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If you are a student, the American opportunity tax credit is a valuable education credit that can reduce your tax bill and even put money back in your wallet.
The AOTC was originally created to increase attendance at post-secondary educational institutions. Like other forms of financial aid, the opportunity tax credit is designed to reduce the cost of college and higher learning, making it attainable for more Americans.
However, there are restrictions, and not everyone will qualify for the credit. Here’s what you need to know about its eligibility criteria.
What Is the American Opportunity Credit?
The American opportunity tax credit has existed since 1997, but it was renamed and expanded in 2009. Designed to encourage people to attend college and post-secondary institutions, the credit can offset some of your education expenses.
Through the program, you can receive a tax credit for the money paid for your tuition and school fees. The AOTC can reduce your tax bill and increase your tax refund.
Since the tax credit was enacted, there has been a steep increase in the number of people claiming education credits. For the 2018 tax year, over 7.3 million people claimed the credit.
How the American Opportunity Tax Credit Works
The AOTC provides a 100% credit for the first $2,000 spent on qualifying education expenses. Then, you get 25% of the next $2,000 spent during the tax year.
For example, let’s say you spent $3,000 on qualified education expenses during the 2020 tax year. You would get a dollar-for-dollar credit on the first $2,000 spent. Then, you’d get a 25% credit for the remaining $1,000, giving you a total of $2,250.
Who Is Eligible For the Credit?
To claim the American opportunity tax credit, you must meet the following criteria:
- You were enrolled at least half time in a program leading to a degree, certificate or other recognized credential for at least one academic period during the tax year.
- You did not complete four years or more of post-secondary education as of the tax year.
- You—or a parent or guardian—have not claimed the tax credit for more than four years.
- You have not been convicted of a state or federal drug offense at the end of the tax year.
You can claim the American opportunity credit for yourself, your spouse or your child, if the child is a dependent on your tax return.
How Much Is It Worth?
Under the AOTC program, you can get a credit worth up to $2,500 per eligible student. It is a refundable tax credit. If the credit reduces your tax bill to $0, you can get 40% of the remaining credit refunded to you, up to a maximum of $1,000.
For example, say you qualified for the full $2,500 tax credit and had a $1,500 tax bill. After the credit pays off the tax bill, you’d have $1,000 left over. Under the rules covering the tax credit, you get 40% of the remainder, so you’d get $400 sent to you with your tax refund.
What Are the Income Limits?
There are income limits on who can claim the American opportunity credit. To qualify for the full AOTC, your modified adjusted gross income (MAGI) must be $80,000 or less (or $160,000 if married filing a joint return).
If your income is between $80,000 and $90,000 ($160,000 and $180,000 if married and filing a joint return), you’ll qualify for a reduced amount of the credit.
You cannot claim the credit if your income is over $90,000 (or over $180,000 if married and filing jointly).
What Expenses Count?
Only some education expenses are eligible for the American opportunity tax credit. Qualified expenses are tuition and fees necessary for enrollment. Money you spend on room and board, insurance, transportation or childcare are not qualified education expenses under the program’s rules.
How To Claim the Credit
If you paid tuition and fees to an eligible institution, the school is required to send you Form 1098-T, “Tuition Statement.” The form lists how much you paid during the tax year. You’ll use that information to claim the credit on your federal tax return.
To claim the tax credit, complete Form 8863, “Education Credits,” and attach it to your Form 1040, Individual Tax Return or 1040-SR, Tax Return for Seniors.
If you use a tax preparation program to file your taxes, the program will ask you questions about your expenses and education and prepare the necessary forms for you.
Frequently Asked Questions (FAQs)
How does the AOTC differ from the Lifetime Learning Credit?
The Lifetime Learning Credit (LLC) is another education tax credit you can claim. With the LLC, you can get a credit worth up to $2,000 on money spent on qualified education expenses.
While it shares some similarities with the AOTC, they differ from one another in several key ways:
- Duration. You can only claim the AOTC for four years. By contrast, there is no limit on how many times you can claim the LLC. If you go to graduate school, pursue a professional credential or take courses to improve your job skills, you can continue to claim the credit.
- Income restrictions. The LLC has lower income requirements than the AOTC. The maximum you can earn and still claim the credit is $68,000 ($136,000 if you’re married and file a joint return).
- Qualified expenses. Under the AOTC, qualified expenses include tuition, fees and course materials. The LLC is more limited; only tuition and fees required for attendance are eligible.
- Refundability. While the AOTC is a refundable tax credit, the LLC is not. If the credit reduces your tax bill to $0, you won’t get the excess as a refund.
Can I claim both the AOTC and LLC?
You cannot claim both the AOTC and LLC at the same time; you can only claim one education credit for the same student and expenses per year.
If you meet the eligibility criteria for both and aren’t sure which to take, the AOTC is the better choice. It’s refundable, so you can get a larger tax refund.
To find out if you are eligible for an education tax credit, use the IRS’ Interactive Tax Assistant tool.
Is a computer a qualified educational expense under the AOTC?
In some cases, a computer can count as a qualified educational expense under the AOTC. You can qualify for the credit if your college or university requires you to have a computer to enroll in courses.
What colleges count as eligible education institutions?
Not all schools are eligible institutions for the purposes of the AOTC. To find out if your school is eligible, visit the Department of Education’s Database of Accredited Postsecondary Institutions and Programs. If your school is included on the list, you can claim the AOTC.
Can I claim the AOTC if I paid my tuition with student loans?
Whether you withdrew money from a 529 plan or took out federal or private student loans to pay for your tuition and fees, you can get credit for all money paid for qualified educational expenses through the AOTC.
The only exception is tax-free educational assistance programs, such as grants. If you received a grant for your education, you must subtract the grant amount from your qualified education expenses when claiming an education tax credit.
