AOTC Phase Out: Can My Child Claim the Credit Instead?

The American Opportunity Tax Credit (AOTC) helps families offset the cost of higher education but phases out at certain income levels. If a parent’s income is too high to claim the full credit, they may wonder whether their child can qualify instead.

This raises important questions about eligibility, tax filing status, and how the credit is calculated when transferred to a student. Understanding these factors can help maximize education-related savings.

Income Thresholds

The AOTC has income limits that determine eligibility for the full benefit or a reduced amount. For 2024, single filers with a modified adjusted gross income (MAGI) above $80,000 see their credit begin to phase out, with elimination at $90,000. For married couples filing jointly, the phase-out starts at $160,000 and ends at $180,000. These thresholds remain unchanged unless revised by Congress.

The AOTC is partially refundable, allowing taxpayers below the phase-out range to receive up to 40% of the credit as a refund, even if they owe no tax. Once income exceeds the lower threshold, the credit gradually decreases until it reaches zero at the upper limit.

Filing Status Implications

Only the taxpayer claiming the student as a dependent can take the AOTC. If a parent lists their child as a dependent, the student cannot claim the credit, even if the parent is ineligible due to income limits.

If a parent’s income exceeds the phase-out range, the student may be able to claim the credit if they file independently. However, they must meet the IRS’s criteria for not being a dependent. Generally, a full-time student under 24 who relies on parental support does not qualify as independent. To file separately and claim the AOTC, the student must provide more than half of their own financial support and not be claimed as a dependent.

For divorced or separated parents, only the one claiming the student as a dependent can take the credit. Even if the other parent pays tuition, they cannot claim the AOTC unless they list the child as a dependent. This rule applies regardless of any private agreements about covering education costs.

Calculating Reduced Credit

Once a taxpayer’s income enters the phase-out range, the AOTC is reduced proportionally. The IRS calculates the adjustment based on what percentage of the phase-out range the taxpayer’s income occupies and applies that percentage to the maximum credit of $2,500 per eligible student.

For example, a single filer with a MAGI of $85,000 in 2024 is halfway through the $10,000 phase-out range. This reduces their credit by 50%, leaving them with $1,250 instead of the full $2,500. If their income were $88,000, they would be 80% through the phase-out, reducing their credit to $500. Once MAGI reaches $90,000 for single filers or $180,000 for joint filers, the credit is eliminated.

Coordination With Other Credits

Taxpayers cannot claim multiple education benefits for the same expenses, so choosing the most advantageous option is essential. The Lifetime Learning Credit (LLC) is an alternative, particularly for those phased out of the AOTC. While the LLC has a lower maximum credit of $2,000 per tax return, it has no limit on the number of years it can be claimed, making it useful for graduate students and lifelong learners.

Another option is the tuition and fees deduction, which allows eligible taxpayers to deduct up to $4,000 in qualified education costs. Unlike credits, which directly reduce tax liability, deductions lower taxable income, making them more beneficial for higher earners. However, this deduction cannot be used with the AOTC or LLC for the same expenses, so taxpayers must compare options to determine which provides the greatest savings.

Qualified Expenses

The AOTC covers tuition, mandatory fees, and course materials such as textbooks, supplies, and equipment if required for enrollment. These expenses must be paid to an eligible educational institution, which includes most accredited postsecondary schools participating in federal student aid programs.

Non-qualifying expenses include room and board, transportation, insurance, and personal living costs. Even if a university requires students to live on campus, housing costs do not qualify. Optional fees, such as parking permits or club memberships, are also excluded. Payments made with tax-free educational assistance, such as scholarships or employer tuition reimbursement, cannot be used to claim the credit. If a student receives a grant that covers tuition, only the portion paid out-of-pocket qualifies for the AOTC.

Documentation Essentials

Proper record-keeping is necessary to support an AOTC claim in case of an IRS audit. Taxpayers should retain receipts, billing statements, and proof of payment for all qualified expenses. Schools issue Form 1098-T, Tuition Statement, which reports tuition paid and scholarships received. However, this form may not include all eligible costs, such as required books and supplies purchased separately. Keeping detailed records ensures that all allowable expenses are accurately reported.

Taxpayers should also retain proof of enrollment, such as course schedules or transcripts, to confirm that the student meets the AOTC’s eligibility criteria. If claiming the credit for multiple years, records should be kept for at least four years in case of future IRS inquiries. Errors or missing documentation can lead to denied claims or repayment demands, making thorough record-keeping essential.