Postsecondary education isn’t cheap, but it can be worth the cost. If you are paying education expenses, you may be eligible for the American Opportunity Tax Credit, which could help pay some of those bills.
What is the American Opportunity Tax Credit?
The American Opportunity Tax Credit (AOTC) is credit that’s available to reimburse money spent on eligible education expenses during the first 4 years of postsecondary education.
How much is American Opportunity Tax Credit?
The maximum annual American Opportunity Tax Credit is $2,500 per eligible student. Any qualified education expenses up to $2,000 receive a 100% credit, followed by 25% of the next $2,000 in qualified education expenses for the eligible student.
How does the American Opportunity Credit work?
The American Opportunity Credit is just that—a tax credit. That means it may reduce the amount of tax you owe or increase your refund (unlike a tax deduction, which reduces your total income before you calculate your owed taxes).
Unlike some other credits, the American Opportunity Tax Credit could zero out your owed taxes and provide money back to you. If the received credit drops your owed taxes to zero, you can still receive 40% of the remaining credit amount (up to $1,000) as a cash refund.
Consider this example: Ruth qualifies for the entire $2,500 American Opportunity Tax Credit, but she only owes $1,500 in taxes. The AOTC funds will zero out Ruth’s owed taxes, with $1,000 remaining in the credit. Ruth is eligible to receive 40% of the remaining credit, or $400.
Who qualifies for the American Opportunity Credit?
If you pay for qualified higher education expenses for a qualified student—it could be yourself, your spouse, or a dependent who you claim on your tax return—you're eligible for AOTC consideration.
Students who are eligible for the AOTC need to meet the following criteria, as explained by the IRS:
- They are pursuing a degree or recognized education credential.
- They are enrolled at least half time for at least one academic period.
- They have not completed the first 4 years of higher education at the beginning of the tax year.
- They have not claimed the AOTC (or the former Hope Credit) for more than 4 tax years.
- They do not have a felony drug conviction.
Income levels have a role in eligibility as well. The limit on modified adjusted gross income (MAGI) is $180,000 for those who are married filing jointly and $90,000 for single filers, head of household, or qualifying surviving spouse. (Taxpayers whose filing status is married filing separately are not eligible for the American Opportunity Tax Credit.)
If a parent submits a claim for the AOTC for a dependent child, the child may not apply for the credit themselves.
Which expenses qualify for an American Opportunity Tax Credit?
The IRS considers the following qualified expenses for the AOTC:
- Tuition
- Required enrollment fees
- Course materials the student needs for a course
American Opportunity Credit vs. Lifetime Learning Credit
The Lifetime Learning Credit (LLC) is a similar educational credit that’s often compared to the American Opportunity Credit. While the AOTC provides credit for undergraduate studies, the LLC is available for expenses related to undergraduate, graduate, and professional degree courses. It’s a slightly smaller credit, $2,000 per tax return, but there’s no limit on the number of years a taxpayer can claim the credit if they are eligible to do so.
MAGI limits are the same for both credits ($180,000 for married filing jointly and $90,000 for single, head of household, or qualifying surviving spouse).
The IRS highlights the following key differences between the American Opportunity Tax Credit and the Lifetime Learning Credit:
| American Opportunity Tax Credit | Lifetime Learning Credit | |
|---|---|---|
| Maximum benefit | Up to $2,500 credit per qualifying student | Up to $2,000 credit per tax return |
| Refundable? | Partially refundable: 40% up to $1,000 | Not refundable |
| Number of years of postsecondary education available | Only if the student hasn’t completed 4 years of postsecondary education before the start of the tax year | All years of postsecondary education and for courses to acquire or improve job skills |
| Number of years the benefit is available | 4 tax years per eligible student | Unlimited |
| Program requirements | Must be pursuing a degree or other recognized education credential | No required degree or education credential |
| Number of courses | Enrolled at least half time for at least one academic period | Available for one or more courses |
| Felony drug conviction | Student must have none | N/A |
| Qualified expenses | Tuition, required enrollment fees, and course materials | Tuition and fees required for enrollment or attendance |
Source: IRS.gov
When it comes time to file, you have to make a choice. Each eligible student may select just one credit for any given year. If, however, you are claiming the credit for 2 (or more) dependents, you can opt to choose the American Opportunity Tax Credit for one and the Lifetime Learning Credit for the other.
How to claim the American Opportunity Tax Credit
So how do you claim the American Opportunity Tax Credit? Well, there’s a form for that. Specifically it’s Form 8863, which you need to complete and attach to your tax return for the year.
To fill out Form 8863, you’ll need to know your educational institution’s employer identification number (EIN). You will find the EIN on Form 1098-T, a tuition statement that the educational institution may be required to send to you for your taxes.
Is the American Opportunity Tax Credit refundable?
Since you have the opportunity to receive some of the AOTC in cash, it’s known as a partially refundable credit. If the credit zeroes out your owed tax payment, you’re eligible to receive 40% of the remaining credit amount (up to $1,000).
Other ways to save on taxes and high education
In addition to education credits, you can turn to deductions and savings plans that help with higher education costs.
When filing your tax return, you might want to consider deductions that are available for tuition and fees, student loan interest, and other qualified education expenses.
Some education-directed savings plans, such as 529 plans or a Coverdell Education Savings Account, offer tax-free growth or even tax-free distributions.
Read Viewpoints on Fidelity.com: The ABCs of 529 savings plans