The American Opportunity Tax Credit (AOTC) is a tax credit provided to eligible students to help with qualified education expenses. It provides a partial refund on these expenses for qualified applicants and helps to reduce the amount of taxes you owe, up to a certain limit.
There are specific eligibility requirements you must meet to qualify for the credit. The educational institution and expenses you claim for the AOTC, as well as the income you earn, all determine your eligibility for the credit and the amount you qualify to receive.
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How Much Is the AOTC Worth?
If you qualify for this credit, you can receive a maximum of $2,500. However, the amount of credit you receive is reduced if the income you earn is above a certain threshold.
The credit amount you can receive is 100% of the first $2,000 of qualifying expenses you claim. If you qualify, the credit also provides 25% of the expenses you claim after the first $2,000. However, the credit will not pay more than a total of $2,500, no matter how many qualifying expenses you claim.
If you receive the AOTC credit and it brings your tax liability to $0, then 40% of the remaining credit is issued as a tax refund. However, the IRS caps this refund credit at $1,000.
To claim expenses for the AOTC, you must attend an eligible educational institution, including a college, university, or vocational school that participates in the U.S. Department of Education’s financial aid program.
To be eligible, the expenses you claim must be related to the program of study, and may include the money you spent on:
- Lab supplies.
- Other school supplies.
- Student fees.
If you pay qualified expenses using student loans or credit cards, you’re not required to reduce your claimed expenses by the amount you borrowed. However, you cannot include any amounts you received from non-taxable assistance like gifts, tax-free scholarships, federal Pell grants, school refunds, or employer tuition grants.
Expenses that are not eligible to claim include:
- Medical insurance.
- Living expenses.
How Do I Claim the AOTC?
Only a qualifying student or a person claiming a qualifying student as a dependent on his or her tax return can qualify for the AOTC credit. The student and/or tax filer must be able to provide valid Social Security numbers when filing for the credit.
To be eligible to claim the AOTC tax credit, you must:
- Currently be pursuing a degree or other educational credential.
- Be enrolled at least half-time for at least one academic period at the start of the tax year.
- Still be working on completing the first four years of higher education at the start of the tax year.
- Not have claimed the AOTC or the former Hope credit more than four times in the past.
- Not have a felony drug conviction on your record at the end of the tax year.
An “academic period” is defined by the school and may be considered a semester, trimester, quarter, or summer school session. If you’re a student who is pursuing continuing education after already completing the first four years of higher education, you are not eligible for the American Opportunity Tax Credit.
Income Limits for the AOTC
To determine if you qualify for the full AOTC tax credit, a reduced credit, or no credit at all, the IRS reviews your modified adjusted gross income (MAGI). In most cases, the MAGI that the IRS uses for you is simply your adjusted gross income (AGI). This is the amount of taxable income you earn. If you’re not sure what your AGI is, you can find it on Line 7 of your Form 1040, if this is the form you usually use to file your tax returns.
To claim the full AOTC, your MAGI must be $80,000 or less as a single filer or $160,000 or less if you’re married and filing jointly. If your MAGI is over $80,000 but less than $90,000 and you’re a single tax filer, you still qualify for some of the AOTC, but the amount you receive will be reduced.
As a married couple filing jointly, if your income is more than $160,000 but less than $180,000, you may also receive partial credit. You do not qualify for any amount from the AOTC if your income exceeds $90,000 as a single tax filer or $180,000 as a married couple filing taxes jointly.
The educational institution you attend should have provided you with a Form 1098-T (Tuition Statement) for tax purposes. This form provides information on the expenses you paid for the year in Box 1. However, keep in mind, some of these expenses may not qualify for the credit so you may need to factor out only the expenses that you can claim.
You must fill out Form 8863, including Part III and the section labeled “American Opportunity Credit.” Attach this form to your completed Form 1040, which is the regular income tax return form you probably submit to the IRS each year. Keep copies of all these documents, including the Tuition Statement, for your records. If you have additional receipts or paperwork relating to the AOTC, you should also keep them on file.
If you’re approved for the maximum AOTC, you can receive up to $2,500 in tax credits. If your tax liability zeros out with this credit, you can receive up to $1,000 as a tax refund.
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