American Opportunity Tax Credit

College can be expensive. Most people can use some help defraying tuition and other education-related costs. If you qualify for it, the American Opportunity Tax Credit could reduce your federal income tax bill by up to $2,500!

What is the American Opportunity Tax Credit?

The AOTC reduces the amount of tax owed by you or the person claiming the credit (for example, your parents). Here’s how it works:

The credit repays you 100 percent of the first $2,000 of qualified education expenses for each eligible student. The credit also pays 25 percent of the next $2,000 of qualified education expenses ($500). So, in effect the total credit is $2,500 on the first $4,000 of expenses per child. For example, parents with two or more students in their first four years of college may be able to claim the credit for each student. That’s a saving of $20,000! 4 Years X 2 students X $2,500 = $20,00. If your Tax liability is already $0 or some of the credit brings you down to $0 then you get you can get 40 percent of the remaining amount (up to $1,000) back as a refund.

Who is eligible for the American Opportunity Tax Credit?

The AOTC has multiple eligibility requirements. It’s important to make sure you’re eligible for this tax credit before filing your taxes so that you don’t potentially trigger an audit.

First, you need to check income limits. For you to claim a full $2,500 AOTC credit, the claimant’s modified adjusted gross income, or MAGI, must be $80,000 or less for an individual or $160,000 or less for a married couple filing jointly.

If you’re a single college student claiming the credit for yourself, you’ll probably have no problem meeting the MAGI limits to qualify for the full credit. It may be more difficult for your parents to claim the credit because their MAGI may exceed the income limitations.

You can get a reduced credit if your MAGI is between $80,000 and $90,000 for an individual and between $160,000 and $180,000 for a married couple filing jointly. If your MAGI is above $90,000 as an individual or $180,000 as a married couple filing jointly, you are not allowed to claim the credit.

Additional eligibility requirements include:

  • You must be pursuing a degree or other recognized educational credential.

  • You must be enrolled at least half-time for at least one academic period that began in the tax year.

  • You must be in your first four years of higher education, which means you can’t claim the credit if you are in your fifth, sixth, etc. year of college. So, if you take some extra time to complete your undergraduate degree or if you’re headed to grad school, you might be out of luck.

  • You can’t have claimed the AOTC (or the former Hope credit) for more than four tax years.

  • You can’t have a felony drug conviction within the tax year.

If you meet the income and eligibility requirements, you can claim the AOTC on your taxes.

How do you claim the credit?

Your college should send you a Form 1098-T Tuition Statement by Jan. 31. You will need this statement to receive your AOTC. Notify your college if you don’t receive it. Make sure to keep this form and any other records related to the tax credit in case the IRS requests the data.

The form will include amounts received or billed during the tax year. You’ll find that amount in either Box 1 or 2. Note: This might not be the total amount you can claim. You may also be able to claim other qualified education expenses, see below.

To claim the AOTC, you will need to use  Form 8863  and attach the completed form to your Form 1040. 

Can I claim the AOTC if my parents also claim it?

No. Only one tax filing can claim the AOTC, so it’s important to discuss this with your parents to make sure you’re not both claiming the credit. You also can’t claim the AOTC and the Lifetime Learning Credit in the same tax year.

What are qualified expenses and what are not?

AOTC qualified expenses include tuition, required fees and course materials, including books, supplies and equipment needed to take the course. These expenses must be at an  eligible post-secondary educational institution. A computer may qualify for the tax credit, but it must be required “as a condition of enrollment or attendance” at the college. This is why the Amount on the Form 1098-T can sometimes be lower and a higher amount used on the Tax return. The University only puts actual tuition on that form while there might be additional expenses such as these.

Not all college-related expenses are eligible. Ones that aren’t eligible include:

  • Room and board

  • Transportation

  • Insurance

  • Student fees that aren’t required

Not everyone is eligible for the AOTC. The good news is the IRS offers another tax credit for college students:

  • Lifetime Learning Credit – The Lifetime Learning Credit  is for qualified tuition and related expenses for eligible students enrolled in eligible educational institutions. The credit is up to $2,000 per tax return, and there are no limitations as to how many years you can claim this credit.

Bottom line

College costs continue to rise. If you qualify for it, the AOTC is one way to reduce your taxes and possibly get a refund. You could then use that money to make interest payments on student loans, pay required enrollment fees or spend on next semester’s books.