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TAX TALK: Are You Eligible to Claim the American Opportunity Credit?

Hal Zemel, CPA, J.D., LL.M. 03.27.2017 | TAX TALK

College costs are high and increasing every year. The federal government offers a credit to help defray the costs of a college education. If you have a child in college, you may be eligible to claim the American Opportunity credit on your 2016 income tax return. However, the credit’s income limitations may preclude your ability to qualify for the credit. If you earn too much to take the credit, your child may be eligible to claim the credit.

Credit Limitations

The American Opportunity credit equals 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses. The credit is capped at $2,500 per student, per year for the first four years of postsecondary education.

The American Opportunity credit begins to phase out when modified adjusted gross income (MAGI) exceeds $160,000 for joint filers ($80,000 for others) and is completely eliminated when MAGI exceeds $180,000 for joint filers ($90,000 for others)

Running the Numbers

If your American Opportunity credit is partially or fully phased out, you should determine whether it would give your family a greater overall tax benefit if your child claimed the credit. In order for your child to claim the credit, you would have to forgo the dependency exemption for the child. So it’s important to run the numbers and see which scenario results in the overall lowest tax.

It is also important to note that the dependency exemptions are subject to a phaseout, so you might not benefit from the dependency exemption regardless of whether your child claims the credit. The 2016 adjusted gross income (AGI) thresholds for the exemption phaseout are $259,400 (singles), $285,350 (heads of households), $311,300 (married filing jointly) and $155,650 (married filing separately).

If your exemption is fully phased out, there likely is no downside to your child taking the credit. If your exemption isn’t fully phased out, compare the tax savings your child would receive from the credit with the savings you’d receive from the exemption to determine which break will provide the greater overall savings for your family.

We can help you run the numbers and can provide more information about qualifying for the American Opportunity credit or other education expense benefits. You can reach me at HZemel@BerdonLLP.com  or contact your Berdon advisor. 

Hal Zemel, a Tax Partner at Berdon LLP, New York Accountants, has nearly 25 years in public accounting and advises businesses in the manufacturing, distribution, advertising, and real estate sectors.

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