American Tax Opportunity Credit: Eligibility & Qualified Expenses

College is more expensive now than ever. For most graduates, a degree comes with a hefty price tag: thousands of dollars in student loan debt. Scholarships and grants may help to ease the burden. But, unfortunately, competition is fierce, and not every student qualifies for these savings. 

College students—and their families—must be aware of any opportunity to save money while pursuing higher education. 

One such opportunity is the government’s American Opportunity Tax Credit (AOTC). The AOTC provides up to $2,500 annually in tax credits for qualifying educational expenses. 

What is the American Opportunity Tax Credit (AOTC)?

In 2009, the AOTC replaced the Hope Credit as the primary tax reduction for easing the burdens associated with post-secondary educational expenses. It was renewed without changes after 2017’s Tax Cuts and Jobs Act (TCJA). Be aware, however, that some personal exemptions and dependent tax credits have changed due to the TCJA. This may affect some taxpayers. (To learn more, be sure to confirm with a certified tax professional.)

Most significantly, the AOTC can be claimed on the tax return of a student, dependent provider, or spouse paying for post-secondary education. 

How much of a tax credit can I get with the AOTC?

In a nutshell, the $2,500 tax credit can be claimed for the first $4,000 spent on qualifying educational expenses. Here’s the breakdown:

• A 100% tax credit for the first $2,000 of qualified expenses
• A 25% credit for the next $2,000 of qualified expenses 

If you spend less than $4,000 on qualifying educational expenses, then this tax credit is reduced. For example, if you spent $3,000 while attending college part-time, your tax credit would be $2,250. 

One appealing aspect of the American Opportunity Tax Credit is up to 40% of the credit is refundable. Say a portion of the AOTC eliminates your tax bill. What’s left over from the tax credit (up to 40%) comes back as a refund. This refund is capped at $1,000.

Of course, you have to meet certain eligibility requirements to qualify for the AOTC. Let’s investigate further to see if you—or your child—may qualify. 

Eligibility for the American Opportunity Tax Credit

According to the Internal Revenue Service’s website, an AOTC student eligible for the credit must:

• Be working toward a degree or recognized education credential
• Have at least half-time enrollment for one or more academic periods (semesters, trimesters, etc.) beginning in the tax year.
• Have less than four years of higher education completed at the beginning of the tax year.
• Have claimed AOTC (or the Hope Credit) for three years or less.
• Not have a felony drug conviction by the end of the tax year.

In addition to these eligibility guidelines, there are also income limits for AOTC.

Income limits for AOTC 

• You can obtain a full tax credit if your modified adjusted gross income (MAGI) is $80,000 or less—$160,000 or less if married and filing jointly.
• Individuals with income between $80,000 and $90,000 ($160,000 to $180,000 if married and filing jointly) can receive a reduced amount of tax credit.
• This tax credit is not available for those with a MAGI over $90,000 or $180,000 if married and filing jointly. 

Also, you cannot claim this tax credit if you are filing as “married and filing separately” or you’re claimed as a dependent on another person’s tax return. 

Claiming the American Opportunity Tax Credit

You, your spouse—if filing a joint return—and the qualifying student must have a valid taxpayer identification number (TIN) issued or applied on or before the due date of the return. 

A TIN can include a:

• Social security number
• Individual taxpayer identification number (ITIN)
• Adoption taxpayer identification number (ATIN)

To claim this credit, you need your (or your dependent’s) Form 1098-T. This is a tuition statement obtained from an eligible educational institution—whether domestic or foreign. These forms are usually delivered to the student by January 31st. 

The Form 1098-T allows you to determine your tax credit. But, this is important: The amount on 1098-T may not be the amount you can claim. Some educational expenses are not considered eligible. (More on this in the next section…)

Once you figure out your eligible expenses, you must complete Form 8863. Then, attach it to your tax return.

What Educational Expenses Qualify for the American Opportunity Tax Credit?

Here is where you need to be careful. Not every educational expense will qualify for the tax credit. It’s important to know what does and doesn’t qualify. Not reporting the correct eligible expenses could mean you pay back the tax credit with interest. You may also have to pay additional penalties and be banned from future AOTC claims for 2 to 10 years.

Eligible AOTC Expenses 

Before going any further, make sure your educational expenses come from an eligible educational institution. Most accredited nonprofit, public, proprietary colleges, universities, vocational schools, or post-secondary educational institutions qualify. Of course, you want to check with your educational institution to be absolutely certain. 

Qualified educational expenses include:

• Tuition
• Student activity fees—if required to be paid by the terms of enrollment
• Books, supplies, and equipment needed for course study
• Prepaid expenses—qualified expenses paid this year for tuition and enrollment in the first three months of next year
  

Educational Expenses NOT Included in AOTC:

• Insurance
• Medical Expenses
• Room and board
• Transportation
• Similar personal, living, or family expenses
• Non-credit courses not related to your degree
• Sports, games, or hobby courses not related to your degree
  

What if you have comprehensive or bundled fees? 

Some educational institutions combine all their fees for an academic period. This doesn’t mean you can simply apply this expense to your tax credit. Contact your educational institution to request an allocation determining what amount is an eligible expense for AOTC. 

Claiming Your AOTC Can Get Confusing

When claiming your AOTC, you want to make sure you’re not doubling your benefits. For example, you CAN’T deduct higher education costs on your income tax return (e.g. business expenses) AND claim an AOTC credit.

In addition, you may have to adjust qualified education expenses based on:

• Tax-free educational assistance
• Refunds received after 2019 but before your income tax return is filed
• Refunds received after 2019 and after your income tax return is filed 

But…You don’t have to reduce qualified education expenses with funds the student receives as a:

• Loan
• Gift
• Inheritance
• Withdrawal from the student’s personal savings
• Payment for services such as wages
• Some scholarships or fellowship grants

If you want to obtain more details about AOTC, check out the IRS’s Publication 970. You may want to make yourself a nice cup of coffee or tea and plan to sit awhile. There’s a lot of information in this document. 

Or, of course, you can save some time and enlist the help of a trusted tax professional who is already familiar with all the intricate details of AOTC. 

Want the Most Out of Your AOTC Credits and Tax Returns?

Have the words “simple” and “taxes” ever appeared in the same sentence? Not if you are trying to maximize your deductions!

Do you have A LOT of free time on your hands to become familiar with the ever-changing tax laws?

Do you want to miss out on money entitled to you by using a “convenient” tax application?

Didn’t think so.

Steven Lissner & Company has you covered. Our team of seasoned Certified Public Accountants knows the tricks of the trade. We help individuals in all situations (even college students) extract the most out of their tax benefits. Skip the tax app—and enjoy “real” interactions when having your questions answered.

Moreover, we’ll help you keep on saving! Once we file your current tax return, we’ll provide you with a list of regularly overlooked tax deductions to prepare you for the upcoming year. 

Help secure your future with Steven Lissner & Company. Request a financial consultation today!