American Opportunity Tax CreditUpdated: June 25, 2021
The American Opportunity Tax Credit, also known simply as AOTC, is a credit for what the IRS describes as, “qualified education expenses paid for an eligible student for the first four years of higher education.”
Note the wording–ask your tax preparer or tax professional about any option you may have to claim this tax credit for education expenses you may have paid on behalf of a dependent if that applies to you.
The American Opportunity Tax Credit
What follows is NOT tax advice. You should only take tax advice from a qualified tax professional or a representative of the Internal Revenue Service (IRS). What follows is reporting on a program listed on the IRS official site.
Tax laws are subject to change from year to year and you will need to discuss your tax issues with a professional or someone who works for the Internal Revenue Service to determine what tax laws apply specifically to you.
This tax credit includes the following features:
- A maximum annual tax credit of $2,500
- If this tax credit makes your tax liability “zero” you may be entitled to “40 percent of any remaining amount of the credit” up to one thousand dollars as a tax refund
- Income restrictions apply
The amount of AOTC is “100 percent of the first $2,000 of qualified education expenses you paid for each eligible student” and “25 percent of the next $2,000 of qualified education expenses you paid for that student.”
Qualifying For AOTC
According to IRS literature, to qualify for this tax credit, the student is required to meet the following requirements:
- The applicant must be pursuing a degree or “other recognized education credential”
- The applicant must enroll for at least half time for at least one academic period* beginning in the tax year
- The applicant must not have finished the first four years of higher education at the beginning of the tax year
- Applicants may not claim the tax credit (or the former Hope credit) more than four times
- The applicant may not have a felony drug conviction at the end of the tax year
*An “academic period” defined by the IRS basically recognizes whatever the school’s approach to the academic year might be; semesters, trimesters, quarters or “any other period of study such as a summer school session.”
There are income limits for those who wish to claim this tax credit.
AOTC Income Restrictions
The IRS official site advises that qualifying for the full amount of the American Opportunity Tax Credit, your modified adjusted gross income (MAGI) must be $80,000 or less for single taxpayers and $160,000 or less for married taxpayers filing jointly.
What happens if you exceed these income caps? Some tax relief may still be available. Taxpayers qualify for a reduced tax benefit if the MAGI is over $80,000 but less than $90,000. IRS.gov also advises that this is true for married joint tax filers who earn more than $160,000 but less than $180,000.
Those with MAGI is over $90,000 ($180,000 for joint filers) are not eligible to claim this tax credit.
Applying For AOTC
Claiming AOTC requires you to fill out certain segments of your federal tax forms as well as submitting a form that should be sent to the student by the school.
Known as Form 1098-T, Tuition Statement, this should be sent to the student early in the new year (usually by the end of January).
This IRS form displays a dollar amount in Box One but you will need to check a list of qualified education expenses found in IRS Publication 970 PDF, Tax Benefits for Education to learn how much you may claim based on your 1098-T.
When claiming this tax credit, you or your tax preparer mist complete IRS Form 8863 PDF and attach the completed form to the tax return.
The IRS advises that it is not possible to claim the American Opportunity Tax Credit, “on a later original return or an amended return if the Taxpayer Identification Number is issued on or applied for after the due date of the return (including extensions).”
Mistakes To Avoid
Some taxpayers make mistakes trying to claim tax credits related to education when filing their federal taxes. Here are some to avoid:
- Claiming tax credits for students listed as a dependent or spouse on another tax return
- Claiming tax credits on students who don’t have a Form 1098-T showing they attended a qualifying school
- Claiming tax credits for students “for whom qualified education expenses were not paid”
- Claiming federal tax credits for a student not attending a college or other higher education
- Claiming “double benefits” for a student
The IRS official site has a lot to say about the last line in that list above. Did you know that IRS rules say a taxpayer cannot have a tax break for “more than one education benefit for the same student and the same expenses”.
Furthermore, students who use tax-free educational assistance (grants are a good example) the taxpayer must subtract that amount from the amount of qualified education expenses.
That said, the IRS reminds taxpayers there are plenty of funding sources that do not require a reduction in the amount of qualified education expenses you report on your tax forms. These include:
- A Student’s personal savings
- Certain scholarships or fellowships reported as income. These may include scholarships where use of the money is allowed only for costs of attendance that are not for qualified education expenses (housing is a good example).
Speak to a tax professional if you are unsure how these rules may affect your tax return.
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News