What is the American Opportunity Tax Credit (AOTC)?
The American Opportunity Tax Credit is a credit for qualified education expenses paid for the first four years of higher education for an eligible student. Students can receive a maximum annual credit of $2,500 per year. The AOTC amount is 100% of the first $2,000 of education expenses you paid for each student and 25% of the next $2,000 of education expenses you paid for that student. If the credit nullifies the amount of tax you owe, 40 percent (up to $1,000) of the credit balance may be refunded to you. This makes the American Opportunity Tax Credit more valuable than some other educational tax credits. This can help offset the self-employment tax and alternative minimum tax, as it is partially refundable.
AOTC gives tax-paying students or their parents the opportunity to deduct the cost of attending college and is a partially refundable credit for undergraduate college education expenses. The student, someone who claims to be a dependent of the student, or his or her spouse who is paying after secondary education, can claim the American Opportunity Tax Credit on their tax return.
The credit generally provides greater tax savings than other education-related tax benefits because it reduces the tax you pay on a dollar-by-dollar basis, rather than reducing the amount of income subject to the credit tax. AOTC costs up to $2,500 per student, for the first $4,000 that you spend to meet educational expenses on behalf of your dependents or your spouse. The maximum amount you can claim is multiplied by the number of eligible students in your family.
How the American Opportunity Tax Credit Work ?
With American Opportunity Tax Credit, a family with an eligible student can receive a maximum tax credit of $2,500 per year for the first four years of higher education. This credit helps with expenses related to educational cost. Eligible students or their parents can claim 100% of the first $2,000 spent on expenses related to educational costs and 25% of the next $2,000. (100% × $2,000) + (25% × $2,000)
Tax credits are nonrefundable, refundable or partially refundable. AOTC is partially refundable, which means it can provide a refund even if your tax liability is $0. Up to $1,000 (40%) of the American Opportunity Tax Credit is refundable, making this credit a partially refundable tax credit. So, if the credit brings your tax liability down to $0, you can get 40 percent of your eligible credit as a refund.
Key Facts of American Opportunity Tax Credit
- AOTC helps offset the cost of post-secondary education for students or parents of dependents.
- This credit allows an annual $2,500 tax credit for qualified tuition expenses, course materials, and school fees.
- Medical costs, room and board, insurance, transportation are not eligible nor are eligible expenses paid for 529 plan funds.
- To claim the full credit, you must have an income MAGI of $80,000 and $160,000 or less if married jointly.
Who is Eligible for American Opportunity Tax Credit?
You must meet specific eligibility requirements to claim American Opportunity Tax Credit. A student can be eligible for AOTC only if he fulfills the following requirements :
American Opportunity Credit Eligibility :
- Taxpayers can claim this credit for themselves or their dependents.
- You pay qualified education expenses for higher education and an eligible student. (The eligible student is either you, a dependent, or your spouse, whom you claim on your tax return.)
- The student must be pursuing a education credential or degree.
- Be enrolled at least half-time for one academic term beginning in the tax year.
- Have not completed the first four years of higher education at the beginning of the tax year.
- The former has not claimed the Hope Credit or AOTC for more than four tax years.
- Any person convicted of a felony drug offense is not eligible.
Additionally, you must obtain Internal Revenue Service Form 1098-T to claim the credit.
The academic period may be trimesters, semesters, quarters or any other period of study such as the summer school session. The academic period is determined by the school. Schools that use credit hours or clocks and do not have academic terms may consider the pay period as the academic period.
Which Expenses Qualify for the AOTC ?
The American Opportunity Tax Credit is considered slightly better than other education tax breaks for enrolling in qualifying educational expenses. Eligible education expenses in this credit include the tuition and certain related costs required to attend an eligible educational institution.
Laboratory supplies, books, equipment, enrollment or attendance activity fees and other classroom course materials may qualify for this credit if they are required by the school to enroll in the course.
Insurance, medical expenses, transportation, room and board are not covered, nor are expenses you can pay with tax-exempt education assistance. You cannot count the same expense twice for more than one educational tax credit.
Students can pay for qualified education expenses with a loan. However, if you paid expenses or grants, scholarships, employer-provided assistance with money from a 529 savings plan, you cannot claim the credit.
What are the Income Limits for American Opportunity Tax Credit ?
