qualify

American Opportunity Tax Credit - Understanding How to Properly Take It



Sharing buttons:

hi this is Dave's egill let's talk about

tax planning and specifically for

college tax planning and the American

Opportunity Tax Credit we see this come

up quite a bit and the clients that come

to us unfortunately oftentimes they've

missed this or misused it so we want to

make sure that people understand the

mechanics and how this fits well into a

good comprehensive college plan so the

American Opportunity Tax Credit is a

$2,500 per year per student tax credit

so it comes straight off the taxes you

owe this isn't a deduction where it then

goes through a whole bunch of

calculations this is a straight credit

back in your pocket it is available for

the first four years of the student's

college now it's important to note here

this is very important that you must pay

four thousand dollars of expenses

out-of-pocket to get this credit so once

you pay four thousand dollars towards

college tuition and expenses you get

twenty five hundred back in a tax credit

the reason I say this is important is we

see this messed up quite a bit where

people might take out a from their 529

college savings plans pay for college

and then try to take this tax credit

that doesn't work the IRS will not allow

that because you're essentially double

dipping on your tax savings the 529 plan

you get to grow tax-free and you don't

pay any tax on it if you take it out to

pay for college so they're not gonna

then let you use that money to get the

tax credit this has to be four thousand

dollars out of pocket and to get a

little bit more specific the calculation

is broken up into two parts the first

two thousand dollars you spend you get a

hundred percent of that the next two

thousand dollars you spend you get

twenty-five percent of that but in total

four thousand dollars gets you twenty

five hundred dollars per year per

student and a tax credit

now there's an income phase-out which is

important and here's where really the

more advanced planning comes into play

if you're married filing jointly at a

hundred and sixty thousand dollars you

start to lose part of that credit and as

your income gets up to a hundred and

eighty thousand dollars that credit is

completely gone so here's the planning

tip and I'll show you the difference

between the two income levels and the

tax effects and then talk about how we

get there here is a hundred and eighty

thousand dollars of adjusted gross

income if we assume a standard deduction

of twenty four thousand dollars which is

what it is starting in 2018

then our tax will be twenty six thousand

two hundred dollars and again this

American Opportunity Tax Credit is not

available because we're up at one

hundred and eighty thousand dollars so

our net tax is still 26 200 if we can

get our income down on our tax return to

one hundred and sixty thousand now our

tax is only twenty one thousand eight

hundred again assuming standard

deduction for married couple so you've

saved forty four hundred on tax plus

you've gotten all the benefit from the

American Opportunity Tax Credit of

twenty five hundred dollars so the net

difference in what you're going to owe

to the IRS is six thousand nine hundred

dollars it's a pretty big savings on

twenty thousand dollars of reducing your

income how do we get here

well if you're employed in a business

and just get a w-2 what you can do is

try to max out what you're contributing

to your retirement plan to bring your

income down that might not get you all

the way there but it's going to at least

help you get some of the some tax credit

and reduce your taxes if you own a

business there's a lot more that you can

do to get this 180 thousand down to one

hundred and sixty either through

additional business expenses or

investments in the business but

particularly the best strategy that we

like to see used is a contribution to

a retirement plan because there's a lot

more options that you can do when you

own your own business there's a lot more

money that you can put away for

retirement so think about this if you

own a business and by the way I fully

understand that if you own a business

there's the new small business tax

deduction in 2018 that would change

these tax calculations we're not going

there in this to keep this simple but

let's say you own a business and your

income is sitting is 180,000 well think

about a few set up a retirement plan and

we do this all the time you set up a

retirement plan you put $20,000 into it

to get your income down to 160,000

you've now put $20,000 away for your

benefit in retirement and out of that

you've saved 69 hundred dollars in taxes

so for your twenty thousand that you're

putting away for yourself you are

getting an almost 35 percent return on

that intact savings right now and not

just right now but you can do this every

single year for four years of that

students college education so even with

this is just one child if you have

multiple children you actually if you

have two kids you'll get twice the

American Opportunity Tax Credit so this

is just one year one child so send this

out four years and you've got $80,000

going into a retirement plan plus over

four years you're just shy of twenty

eight thousand dollars of tax savings

just by understanding the credits that

are available and applying them to some

good tax planning as part of your

overall financial planning like I said

this is just one kid imagine if you

started adding a sucking child every

year or if you have three children and

you're multiplying this out over many

years I mean the benefits just become

gigantic and this is how you properly

plan for tax credits when you have a

child that is going through college or

is coming up quickly on college and you

have to understand how to shift some

come around there's a lot of other tax

planning that you can do around college

funding but this is just a good clean

example of an easy tax credit to obtain

if you can just monitor your income and

make sure that you're doing everything

else properly in order to claim it so I

hope this helps if you have any

questions definitely reach out to me or

leave me a note I'll respond and do the

best I can to explain this if there's

any questions on it but this like I said

this is a very easy tax planning example

that can get you a ton of benefit if you

are actually doing the planning in

advance and understanding the mechanics

so thanks for watching and look forward

to more videos on topics like this

thanks