Hi online community,
Is the American Opportunity Credit based on the first 4 years of the years completed in college or the the first 4 years of the credit claimed. For example, a student finished the first 3 years with scholarship payments, no credits claimed. Are those 3 years counting for the credit even though she never claimed the credit? Somebody got me confused, my opinion, they will count because I think it is related to the first 4 years of post secondary education. I am just making sure. Appreciate it. Thank and have a great day.
Oddly enough, the educational institution sets the rules. AOTC grew out of the old Hope Credit. When Congress expanded the Hope credit from 2 years to 4 years, the IRS never bothered to update the regulations so there's something of a leap of faith involved. 1.25A-3(d)(1)(iii) is the best we have to go on:
Year of study requirement. As of the beginning of the taxable year, the student has not completed the first two years of postsecondary education at an eligible educational institution. Whether a student has completed the first two years of postsecondary education at an eligible educational institution as of the beginning of a taxable year is determined based on whether the institution in which the student is enrolled in a degree program (as described in paragraph (d)(1)(i) of this section) awards the student two years of academic credit at that institution for postsecondary course work completed by the student prior to the beginning of the taxable year. Any academic credit awarded by the eligible educational institution solely on the basis of the student's performance on proficiency examinations is disregarded in determining whether the student has completed two years of postsecondary education
So the old Hope rules were "does the school consider you a Freshman or Sophomore?" When expanded to 4 years, that changed the translation into "does the school consider you a Freshman, Sophomore, Junior or Senior?" Also keep in mind this particular rule is by exception. You ARE qualified UNLESS you have "completed" 4 years of undergraduate study. If someone is taking a couple night classes, it may take them 6 or 8 years to complete the course work required for an undergraduate degree. All of those years would count for this condition. Then you would run into the other "4 year" rule which I refer to as the "4 tax returns" rule. The credit can be claimed for the eligible student in years 1, 2, 3, and 4. Or in years 3, 4, 5, and 6. Or whatever makes sense based on the amount of expenses paid, AGI, etc.
I think you’re relying on the descriptive header of the relevant paragraph in Section 25A, and not the words of the Code itself.
(C) Credit allowed only for first 4 years of postsecondary education
–that’s just the headline, the news is what follows.
The American Opportunity Tax Credit under subsection (a)(1) shall not be allowed for a taxable year with respect to the qualified tuition and related expenses of an eligible student if the student has completed (before the beginning of such taxable year) the first 4 years of postsecondary education at an eligible educational institution.
So you’re talking about the student who graduates in May and starts a master’s degree program in September. At the start of the year, she has not completed the first four years. So any expenses paid during the calendar year would qualify, including the first semester (or quarter, which the best schools use) of the postgraduate program. Regulations are not needed when the plain language of the statute is unambiguous.