American Opportunity Credit: Definition & Overview

KEY TAKEAWAYS

• A $2,500 income tax credit is available to qualifying students who have not yet completed four years of education.
• This credit is an education tax credit that may be partially refundable. 
• Taxpayers must meet certain eligibility criteria, such as the household income thresholds and the student’s enrollment status, in order to be eligible.

What Is the American Opportunity Tax Credit?

The American opportunity credit is an education tax credit, part of which may be refundable, available to qualified Americans. This tax credit is available to eligible students who: 

• Have not yet finished four years of post-secondary education
• Are enrolled in a program that leads to a degree or a certificate
• Are attending school on at least a part-time basis
• Do not have a felony drug conviction.

To promote higher education and offer some form of tuition compensation for parents or students who are paying for college tuition and fees, the American opportunity and the Lifetime  Learning credits were passed into law. 

The tax credit reduces the amount of income tax you have to pay, unlike a deduction, which reduces the amount of taxable income. You may claim either a credit or a deduction for the same expense, but not both. You may be able to claim a credit of up to $2,500 for adjusted qualified education expenses paid for each eligible student.

How the AOTC Works

One of two education credits offered to taxpayers is the American Opportunity Tax Credit. Recipients are eligible to use the AOTC for books, tuition, and other qualified education expenditures. However, expenses such as accommodations, healthcare costs, and insurance are not eligible for credit. 

Unlike the AOTC, which is only available for the first 4 years of post secondary education, the nonrefundable Lifetime Learning Credit is available for an unlimited number of tax years for all years of higher education and courses to acquire or improve job skills. 

A portion of the AOTC became refundable when the Hope Credit was expanded and renamed the American Opportunity Tax Credit. This means that if the credit reduces the taxpayer’s tax liability to zero, they are entitled to a 40% return of the balance of the credit, up to a maximum of $1,000.

How Do You Qualify for the AOTC?

The American Opportunity Tax Credit is available to a wider variety of taxpayers due to an expanded eligibility. The credit is subject to a phaseout based on income levels: Individuals having a modified adjusted gross income (MAGI) of $80,000 or less are eligible for the full amount of credit. For joint filers, this is increased to $160,000 or less.

If a student has been enrolled at least part-time in a recognized post-secondary institution for one academic year, the Internal Revenue Service considers them to be qualified. The student must not have been convicted of any felony drug charge by the conclusion of the tax year and must still be enrolled at the institution at the start of the tax year, taking courses toward a degree or another recognized educational qualification.

How Do I Claim the AOTC?

You must file a federal tax return, fill out Form 8863, and then attach the form to your Form 1040 or Form 1040A in order to claim the AOTC.

You can use the details from the Form 1098-T Tuition Statement that was received from the school the student attended. The form contains information about:

• The institution’s federal identification number
• The student’s taxpayer identification number
• Any payments made for tuition and related fees
• The amounts billed or refunded
• The scholarships the institution administers
• The student’s enrollment and graduation status

Summary

The American Opportunity Tax Credit, (formerly known as the Hope Credit), is a tax credit that can be used to offset the cost of the first 4 years of post-secondary education. Each eligible student may receive a maximum annual credit of $2,500, and if no taxes are due, 40%, or $1,000, may be reimbursed. 

Limitations based on income apply to this credit.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.