Tuition Payments Made in Advance
Frequently overlooked is the special rule that allows the tuition for an academic period that begins in the first three months of the next year to be paid in advance. Thus, increasing the amount of tuition qualifying for the credit in the year the tuition is paid. This allows for planning when to make tuition payments to maximize credits, especially in the first partial calendar year.
Example: Jill graduated from high school in June and will start college in September. Her tuition and credit-qualifying expenses for the semester covering the last four months of the year and January of the next year are $1,500. Her mother, Cindy, claims Jill as a dependent, and is aware of the 3-month rule, so in December she prepays Jill’s $1,700 tuition for the semester beginning February 1 of the next year, bringing the qualifying expenses to a total of $3,200. The AOTC is equal to 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000. Thus, the AOTC for Jill that Cindy claims is $2,300 ($2,000 + 25% of $1,200). Cindy could increase the credit for the year to the full $2,500 maximum by purchasing $800 worth of course materials needed for “meaningful attendance or enrollment” in Jill’s course of study.
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