The American Opportunity Tax Credit: Benefits for Students

Considering going back to school? The quest for higher education can be a worthwhile but costly pursuit. On top of tuition and fees, hidden costs and supplies add financial and emotional challenges to the many lower-income students who already have debt burdens.

With so many struggling with financial stress nowadays, cost could be the main holdup for someone seeking higher education. Luckily, there are options. Check out some commonly overlooked credits and deductions and learn more about the American Opportunity Tax Credit.

Find out if you may be one of the students who’s eligible for an education tax credit on your school expenses.

What is the American Opportunity Tax Credit?

The American Opportunity Tax Credit (AOTC) is a tax credit to help pay for qualified education expenses for the first four years of education completed after high school. You can get a maximum annual credit of $2,500 per eligible student, and 40% or $1,000 could be refunded with no tax owed. 

The AOTC helps offset the cost of post-secondary education for students or their parents if the student is still claimed as a dependent.

Sounds great, right? It is, but it’s important to note that this credit is subject to income limitations, including that your modified adjusted gross income (AGI) must be below the threshold. We’ll cover more about qualifications below.

Who qualifies for the American Opportunity Tax Credit?

These are the general guidelines for who qualifies for the AOTC:

• The student must be you, your spouse, or a dependent that you listed on your tax return. 
• The student must be pursuing a degree or other recognized educational credential.
• The student must be enrolled at least half time, for at least one academic period, such as semesters, trimesters, quarters, or any other period of study beginning in the tax year.
• The student hasn’t completed the first four years of higher education at the beginning of the tax year. 
• The student hasn’t claimed the AOTC (or the former Hope credit) for more than four tax years.

One other thing to note is that if you’ve ever been a state or federal criminal because of a felony drug conviction, you likely aren’t eligible.

Which education expenses are eligible?

The AOTC is based on qualified educational expenses that must be paid for by you or on behalf of yourself, a child, or a spouse.

The following educational expenses may be eligible:

• Paying tuition and fees to an eligible educational institute (educational institutes can be more than just colleges or universities and can include any post-secondary school that satisfies the participation requirements in the U.S. Department of Education financial aid program)
• Specific expenses and student activity fees that are required for enrollment or attendance at an eligible educational institute
• Purchases and expenses for books, supplies, and equipment deemed necessary for the program of study

The credit doesn’t cover costs associated with:

• Room and board
• Medical expenses
• Student fees (unless required for condition of enrollment or attendance) 
• Transportation
• Personal, living, or family expenses

It’s important to also note that you cannot use the same expenses paid with tax-free education assistance. Moreover, the eligible expenses cannot have been used to claim any other tax deduction, credit, or education benefit. 

The IRS doesn’t require you to reduce qualified expenses by any amount you pay with borrowed funds, such as credit cards or student loans. However, you can’t include any amount you receive from:

• Tax-free scholarships or fellowships
• Federal Pell grants
• Tuition grants from an employer
• Refunds from the school
• Other non-taxable assistance received, other than inheritances and gifts

How do I calculate my credit amount?

The AOTC amount is equal to 100% of the first $2,000 of qualified expenses plus 25% of the expenses in excess of $2,000 for a maximum credit of up to $2,500. 

Only one AOTC is available per eligible student each tax year. If you have two dependents who are eligible students, you can claim a different educational tax benefit for one student if you claim the AOTC for the other student. You can, but don’t have to claim the same tax credit for both dependents. And you can’t claim more than one tax benefit per year for each student.

What is the maximum amount for the credit?

The maximum AOTC credit can be worth up to $2,500 annually per student for the first $4,000 you spend on qualified educational expenses on behalf of yourself, your dependents, or your spouse for the first four years of education completed after high school. 

The credit translates to $2,000 of the first qualified education expenses paid and 25 percent of the next $2,000.

There are some cases where using the credit will bring the amount of tax you owe to zero. If this happens, you can have a portion of the remaining amount of the credit refunded to you, with the potential refund limited to $1,000.

What do I need to do to claim the American Opportunity Tax Credit?

In order to go about claiming the AOTC, several requirements must be met.

Enrollment

First, you must be enrolled for at least one academic period that begins in the tax year. Enrollment includes being at least part-time and enrolled in a post-secondary undergraduate program leading to a degree, certificate, or other recognized educational credential.

A school will decide what qualifies as full-time or half-time enrollment, and although the number can be higher or lower, most educational institutes see 12 credit hours in one semester as full-time status. The difference is that the standard half-time workload can’t be lower than the established Department of Education standard.

The student must not have completed the first four years of post-secondary education as of the beginning of the tax year. This is determined by the school.

Form 1098 T

In order to be eligible to claim the AOTC, the law requires a taxpayer or a dependent to have received Form 1098-T, Tuition Statement, from an eligible educational institution, domestic or foreign.

Students generally receive a Form 1098-T Tuition Statement from their school by January 31st. This Tuition Statement helps you figure out your credit. Box 1 of the form will have an amount that shows what you’ve paid for qualified tuition and related expenses during the year. 

Modified adjusted gross income

To claim the full AOTC, your modified adjusted gross income (MAGI) must be $80,000 or less as a single filer. If you are married filing jointly, to claim the full AOTC, your MAGI must be $160,000 or less.

A phase-out applies to the AOTC, meaning that at a certain threshold, you’ll only be eligible for a partial credit.

For 2023, the phase-out applies if:

• You’re a single filer with an AGI between $80,000 and $90,000 
• You’re a joint tax filer with an AGI between $160,000 and $180,000

If your MAGI exceeds $90,000 as a single filer or $180,000 as a joint filer, you’re no longer eligible for the credit.

4-year limit

If you have previously claimed the American Opportunity Tax Credit, you can only claim the AOTC a total of four times.

Once you’ve ensured your expenses qualify and you meet the above requirements, Form 8863, Educational Credits (American Opportunity and Lifetime Learning Credits), will be included with your tax return to claim the AOTC.

What are other education tax breaks to consider?

The federal and state governments support higher education expenses through various tax deductions, tax credits, and tax-advantaged saving plans. The programs offered can help lower your income taxes and make education more affordable when it comes to tuition and fees, student loan interest, qualified education expenses, and business deductions for work-related education.

Saving plans can also help with higher education expenses. Look into qualified tuition programs (529 plans) and Coverdell Education Savings Account (ESA). These are tax-advantaged accounts that allow you to save and pay for qualified education expenses.

American Opportunity Tax Credit vs. Lifetime Learning Credit

The American Opportunity Tax Credit and the Lifetime Learning Credit (LLC) are popular education tax breaks that help taxpayers with the cost of higher education by reducing your bill on your annual tax return.

There are several differences and some similarities between the AOTC and the LLC, but with the LLC, you can claim up to 20% of the first $10,000 of qualifying expenses (a maximum credit of up to $2,000). The LLC also covers a broader group of students and is not limited to just those pursuing a degree or studying at least part-time. It’s available to students part-time, full-time, undergraduate, graduate, and courses.

Unlike the refundable AOTC, the LLC is nonrefundable, so once your tax bill hits zero, you won’t receive a refund on any credit balance.

If you’re eligible, on the same tax return, you can claim both the AOTC and the LLC (as well as a deduction for tuition and fees) – but not for the same student or the same qualified expenses. Assess your individual situation to determine what tax credit proves to be the greater benefit.

File with confidence

Make the steps to higher education with confidence and leave the financial stress and burden behind. Seek out educational tax breaks like the AOTC that are geared towards partially refundable tax credits that cover the cost of qualified education expenses of post-secondary students.

No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.