As a real estate investor, it's important to continually expand and grow your knowledge base. The more techniques, knowledge, and experience you have, the more adaptable you will be. The American Opportunity Tax Credit (AOTC) is a credit against income for qualified educational expenses in the first four years of higher education. This article will delve into the AOTC as it applies to real estate investors so that you have a full understanding of if and how this tax credit can serve you.
What is the American Opportunity Tax Credit?
The American Opportunity Tax Credit was created to offer a tax deduction of up to $2,500 per year for each eligible student for up to the first four years of qualified higher education, providing a total of $10,000 in tax credits.
Who is eligible for the American opportunity tax credit?
An eligible student is:
- Any student pursuing a degree or other recognized education credential who has:
- not completed four years of secondary education
- and is enrolled at least half time for one or more semesters in the applicable tax year.
- Your modified adjusted gross income must be $80,000 or less ($160,000 if filing jointly), and you may not be convicted of a drug felony by the end of the tax year.
If you already have your four-year degree, such as a bachelor's degree, you're out of luck on this tax credit. But if you have only completed high school or even an associate's two-year degree, you could be eligible for the AOTC.
Only certain educational institutions qualify, and each investor's school will obviously vary by location and intended degree or certificate, so check the U.S. Department of Education’s Database of Accredited Postsecondary Institutions and Programs to confirm if the school you're considering counts. The database does include trade schools, not just colleges and universities.
Does it apply to real estate education?
The American Opportunity Tax Credit could apply to real estate education, depending on the type of education you're seeking. The AOTC would apply to a business degree, but outside of that, there are few four-year degrees in real-estate-related fields. So most of your traditional real estate education licenses or courses do not qualify for the AOTC.
Instead, aspiring real estate investors or agents should look to an alternative tax credit, the Lifetime Learning Credit (LLC), which is more likely to help you defray the costs of courses.
What is deductible as a part of the American Opportunity Tax Credit?
If the education you're seeking qualifies for the AOTC, you can deduct expenses for tuition and associated school fees. The AOTC will also cover the costs of books, supplies, and equipment related to your education. You are able to deduct 100% of the first $2,000 in expenses plus 25% of an additional $2,000 in expenses for a total of $2,500 per tax year.
That means if you spent $3,000, you would be able to claim $2,250, and if you spent $6,000, you would be able to claim $2,500. You don't even need to purchase these items directly from the institution -- just make sure to keep all applicable receipts.
The Millionacres bottom line
The American Opportunity Tax Credit holds a lot of potential for students but unfortunately is not well-suited for most real estate investors. The Lifetime Learning Credit may fill that need better as it applies to continuing education, including non-degree education like passing your state real estate board exam. You may have already been utilizing this credit without knowing it. If you already have an established real estate business, you have likely been able to offset some of the education expenses as business deductions for furthering your education -- that's the limited liability company (LLC) at work.
Ultimately, if you're unsure whether the AOTC or the LLC applies to you, ask your accountant to clarify, even if they weren't the ones to bring it to your attention. Otherwise, you could be leaving money on the table.