American Opportunity Tax Credit (AOTC): Definition and Benefits
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What Is the American Opportunity Tax Credit (AOTC)?
The American Opportunity Tax Credit (AOTC) is a tax credit for qualified education expenses associated with the first four years of a student’s postsecondary education. The maximum annual credit is $2,500 per eligible student. The student, someone claiming the student as a dependent, or a spouse making postsecondary education payments can claim the AOTC on their tax return.
Key Takeaways
- The American Opportunity Tax Credit (AOTC) helps offset the costs of postsecondary education for students or their parents (if the student is a dependent).
- The AOTC allows an annual $2,500 tax credit for qualified tuition expenses, school fees, and course materials.
- Room and board, medical costs, transportation, and insurance do not qualify, nor do qualified expenses paid for with 529 plan funds.
- To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 if married filing jointly).
Understanding the American Opportunity Tax Credit (AOTC)
With the AOTC, a household with a qualifying student can receive a maximum $2,500 tax credit per year for the first four years of higher education. Parents claiming a dependent child who is a full-time student ages 19 to 24 can claim an additional $500 Child Tax Credit.
The AOTC helps with educational costs such as tuition and other expenses related to a student’s coursework. Eligible students (or their parents) can claim 100% of the first $2,000 spent on school expenses and 25% of the next $2,000. This comes out to a maximum credit of $2,500: (100% × $2,000) + (25% × $2,000).
The American Opportunity Tax Credit is partially refundable, which means that it could provide a refund even if your tax liability is $0.
In general, tax credits are refundable, nonrefundable, or partially refundable. Up to $1,000 (40%) of the AOTC is refundable, making it a partially refundable tax credit. So, if the credit brings your tax liability to $0, you can receive 40% of your eligible credit (up to $1,000) as a refund.
AOTC Eligibility Requirements
Like other tax credits, you must meet specific eligibility requirements to claim the AOTC.
Who Can Claim the AOTC?
To claim the AOTC on your tax return, you must meet all three of these requirements:
- You pay qualified education expenses for higher education.
- You pay the education expenses for an eligible student.
- The eligible student is either you, your spouse, or a dependent whom you claim on your tax return.
Additionally, you must receive Internal Revenue Service (IRS) Form 1098-T to claim the credit. Here’s an example of a completed form:
Source: Internal Revenue Service
Which Students Qualify for the AOTC?
A student is eligible for the AOTC only if they meet certain requirements. Specifically, the student must:
- Be taking courses toward a degree or some other recognized education qualification
- Be enrolled at least part time for at least one academic period beginning in the tax year
- Not have finished the first four years of higher education at the beginning of the tax year
- Not have claimed the AOTC (or the former Hope credit) for more than four tax years
- Not have a felony drug conviction at the end of the tax year
Academic periods can be quarters, trimesters, semesters, or summer school sessions. If the school doesn’t have academic terms, you can treat the payment period as an academic period.
Which Expenses Qualify for the AOTC?
For the purposes of the AOTC, qualified education expenses include tuition and some related costs required for attending an eligible educational institution. An eligible educational institution is any accredited public, nonprofit, or private college, university, vocational school, or other postsecondary educational institution. Related expenses include:
- Student activity fees paid to the school as a condition of enrollment or attendance
- Books, supplies, and equipment needed for classes, whether or not you buy them from the school
Insurance, medical expenses (including student health fees), room and board, transportation, and living expenses do not count as qualified education expenses.
You can pay for qualified education expenses with student loans. However, you can’t claim the credit if you paid for expenses with scholarships, grants, employer-provided assistance, or funds from a 529 savings plan.
What Are the Income Limits for the AOTC?
To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 if married filing jointly). The credit begins to phase out above these limits and disappears entirely if your MAGI is above $90,000 ($180,000 for married filing jointly).
| Income Limits for the American Opportunity Tax Credit | ||
|---|---|---|
| Single | Married Filing Jointly | |
| Full Credit | $80,000 or less | $160,000 or less |
| Partial Credit | More than $80,000 but less than $90,000 | More than $160,000 but less than $180,000 |
| No Credit | More than $90,000 | More than $180,000 |
AOTC vs. Lifetime Learning Credit
The AOTC and the Lifetime Learning Credit (LLC) are popular tax breaks that people with educational expenses can claim on their annual tax returns. While similar, the LLC and the AOTC differ in several ways.
