The American Opportunity Tax Credit is an income tax credit for qualified college or university education expenses for the first four years of higher education per dependent. The maximum credit is $2,500 per year per eligible student for a potential total of $10,000 over four years per student.
To claim the full credit, a taxpayers Modified Adjusted Gross Income (MAGI) must be $80,000 or less for single tax filers or $160,000 or less for those filing Married Filing Joint. The credit is fully phased out when MAGI exceeds $90,000 for single filers and exceeds $180,000 for those filing jointly.
Proper tax planning, such as managing investment income or increasing salary deferrals to work 401k or Health Savings Account (HSA) type plans, can help keep MAGI low enough so that families can claim the maximum credit available which can lead to large tax savings.
A tax credit, as opposed to a tax deduction, can directly reduce taxes. A tax deduction reduces taxable income so that the tax savings is basically the amount of the deduction multiplied by the taxpayer’s tax rate. A tax credit is a dollar-for-dollar reduction in tax which can create valuable financial relief, especially in years of college tuition.