American Opportunity Tax Credit: Eligibility, Benefits, and How to Claim
What is American Opportunity Tax Credit
In short, the American Opportunity Tax Credit (AOTC) is a tax credit that can help you or your family members pay for higher education expenses.
The credit is worth up to $2,500 per eligible student per year and is available for up to four years of undergraduate study.
How the American Opportunity Tax Credit Works
The AOTC is a credit that helps eligible students and their families pay for qualified expenses related to higher education. The credit can be worth up to $2,500 per eligible student, based on 100% of the first $2,000 of qualified expenses and 25% of the next $2,000 of qualified expenses.
The AOTC is partially refundable, which means that even if you owe no tax, you may still be eligible to receive up to $1,000 of the credit as a refund. The refundable portion of the credit is also subject to income limitations.
NOTE! You can't claim the AOTC and the Lifetime Learning Credit for the same student in the same year. You also can't claim the AOTC if you're claiming the tuition and fees deduction for the same student in the same year.
AOTC Eligibility Requirements: Who Can Claim the AOTC?
To claim the AOTC, you must meet certain eligibility requirements. Here are the key criteria:
- You must be a U.S. citizen, U.S. national, or eligible non-citizen;
- You must have paid qualified education expenses for an eligible student;
- The eligible student must be yourself, your spouse, or a dependent you claim on your tax return;
- The eligible student must be enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential at an eligible educational institution;
- The eligible student must not have completed the first four years of post-secondary education at the beginning of the tax year;
- You must have a modified adjusted gross income (MAGI) below certain limits.
NOTE! The eligible expenses must be paid directly to the educational institution, and not to a third party.
What Students Qualify for the AOTC?
To qualify for the AOTC, the student must meet the following criteria:
- The student must be pursuing an undergraduate degree, vocational degree or other recognized educational credential. Graduate students are not eligible for the AOTC, but they may be eligible for other education-related tax credits or deductions.
- The student must be enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.
- The student must not have completed the first four years of post-secondary education at the beginning of the tax year.
- The student must not have claimed the AOTC or the former Hope credit for more than four tax years.
- The student must not have a felony drug conviction at the end of the tax year.
What Expenses Qualify for the AOTC?
Now that you know who can claim the AOTC, let's look at what expenses qualify for the credit. Here's a breakdown:
- Tuition and fees required for enrollment or attendance at an eligible educational institution;
- Course-related books, supplies, and equipment required for the course of study;
- Other necessary expenses, such as room and board, if the expenses are part of the school's published cost of attendance.
What Are the Income Limits for the AOTC?
To claim the full AOTC, your MAGI must be below $80,000 if you're a single filer or $160,000 if you're married filing jointly.
The credit begins to phase out at a MAGI of $80,000 for single filers and $160,000 for married filing jointly, and is completely phased out at a MAGI of $90,000 for single filers and $180,000 for married filing jointly.
How to Claim the AOTC?
To be eligible to claim the AOTC or the lifetime learning credit (LLC), the law requires a taxpayer (or a dependent) to have received Form 1098-T, Tuition Statement, from an eligible educational institution, whether domestic or foreign.
Step 1. Get your 1098-T Form
Typically, schools provide students with a Form 1098-T Tuition Statement by January 31st. This form is important because it helps you figure out your credit. Box 1 on the form will show you the amounts received during the year. However, please note that this amount may not necessarily be the amount you can claim.
NOTE! It's important to carefully review the Form 1098-T to ensure that all the information on it is correct. In case you find any errors or do not receive the form, do not hesitate to reach out to your school for assistance.
Step 2. Claim your credit
After confirming your eligibility for the American Opportunity Tax Credit, the next step is to claim the credit. You can claim the credit by completing and submitting IRS Form 8863 along with your tax return.
To claim the AOTC, you will need to provide the educational institution's name and address, the amount of qualified expenses paid, and the student's Social Security Number or Individual Taxpayer Identification Number.
Pro Tip: It's important to keep all documentation related to your educational expenses, such as tuition statements and receipts, in case the IRS requests them as proof of your claim.
You can claim the AOTC for up to four tax years for the same student, provided that the student continues to meet the eligibility requirements.
AOTC vs Lifetime Learning Credit
The AOTC is not the only educational tax credit available. The Lifetime Learning Credit (LLC) is another credit that you can claim to offset the cost of qualified educational expenses.
One key difference between the AOTC and the LLC is that the AOTC is only available for the first four years of undergraduate education, while the LLC can be claimed for any level of postsecondary education, including graduate or professional programs.
The AOTC provides a more significant credit than the LLC, with a maximum credit of $2,500 per eligible student, while the LLC only provides a maximum credit of $2,000 per tax return.
Furthermore, the AOTC has more stringent eligibility requirements, including the requirement that the student must be pursuing a degree or other recognized educational credential.
1. Can I claim the AOTC and the Lifetime Learning Credit?
No, you cannot claim both credits for the same student in the same tax year. However, you may be able to claim both credits for different students in the same tax year, as long as they each meet the eligibility requirements.
2. Is the American Opportunity Tax Credit worth it?
The American Opportunity Tax Credit is definitely worth considering if you are eligible. The credit can significantly reduce the amount of taxes you owe, and it can also provide a refund if the credit exceeds the taxes you owe. It's definitely worth considering if you're looking for ways to save money on educational expenses.
3. How to calculate American Opportunity Tax Credit?
Calculating the AOTC is actually pretty simple. Just add up your qualified education expenses and multiply that amount by 100%. You can then claim a credit of up to 100% of the first $2,000 of qualified expenses and up to 25% of the next $2,000 of qualified expenses, for a maximum credit of $2,500.
4. Do you have to pay back American Opportunity Credit?
No, you don't have to pay back the AOTC as long as you meet the eligibility requirements and use the credit for qualified educational expenses.
5. How many times can you claim the American Opportunity Credit on your taxes?
You can claim the AOTC for the same student for up to four tax years, as long as they continue to meet the eligibility requirements.