In another thread I recently suggested taking the American Opportunity Tax Credit for this year (tax year 2017) if at all possible, but now I’m rethinking that, because of the changes that may be coming in tax legislation. My thoughts here assume that the taxpayer is eligible in all regards to choose from whatever tax credits are currently offered.
Up until now, my baseline strategy has been to use the AOTC as soon as possible for as long as possible, because it is the largest available credit, and then switch to the Lifetime Learning Credit. Both credits cannot be used in the same tax year for the same student. Typically, an undergraduate course of study will span four academic years and five tax years (Fall semester of freshman year to Spring semester of senior year). Currently, the AOTC can only be used a maximum of four times for the same student, with an annual tax credit as high as $2,500 (for up to $4,000 of spending on qualified education expenses using money that isn’t otherwise tax advantaged). There is no limit to the number of times that the LLC can be used for the same student, and it provides an annual tax credit as high as $2,000 (for up to $10,000 of spending on qualified education expenses using money that isn’t otherwise tax advantaged). So, my suggestion would have been to use the AOTC for the first four tax years during which the eligible student was in school, and then after the student uses up all four years of the AOTC, use the LLC for the fifth and final tax year before graduation.
But the major tax legislation now being considered in Congress could change everything. The version passed by the House of Representatives proposes to eliminate the LLC and add a fifth year to the AOTC, albeit with a reduced benefit in the final fifth year (a tax credit of $1,250). As far as I can tell, the Senate version makes no changes to either of these two education credits. If after conference and enactment there is no change (or if nothing at all passes), then my original baseline strategy remains in effect. However, if the House version becomes law, some rethinking is required, and quickly if you have a current student because the opportunity to use the LLC will be going away when the 2017 tax filing season ends. If 2017 will be the last tax year that the LLC will be available and your student has not already used all four years of the AOTC, you may want to consider using the LLC in tax year 2017 instead of another year of AOTC eligibility, so that you can get the potentially higher benefit of the LLC instead of the reduced benefit of a fifth year of the AOTC under the proposed House legislation. The important thing to note here is that in order to get the maximum $2,000 credit for what may be the last year of the LLC, $10,000 of what is otherwise non-tax advantaged money must be spent in 2017 on qualified education expenses for an academic period that begins in 2017 or the first three months of 2018. 2017 ends in 25 days, so you may want to think about how and when you pay for remaining Fall 2017 expenses and Spring 2018 expenses.