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What Is the American Opportunity Tax Credit?

Every year, countless people in America struggle to keep up with the high cost of a college education. That’s a problem. But at Lucia Capital Group, we’re all about solutions—so we’re going to tell you about a little-known tax credit that could allow you to get a chunk of that money back. It’s called the American Opportunity Tax Credit. And if you qualify this year, you could get up to $2,500 of your taxes refunded to you for each eligible student in your household.

Now remember, a tax credit is not the same as a tax deduction. A deduction reduces your income, and the amount you save is based on your effective tax rate. But a credit reduces your taxes owed dollar for dollar. And the American Opportunity Tax Credit is just what it says: a tax CREDIT. The formula used to calculate it is a little weird, but if you’re eligible, you’ll get a credit of 100% of your first $2,000 in qualified educational expenses plus 25% of your next $2,000 in qualified expenses, for a total of up to $2,500 per student.

Make sense? Here’s a quick example. Let’s say that, based on your income, you qualify for the full credit. If you spend $4,000 this year on qualified higher education expenses, you’ll get back the first $2,000 in its entirety plus 25% of the next $2,000 ($500) for a total of $2,500.

So what are qualified expenses? For the purposes of the American Opportunity Tax Credit, these include tuition, fees, books, supplies, and other necessary things like lab equipment. To qualify, you or your child will need to be pursuing a degree at a qualified institution, and the credit can only be claimed for expenses you had during the first four years of education.

Like a lot of tax credits, if you make too much money you get phased out. If your modified adjusted gross income is above $90,000 if you’re single—or $180,000 if you’re married—you can’t claim the credit. But one huge benefit is that it’s partially refundable, which means that if it brings your tax liability all the way down to zero, you could get up to $1,000 as a refund. Not bad!

If you’re a student, or financing college on behalf of a student, it could really pay to see if you’re eligible to claim the American Opportunity Tax Credit this year. As long as you meet the criteria, you could see some big rewards at tax time.

Information presented should not be considered specific tax, legal, or investment advice. You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

This information is for educational purposes only and no tax payer shall use it for unlawful tax reporting.

No client or prospective client should assume that the presentation (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from LCG or from any other investment professional.

Raymond J. Lucia Jr. is chairman of Lucia Capital Group, a registered investment advisor and CEO of its affiliated broker-dealer, Lucia Securities, LLC, member FINRA/SIPC. Advisory services offered through Lucia Capital Group. Securities offered through Lucia Securities, LLC. Registration with the SEC does not imply a certain level of skill or training.

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