What Is the American Opportunity Tax Credit?
This federal tax credit helps offset the costs of the first four years of college by directly reducing your tax liability, with a portion being refundable.
The American Opportunity Tax Credit (AOTC) is a federal tax credit for individuals paying for postsecondary education. This credit reduces a taxpayer’s final tax liability dollar-for-dollar and assists with costs for the first four years of higher education. The AOTC is also partially refundable, meaning a taxpayer may receive a portion of the credit as a refund even if their tax liability is zero.
Eligibility Requirements for the AOTC
Student Requirements
For a student’s expenses to qualify, the student must be pursuing a degree or another recognized education credential. They must be enrolled at least half-time for at least one academic period beginning in the tax year. The student cannot have completed the first four years of higher education before the start of the tax year.
A student is ineligible for the AOTC if they have a felony drug conviction at the end of the tax year. The credit can be claimed for a student for a maximum of four tax years. This limit includes any prior years the former Hope Credit was claimed for the same student.
Taxpayer Requirements
The person claiming the credit must also meet certain criteria. A taxpayer cannot claim the AOTC if they are claimed as a dependent on someone else’s tax return. If a parent claims their child as a dependent, only the parent can claim the AOTC based on that child’s expenses.
Taxpayers using the married filing separately status are not eligible to claim the AOTC. To claim the credit, the taxpayer, their spouse if filing jointly, and the student must each have a valid taxpayer identification number (TIN). The TIN must be issued on or before the due date of the tax return.
Income Limitations
The AOTC is subject to income limitations based on Modified Adjusted Gross Income (MAGI). For the 2024 tax year, a taxpayer can claim the full credit if their MAGI is $80,000 or less for single filers. For those married filing jointly, the MAGI must be $160,000 or less.
The credit amount is gradually reduced for taxpayers with MAGI above these thresholds. For single filers, this phase-out occurs for MAGI between $80,001 and $90,000. For joint filers, the phase-out range is between $160,001 and $180,000. Taxpayers with MAGI exceeding these upper limits cannot claim the credit.
Qualified Education Expenses
Qualified expenses for the AOTC include payments for tuition and fees required for enrollment at an eligible educational institution. The credit also covers costs for books, supplies, and equipment needed for a course of study. These materials do not have to be purchased from the institution to qualify.
Certain costs are excluded from qualified education expenses, including room and board, transportation, insurance, and medical expenses. These costs cannot be used when calculating the AOTC, even if they are paid to the school.
Calculating the Credit Value
The Calculation Formula
The AOTC is calculated using a two-part formula on the first $4,000 of qualified expenses per student. The credit is 100% of the first $2,000 of these expenses. It then adds 25% of the next $2,000 of qualified expenses.
This structure results in a maximum annual credit of $2,500 per student. For instance, if a taxpayer pays $5,000 in tuition, the credit is calculated on the first $4,000, resulting in the maximum $2,500 credit. If they paid $3,000 in expenses, the credit would be $2,250, which is $2,000 for the first $2,000 plus 25% of the remaining $1,000.
Refundability
The AOTC is partially refundable, so up to 40% of the calculated credit can be returned to the taxpayer as a refund, even if they owe no income tax. The maximum refundable portion is $1,000 per student, which is 40% of the maximum $2,500 credit.
This feature benefits taxpayers who may not have a tax liability to offset. For example, if a taxpayer calculates a $2,500 AOTC but has only $2,000 in tax liability, the credit first reduces their tax to zero. They would still be eligible for a refundable credit of $1,000, which would be issued as part of their tax refund.
Information and Documentation Needed
Required Documents
The primary document needed is Form 1098-T, Tuition Statement, from the student’s educational institution. This form reports tuition payments, scholarships, and the school’s Employer Identification Number (EIN). Taxpayers must also keep records of qualified expenses not on Form 1098-T, like receipts for required books and supplies.
Completing Form 8863
The AOTC is calculated using IRS Form 8863, Education Credits, which is filed with the annual tax return. When completing the form, the taxpayer provides the student’s information and the institution’s details from Form 1098-T. The form guides the user through calculating the credit amount.
How to Claim the Credit on Your Tax Return
Filing Process
After completing Form 8863, it must be submitted with the taxpayer’s annual Form 1040 tax return. The total credit from Form 8863 is transferred to the appropriate line on Form 1040. Attaching the form is required to claim the AOTC.
Submission Methods
Taxpayers can submit their return electronically or by mail. E-filing through tax preparation software is common, and the software will generate and attach Form 8863. For a paper return, taxpayers must physically attach a copy of Form 8863 to their Form 1040.
Post-Filing
Once the IRS processes the return, the AOTC is applied against any tax owed. If the credit is larger than the tax liability, the nonrefundable portion reduces the liability to zero. The refundable portion, up to $1,000, is then added to the taxpayer’s total refund.