American Opportunity Tax Credit (AOTC)

The American Opportunity Tax Credit (AOTC) is a refundable federal tax credit. It’s a credit for qualified education expenses paid for an eligible student for the 1st 4 years of college education. Maximum per student is $2,500. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.

Calculation

The amount of the credit 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. 

Example: If the qualified expenses of an individual student were $5,000, the AOTC would be $2,500 (100% x $2,000 + 25% x $2,000). If the expenses were only $1,500, the AOTC would be $1,500 (100% x $1,500).

Maximum AOTC

The maximum AOTC allowed per student is $2,500 per year for four years. The AOTC can be claimed for each student on the tax return. For example, if there are 4 “eligible students” who have qualified expenses, a maximum AOTC of $10,000 (4 students x $2,500).

Form 1098-T

Generally, students receive a Form 1098-T Tuition Statement, from their school by January 31. This statement helps you figure your credit. The form will have an amount in box 1 to show the amounts received during the year. But this amount may not be the amount you can claim. See qualified education expenses in Publication 970, Tax Benefits for Education, for more information on what amount to claim.

What are the income limits for AOTC?

• To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).
• You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly).
• You cannot claim the credit if your MAGI is over $90,000 (over $180,000 for joint filers).

Example: A married taxpayer with $170,000 in modified AGI would have a maximum AOTC of $1,250 per eligible student.

No American Opportunity Tax Credit is allowed for married individuals filing separate returns.

Qualified expenses are tuition and related fees at these eligible educational institutions. Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses, only if the fees and expenses must be paid to the institution for enrollment or attendance. However, they do not include books, room and board, personal transportation or living expenses, activity fees, or insurance.

The qualified expenses are reduced by any tax-free grants, scholarships; employer-provided educational assistance, veterans education benefits, and qualified education expenses deducted elsewhere on the tax return Qualified expenses paid with the proceeds of a loan would be eligible for the AOTC. However, the AOTC cannot be claimed for the same qualified expenses for which the Lifetime Learning Credit (LLC) is claimed.

The AOTC can’t be claimed in the same year that a tax-free distribution from a Coverdell Education Savings Account (CESA) or Qualified Tuition (529) Plan is received. However, if the CESA or 529 distributions is elected to be taxable, the AOTC can be claimed. For high-income families, the parent(s) can give up the American Opportunity Credit, which allows the student to claim the credit if the student has an income tax liability.