American Opportunity Tax Credit: What it is and how it works

Key takeaways

• The American Opportunity Tax Credit (AOTC) is designed to make college more affordable for students and their families.
• Eligibility for the AOTC is determined by many things related to the student, their educational status, and the taxpayer claiming the credit.
• The AOTC can provide a maximum credit of up to $2,500 per eligible student each year
• To claim the AOTC, you need to fill out IRS Form 8863 and attach it to your federal tax return.
• The AOTC is partially refundable, which means if the credit reduces your taxes to zero, you can get up to 40% (up to $1,000) of the credit that remains back as a refund.
• You can claim the AOTC for a maximum of four tax years for each eligible student.
• Both the AOTC and the Lifetime Learning Credit (LLC) can help to reduce your tax bill, but you can’t claim both credits for the same student.

What is the American Opportunity Tax Credit?

The American Opportunity Tax Credit (AOTC) is designed to make college more affordable for students and their families. This tax credit is available for the first four years of post-secondary education and can help to significantly reduce your taxes by covering a portion of your qualifying education expenses.

Qualifying expenses include tuition, fees, and course materials required for enrollment or attendance. The AOTC does not cover room and board, insurance, or transportation.

Who qualifies for the American Opportunity Tax Credit?

Eligibility for the AOTC is determined by several factors related to the student, their educational status, and the taxpayer claiming the credit.

Student requirements

• The student must be enrolled full-time for any part of five months of the year in a program leading to a degree or other recognized educational credential.
• The AOTC is available for the first four years of post-secondary education, which typically means undergraduate studies.
• The student must not have a felony drug conviction at the end of the tax year.

Taxpayer requirements

• The taxpayer cannot claim the AOTC if they have already claimed the maximum number of AOTC years for the student.
• The taxpayer claiming the credit must have a modified adjusted gross income (MAGI), which is your adjusted gross income with certain deductions added back in, like your IRA contributions, within the IRS’s limits. The credit phases out at higher income levels.

Income limits for the AOTC 

How much is the American Opportunity Tax Credit?

The AOTC can provide a maximum credit of up to $2,500 per eligible student each year. This amount is based on qualifying education expenses, like tuition, fees, and required course materials. It covers 100% of the first $2,000 spent on qualifying education expenses and 25% of the next $2,000 spent on these expenses.

To maximize the AOTC, make sure you are aware of all qualifying expenses and keep thorough records. This way, you can fully benefit from the available credit.

Calculating the American Opportunity Tax Credit

Start calculating the AOTC by gathering all your qualifying education expenses. These include tuition and fees required for enrollment or attendance, as well as any course materials you need for your classes, such as books, supplies, and equipment. As we mentioned, you can claim 100% of the first $2,000 of qualifying expenses, and you can claim 25% of any expenses left over.

Here’s an example

Let’s say you have $3,500 in qualifying expenses for the year, and your MAGI is $85,000, which falls within the phase-out range of $80,000 - $90,000 for single filers. Here’s how you would calculate your AOTC.

To start, add the first $2,000 you can claim to 25% of your remaining eligible expenses.

$2,000+($1,500×.25)=$2,375

Since your income is within the phase-out range, the credit amount will be reduced proportionally. For an income of $85,000, which is halfway through the $80,000 - $90,000 phase-out range, you lose 50% of the calculated credit.

$2,375×.5=$1,187.50

In this example, after considering the phase-out range, your total AOTC amount would be $1,187.50, which you can then use to reduce your taxes.

Claiming the American Opportunity Tax Credit

Claiming the AOTC involves a few important steps to ensure you get the full benefit. But, before you start, make sure you have all the necessary documents, like receipts and records of your qualifying education expenses, as well as Form 1098-T. This form is provided by your educational institution and shows the amounts you paid for tuition and other qualifying expenses.

To claim the AOTC, you need to fill out IRS Form 8863. This form helps you calculate the amount of your credit and ensures you meet all the requirements. Once you’ve filled out Form 8863, attach it to your federal tax return (Form 1040). Make sure to complete all relevant sections to accurately reflect your qualifying expenses and calculate your credit.

Finally, submit your tax return with the completed Form 8863

Is the American Opportunity Tax Credit refundable?

One of the standout features of the AOTC is that it’s partially refundable. This means that if the credit reduces your taxes to zero, you can still receive 40% (up to $1,000) of the remaining credit as a refund.

How many times can I claim the American Opportunity Credit?

You can claim the AOTC for a maximum of four tax years for each eligible student. These four years do not need to be consecutive, but they must be within the student's first four years of post-secondary education. This typically applies to undergraduate studies.

Should I claim the American Opportunity Tax Credit or the Lifetime Learning Credit?

Both the AOTC and the Lifetime Learning Credit (LLC) can help to reduce your taxes and make college more affordable, but you can’t claim both at the same time for the same student.

Deciding whether to claim the AOTC or the LLC can be a crucial decision in maximizing your education-related tax benefits. Both credits offer significant advantages, but they have different eligibility requirements and benefits.

Here are a few things you should know about the LLC

• The LLC is available for any post-secondary education and for courses to acquire or improve job skills. This credit is not limited to the first four years of education and does not require at least half-time enrollment.
• The LLC offers a maximum credit of up to $2,000 per tax return, not per student. It covers 20% of the first $10,000 of qualifying expenses.
• The LLC is non-refundable, which means it can reduce your tax to zero but will not provide a refund if the credit is greater than your tax.
• Eligible expenses for the LLC include tuition and fees required for enrollment or attendance, but not course materials, unless it comes directly from your school.

Income limits for the LLC 

What to consider when deciding between the AOTC and the LLC

• If you (or your dependent student) are within the first four years of post-secondary education and meet the eligibility criteria, the AOTC generally offers a higher benefit, especially with its refundable portion.
• If you are taking courses to improve job skills or continuing education beyond the first four years, the LLC is your only option.
• If you have multiple students in your family, the AOTC can be claimed for each eligible student; whereas, the LLC has a single maximum credit per tax return.

Whether you need help determining which tax credit to take, claiming the AOTC or the LLC, or maximizing your tax benefits, Jackson Hewitt can help. Work with a Tax Pro who can help you get every dollar you deserve.