What Is the American Opportunity Tax Credit (AOTC)?

What Is the American Opportunity Tax Credit (AOTC)?

Let me explain the American Opportunity Tax Credit, or AOTC, directly to you. It's a partially refundable tax credit designed to help cover qualified higher education expenses for the first four years of postsecondary education. You can claim up to $2,500 per eligible student each year, and this credit is available to the student, their parents if the student is a dependent, or their spouse.

Key Takeaways

Here's what you need to know upfront. The AOTC can offset up to $2,500 in eligible college expenses per student per year. It applies to tuition, required fees, and course materials, but it doesn't cover room and board, insurance, transportation, or medical expenses. Importantly, up to $1,000 of this credit is refundable, meaning you can get that amount back even if you don't owe any taxes. For the full credit, your modified adjusted gross income, or MAGI, has to be $80,000 or less if you're single, or $160,000 or less if you're married filing jointly.

Understanding the American Opportunity Tax Credit (AOTC)

If you have a qualifying student in your household, the AOTC lets you claim a maximum of $2,500 tax credit per year for their first four years of higher education. This credit directly helps with costs like tuition and other expenses tied to the student's coursework. You can claim 100% of the first $2,000 spent on school expenses and 25% of the next $2,000, which adds up to that $2,500 maximum.

Remember, the AOTC is partially refundable. That means if it reduces your tax liability to zero, you can still get up to $1,000—or 40% of the credit—as a refund. Tax credits in general come in refundable, nonrefundable, or partially refundable forms, and this one falls into the partially refundable category.

AOTC Eligibility Requirements

You have to meet specific requirements to claim the AOTC. To do so on your tax return, you must pay qualified education expenses for higher education, those expenses must be for an eligible student, and that student has to be you, your spouse, or a dependent you claim. Additionally, you'll need to receive IRS Form 1098-T from an eligible school; you can find all pages of this form on the IRS website.

Which Students Qualify for the AOTC?

A student qualifies if they're pursuing a degree or recognized educational qualification, enrolled at least half-time for at least one academic period in the tax year, haven't completed the first four years of higher education at the year's start, haven't claimed the AOTC or the old Hope credit for more than four tax years, and don't have a felony drug conviction by the end of the tax year. Academic periods include quarters, trimesters, semesters, or summer sessions; if there's no formal term, the payment period counts.

Which Expenses Qualify for the AOTC?

Qualified expenses cover tuition and related costs required to attend an eligible institution, which includes accredited public, nonprofit, or private colleges, universities, vocational schools, or other postsecondary places. Related costs mean student activity fees paid as a condition of enrollment and books, supplies, or equipment needed for classes, regardless of where you buy them. Be aware that insurance, medical expenses including student health fees, room and board, transportation, and living expenses do not qualify.

You can use student loans for these expenses and still claim the credit, but not if you paid with scholarships, grants, employer assistance, or 529 plan funds. There's an exception: if tax-free assistance doesn't cover everything, the remaining qualified expenses are eligible.

What Are the Income Limits for the AOTC?

For the full credit, your MAGI needs to be $80,000 or less if single, or $160,000 or less if married filing jointly. The credit phases out above these amounts and is completely gone if your MAGI exceeds $90,000 single or $180,000 joint.

AOTC vs. Lifetime Learning Credit

There's also the Lifetime Learning Credit, or LLC, which is similar but different. With the LLC, you get up to 20% of the first $10,000 in qualifying expenses, maxing at $2,000 per return. It's not limited to degree-seeking or half-time students; it covers part-time, full-time, undergrad, grad, and skill development courses. Unlike the AOTC, the LLC is nonrefundable, so no refund if your tax bill hits zero.

You can't claim both for the same student or expenses. If eligible for both, evaluate which gives you more benefit. Note that you can claim the AOTC and LLC on the same return, but not for the same student or expenses, and the same goes for the tuition and fees deduction.

Other Tax Breaks for Education

Beyond the AOTC and LLC, look into other federal and state supports like tax deductions for tuition and fees, student loan interest, qualified education expenses, and business deductions for work-related education. Savings plans help too, such as 529 plans and Coverdell ESAs, which are tax-advantaged for education costs. Thanks to the Tax Cuts and Jobs Act, you can now use up to $10,000 from 529 plans annually for K-12 costs per beneficiary, not just postsecondary.

AOTC Example

Consider Rosa, a full-time undergrad at a four-year school who works at a law firm. Her parents have a 529 account that doesn't cover everything, and she has a student loan with deferred payments. They pay tuition with the loan and use 529 funds for room and board. Rosa gets her 1098-T and claims the AOTC herself since she's working. She picks it over the LLC for the larger, partially refundable credit. The loan qualifies for AOTC, she gets tax relief and a partial refund, and the 529 distribution is tax-free for room and board.

How Do I Claim the American Opportunity Tax Credit?

To claim it, fill out Form 8863 and attach it to your Form 1040 or 1040-SR. Put the nonrefundable part on Schedule 3, line 3, and the refundable part on line 29 of the 1040 or 1040-SR.

Can I Claim the AOTC and the Lifetime Learning Credit?

You can claim both on the same return, but not for the same student or expenses in the same year.

Can I Claim the AOTC If I Get a Grant?

Yes, but subtract the grant from your qualified expenses first. For example, if you have $5,000 in costs and a $4,000 grant, you claim on the remaining $1,000. Grants include tax-free scholarships, Pell Grants, employer aid, veterans' assistance, and other tax-free educational payments, excluding gifts or inheritances.

The Bottom Line

In summary, the AOTC is a partially refundable credit that offsets qualified postsecondary education expenses up to $2,500 per student. If it zeros out your tax bill, you can get up to $1,000 refunded. Claim it if you're the student, spouse, or claiming the student as a dependent.