Here's How the American Opportunity Tax Credit Could Save You Thousands This Year

By Markets Fool.com

With college costs continuing to skyrocket, students and their parents often have to stretch themselves financially in order to foot those tuition bills. The average tuition costs for the 2015-2016 school year are $9,410 for a public four-year in-state college, $23,893 for a public four-year out-of-state school, and $32,405 for a private nonprofit four-year college.

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Fortunately, there's a tax break that can help offset those monstrous costs. The American Opportunity Tax Credit rewards the pursuit of higher education in the form of money back on your taxes.

Eligibility
To take advantage of the American Opportunity Tax Credit, you must either be pursuing a degree or have a child doing so at a qualified educational institution. The credit can be applied for a student's first four years of higher education. However, as tends to be the case with most tax credits, there's an income limit at play.

If you're filing a tax return on your own, then you must have a modified adjusted gross income of $80,000 or less to receive the full credit. If your MAGI is between $80,000 and $90,000, you can receive a partial credit.

If you're married filing jointly, you can receive the full credit if your MAGI is $160,000 or less, and you can get a partial credit if your MAGI is between $160,000 and $180,000.

Let's talk money
The American Opportunity Tax Credit could put up to $2,500 back in your wallet for each qualified student in your household. If you're eligible, you'll get 100% of your first $2,000 in qualified educational expenses per student, plus 25% of the next $2,000 in qualified educational expenses per student.

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For example, if your income level makes you eligible for the full credit, and you incurred $3,000 in qualified educational expenses in 2015, then you can claim the first $2,000 back in its entirety, plus 25% of that additional $1,000, or $250, for a total of $2,250.

Better yet, the American Opportunity Tax Credit is partially refundable, which means that if it reduces your tax liability to zero, any excess will be refunded to you up to the lesser of 40% of the credit or $1,000.So let's say you owe the IRS $2,000 in taxes but are eligible for the full $2,500 credit. The 60% nonrefundable portion of the credit (that's $1,500) will first be applied to your tax bill to reduce it to $500. From there, you're left with the refundable portion -- $1,000 in total -- which will first cut your tax liability down to zero and then leave you with a $500 refund check coming your way.

What it covers
Unlike other education tax credits, which only cover tuition and fees paid directly to a qualified learning institution, the American Opportunity Tax Credit covers books, supplies, and equipment used for educational purposes. So while the credit can be used to pay for computers and online course materials, it can't be used to pay for room and board, transportation, or medical expenses. Still, this means that if you only paid $2,000 in tuition last year but spent another $1,000 on textbooks (which isn't out of the question), you can still get 25% of that last $1,000 back.

If you're eligible for the American Opportunity Tax Credit, don't forget to include Form 8863with this year's return. Otherwise you're essentially saying "No, thanks" to free money. And really, who'd want to do that?

The article Here's How the American Opportunity Tax Credit Could Save You Thousands This Year originally appeared on Fool.com.

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