With the LLC, you can claim up to 20% of the first $10,000 of qualifying expenses ($2,000). The LLC is not limited to students pursuing a degree or studying at least part time. Instead, it covers a broader group of students—including part-time, full-time, undergraduate, graduate, and courses for skill development. Finally, the LLC is nonrefundable, meaning that once your tax bill hits zero, you won’t receive a refund on any credit balance.
| American Opportunity Tax Credit (AOTC) vs. Lifetime Learning Credit (LLC) | ||
|---|---|---|
| Criteria | AOTC | LLC |
| Maximum Benefit | Up to $2,500 per student | Up to $2,000 per return |
| Credit Type | Partially refundable (40% of credit) | Nonrefundable |
| MAGI Limit (Single) | $90,000 | $80,000 |
| MAGI Limit (Married Filing Jointly) | $180,000 | $160,000 |
| # of Tax Years Available | Four per student | Unlimited |
| Program Requirement | Degree seeking | N/A |
| Course Load | At least half time for at least one academic period | At least one course |
| Qualified Expenses | Tuition, required fees, and course materials | Tuition and fees |
| Felony Drug Conviction | Not allowed | N/A |
If you’re eligible for both the AOTC and the LLC, be sure to assess your individual situation to determine which tax credit provides the greater benefit. The partial refundability of the AOTC can be an important factor. Of course, some taxpayers may only qualify for the LLC, making the decision easy.
You can claim the AOTC and the LLC (as well as the deduction for tuition and fees) on the same tax return—but not for the same student or the same qualified expenses.
Other Tax Breaks for Education
Federal and state governments support higher education expenses through various tax credits, tax deductions, and tax-advantaged savings plans. Each of these programs can help lower your income tax liability and make education more affordable. Beyond the AOTC and the LLC, be sure to claim any education-related tax deductions for which you may be eligible, including those for:
Savings plans can also help with higher education expenses. These are tax-advantaged accounts that allow you to save—and pay for—education expenses. Two popular programs include:
Thanks to the Tax Cuts and Jobs Act, you can now use up to $10,000 of 529 plan distributions to pay for K–12 costs per beneficiary each year. Previously, you could use the funds only for college and other postsecondary education expenses.
AOTC Example
Rosa is a full-time undergraduate college student at a four-year institution. She also works for a law firm. Her parents have a substantial 529 savings account in place, but it doesn’t cover all of Rosa’s expenses. Rosa also has a student loan with deferred payments and interest until after graduation.
Rosa and her family pay her tuition with student loans and use funds from a 529 plan to cover room and board. Rosa receives her annual 1098-T statement and, since she is working, she plans to take the AOTC herself. She is eligible for both the AOTC and the LLC, but she chooses the AOTC because it provides a larger credit and is partially refundable.
Rosa paid her tuition with a student loan, which is allowable for the AOTC. The AOTC helps alleviate any tax that she owes and she also gets a partial refund. Rosa doesn’t owe anything on her loans until after she graduates. The money distributed from the 529 was tax-free because it was used for room and board, which is a qualified 529 expense.
How Do I Claim the American Opportunity Tax Credit (AOTC)?
To claim the American Opportunity Tax Credit (AOTC), complete Form 8863 and submit it with your Form 1040 or 1040-SR when filing your annual income tax return. Enter the nonrefundable part of the credit on Schedule 3 of your 1040 or 1040-SR, line 3. The refundable portion of the credit goes on line 29 of the 1040 or 1040-SR.
Can I Claim the AOTC and the Lifetime Learning Credit?
Yes. You can claim the AOTC and the Lifetime Learning Credit (LLC) on the same tax return. However, you can’t claim both credits for the same student or the same expenses during a single tax year.
Can I Claim the AOTC if I Get a Grant?
Yes. However, you need to subtract that amount from your qualified education expenses before claiming the tax credit. So, if you have $5,000 in costs and a $4,000 grant, you would be able to claim $1,000 of qualified education expenses for the AOTC. For the purposes of the AOTC, grants include:
- Tax-free parts of scholarships and fellowships
- Pell Grants and other need-based education grants
- Employer-provided assistance
- Veterans’ educational assistance
- Any other tax-free payments that you receive for educational aid (excluding gifts and inheritances)
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