the amount of income from American Samoa you are excluding (Form 4563, line 15) | 5. | |||||
6. | Add the amounts on lines 2, 3, 4, and 5 |
6. | |||||
7. | Add the amounts on lines 1 and 6. This is your modified adjusted gross income. Enter here and on Form 8863, line 9 |
7. |
Example.
You are filing a joint return and your MAGI is $165,000. In 2011, you paid $5,000 of qualified education expenses.
You figure a tentative American opportunity credit of $2,500 (100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000 of qualified education expenses).
Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($2,500) by a fraction. The numerator of the fraction is $180,000 (the upper limit for those filing a joint return) minus your MAGI. The denominator is $20,000, the range of incomes for the phaseout ($160,000 to $180,000). The result is the amount of your phased out (reduced) American opportunity credit ($1,875).
Forty percent of the American opportunity credit is refundable for most taxpayers. However, if you were under age 24 at the end of 2011 and the conditions listed below apply to you, you cannot claim any part of the American opportunity credit as a refundable credit on your tax return. Instead, your allowed credit (figured on Form 8863, Part IV) will be used to reduce your tax as a nonrefundable credit only.
You do not qualify for a refund if items 1 (a, b, or c), 2, and 3 below apply to you.
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You were:
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Under age 18 at the end of 2011, or
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Age 18 at the end of 2011 and your earned income (defined below) was less than one-half of your support (defined below), or
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Over age 18 and under age 24 at the end of 2011 and a full-time student (defined below) and your earned income (defined below) was less than one-half of your support (defined below).
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At least one of your parents was alive at the end of 2011.
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You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2011.
You claim the American opportunity credit by completing Parts I, III, and IV of Form 8863 and submitting it with your Form 1040 or 1040A. Enter the nonrefundable part of the credit on Form 1040, line 49, or on Form 1040A, line 31. Enter the refundable part of the credit on Form 1040, line 66, or on Form 1040A, line 40. A filled-in Form 8863 is shown at the end of this chapter.
If, after you file your 2011 tax return, you or someone else receives tax-free educational assistance for, or a refund of, an expense you used to figure an American opportunity credit on that return, you may have to repay all or part of the credit. You must refigure your American opportunity credit for 2011 as if the assistance or refund was received in 2011. Next, you must refigure your tax liability using the revised credit. The increased tax liability is the amount you must repay. Add the repayment (recapture) to your tax liability for the year in which you receive the assistance or refund. See the instructions for your tax return for that year to find out how to report the recapture amount. Your original 2011 tax return does not change.
Example.
You paid $7,000 tuition and fees in August 2011, and your child began college in September 2011. You filed your 2011 tax return on February 15, 2012, and claimed an American opportunity credit of $2,500. After you filed your return, you received a refund of $4,000. You must refigure your 2011 American opportunity credit using $3,000 of qualified education expenses instead of $7,000. The refigured credit is $2,250. The increase to your tax liability is also $250. Include the difference of $250 as additional tax on your 2012 income tax return. See the instructions for your 2012 income tax return to determine where to include this tax.
Bill Pass, age 28 and a single taxpayer, enrolled full-time at a local college to earn a degree in law enforcement. This is the first year of his postsecondary education. During 2011, he paid $5,600 for his qualified 2011 tuition. He received Form 1098-T (shown on the next page) from the college. He and the college meet all of the requirements for the American opportunity credit. Bill's MAGI is $57,000. His income tax liability, before credits, is $8,106. Bill claims no credits other than the American opportunity credit. He figures his American opportunity credit of $2,500, of which $1,000 is refundable, as shown on the Form 8863, later.
Note.
In Appendix A, Illustrated Example of Education Credits at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return.
Credit Limit Worksheet—Form 8863, Line 23
Nonrefundable lifetime learning credit | |||||||
1. | Enter the amount from Form 8863, line 22 | 1. | |||||
2. | Enter the amount from Form 1040, line 46, or Form 1040A, line 28 | 2. | |||||
3. | Enter the total, if any, of your credits from: | ||||||
• | Form 1040, lines 47, 48, and the amount from Schedule R entered on line 53 | 3. | |||||
• | Form 1040A, lines 29 and 30 | ||||||
4. | Subtract line 3 from line 2 | 4. | |||||
5. | Nonrefundable lifetime learning credit. Enter the smaller of line 1 or line 4 | 5. | |||||
Nonrefundable American opportunity credit | |||||||
6. | Enter the amount from Form 8863, line 15 | 6. | 1,500 | ||||
7. | Enter the amount from Form 1040, line 46, or Form 1040A, line 28 | 7. | 8,106 | ||||
8. | Enter the total, if any, of your credits from: | ||||||
• | Form 1040, lines 47, 48, and the amount from Schedule R entered on line 53, and the amount from line 5 above | 8. | 0 | ||||
• | Form 1040A, lines 29 and 30, and the amount from line 5 above | ||||||
9. | Subtract line 8 from line 7 | 9. | 8,106 | ||||
10. | Nonrefundable American opportunity credit. Enter the smaller of line 6 or line 9 | 10. | 1,500 | ||||
11. | Nonrefundable education credits. Add line 5 and line 10. Enter here and on Form 8863, line 23 | 11. | 1,500 |
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