If you want to claim AOTC, you need to meet the following income requirements :
- To claim the full American Opportunity Tax Credit, your modified adjusted gross income (MAGI) must be $80,000 or less and $160,000 or less for married filing jointly.
- If your MAGI is more than $80,000 but less than $90,000, you receive a lower amount of the credit. (More than $160,000 but less than $180,000 for married filing jointly)
- You cannot claim the credit if your modified adjusted gross income exceeds $90,000. ($180,000 for joint filers)
American Opportunity credit income limits for 2023-24 :
|
|
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 |
How Much is American Opportunity Tax Credit ?
AOTC is a credit for qualified education expenses paid for the first four years of higher education for an eligible student. You can receive an annual credit of up to $2,500 per eligible student.
How is the American Opportunity Tax Credit Calculated ?
The American Opportunity Tax Credit works out to 100% of the first $2,000 you spend on education expenses, plus 25% of the next $2,000, for a total potential credit of $2,500. The maximum $2,500 creditworthiness is based on $4,000 in expenses. If your expenses are less than $4,000, your credit will be lower.
American Opportunity Tax Credit Calculator :
100% of the first $2,000 of eligible expenses + 25% of expenses over $2,000. (The maximum annual credit per student is $2,500.)
Tip : Use Form 8863 to calculate the exact amount of the tax credit you are entitled to.
How to Claim the American Opportunity Tax Credit ?
To be eligible to claim American Opportunity Tax Credit (AOTC), the law requires a taxpayer to obtain Form 1098-T or a tuition statement from an eligible educational institution. This statement helps you find out your credit. The form will have the amount in box 1 to show the amount received during the year. Check Form 1098-T to make sure this amount is correct. If it is not correct or you do not get the form, students can contact their school.
For more information on what amounts to claim, see Qualified Education Expenses in Publication 970, Tax Benefits for Education.
To claim the American Opportunity Tax Credit, you must complete Form 8863 and attach the completed form to your tax return when filing your annual income tax return.
Enter the nonrefundable portion of the credit on Schedule 3 of Form 1040 or 1040-SR, Line 3. The refundable portion of the credit goes on line 29 of Form 1040 or 1040-SR. Both the student and the taxpayer claiming American Opportunity Tax Credit must have a valid Social Security number or other tax identification number at the time of the tax return due date.
Precautions to be taken while claiming AOTC
Before claiming the AOTC make sure you qualify and that you keep copies of all the documents you used to find out if you qualify and the amount of your credit. If the IRS finds that your American Opportunity Tax Credit claim is false, you must pay the amount of the credit you received in error, along with interest. The Internal Revenue Service may also fine you for fraud or accuracy, or you may be banned from claiming credit for two to ten years.
If your claim is denied, you may need to file Form 8862 before claiming the credit in future tax years. For more information see, What to Do if We Deny Your Claim for a Credit.
Frequently Asked Questions
Can I Get American Opportunity Tax Credit for Master's Degree ?
No, AOTC only applies to the first four years of education after high-school graduation. If you complete your bachelor's degree in less than four years, any of the remaining four years of study may be covered.
How many times have I claimed the American Opportunity Credit ?
AOTC is available to claim 4 times per student. This includes the number of times the Hope Education Credit can be claimed.
Is AOTC different for every state ?
No, the American Opportunity Tax Credit is a federal benefit, so it's the same amount across the board in every state.
Can I claim American Opportunity Tax Credit and Lifetime Learning Credit on the same tax return ?
Yes, you can claim AOTC and LLC on the same tax return. However, you cannot claim both credits for the same student or for the same expense during a tax year.
Can I Claim American Opportunity Tax Credit if I Receive a Grant ?
Yes, but you must deduct that amount from your qualified education expenses before you can claim the tax credit. If you have a grant of $5,000 and $4,000 in costs, you will be able to claim $1,000 of qualified education expenses for the AOTC.
Who is not eligible for American Opportunity Tax Credit ?
AOTC is available for the first 4 years of a student's secondary education so students who have already completed 4 years of college education are not eligible to claim AOTC.
Can I claim AOTC for each student ?
There is only one American Opportunity Tax Credit available per student in each tax year. You cannot claim more than one tax benefit per year for each student. If you have two eligible dependent students, you can claim a separate educational tax benefit for one student. You cannot claim the same credit for both dependents.