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IF you... THEN only... claim on your tax return a dependent who is an eligible student you can claim the American opportunity credit based on that dependent's expenses. The dependent can't claim the credit. don't claim on your tax return a dependent who is an eligible student (even if entitled to claim the dependent) the dependent can claim the American opportunity credit. You can't claim the credit based on this dependent's expenses. Expenses paid by dependent. If you claim on your tax return an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Include these expenses when figuring the amount of your American opportunity credit. Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are trea- ted as paid by your dependent. Expenses paid by you. If you claim a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the American oppor- tunity credit. If neither you nor anyone else claims the de- pendent, only the dependent can include any expenses you paid when figuring the American opportunity credit. Expenses paid by others. Someone other than you, your spouse, or your dependent (such as a relative or for- mer spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's quali- fied education expenses. In this case, the student is trea- ted as receiving the payment from the other person and, in turn, paying the institution. If you claim the student as a dependent on your tax return, you are considered to have paid the expenses. Example. In 2021, Ms. Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. For purposes of claiming an American opportunity credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. Unless Todd is claimed as a dependent on someone else's 2021 tax return, only Todd can use the payment to claim an American opportunity credit. If anyone, such as Todd's parents, claims Todd on his or her 2021 tax return, whoever claims him may be able to use the expenses to claim an American opportunity credit. If anyone else claims Todd, Todd can't claim an American opportunity credit. Tuition reduction. When an eligible educational institu- tion provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. If it is taxable, the employee is treated as receiving a pay- TIP ment of that amount and, in turn, paying it to the educa- tional institution on behalf of the student. For more infor- mation on tuition reductions, see Qualified Tuition Reduction in chapter 1. Figuring the Credit The amount of the American opportunity credit (per eligi- ble student) is the sum of: 1. 100% of the first $2,000 of qualified education expen- ses you paid for the eligible student, and 2. 25% of the next $2,000 of qualified education expen- ses you paid for that student. The maximum amount of American opportunity credit you can claim in 2021 is $2,500 multiplied by the number of eligible students. You can claim the full $2,500 for each eligible student for whom you paid at least $4,000 of ad- justed qualified education expenses. However, the credit may be reduced based on your MAGI. See Effect of the Amount of Your Income on the Amount of Your Credit, later. Example. Jack and Kay Ford are married and file a joint tax return. For 2021, they claim their dependent daughter on their tax return. Their MAGI is $70,000. Their daughter is in her junior (third) year of studies at the local university. Jack and Kay paid qualified education expen- ses of $4,300 in 2021. Jack and Kay, their daughter, and the local university meet all of the requirements for the American opportunity credit. Jack and Kay can claim a $2,500 American oppor- tunity credit in 2021. This is 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000. Form 1098-T. To help you figure your American opportu- nity credit, the student may receive Form 1098-T. Gener- ally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable sub- stitute) to each enrolled student by January 31, 2022. An institution will report payments received (box 1) for quali- fied education expenses. However, the amount on Form 1098-T might be different from what you paid. When figur- ing the credit, use only the amounts you paid or are deemed to have paid in 2021 for qualified education ex- penses. In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimburse- ments or refunds, and whether the student was enrolled at least half-time or was a graduate student. The eligible educational institution may ask for a com- pleted Form W-9S, Request for Student's or Borrower's Taxpayer Identification Number and Certification, or simi- lar statement to obtain the student's name, address, and TIN. Page 20 Chapter 2 American Opportunity Credit