American Opportunity Tax Credit: How to Qualify & Claim It

The American Opportunity Tax Credit (AOTC) is one of the most valuable U.S. college tax credits available to students and their families that offers up to $2,500 back on education costs. It can directly reduce your tax liability if you’re in the first four years of higher education, making the expenses much more manageable and education more affordable.

In this article, we’ll cover in depth the American Opportunity Tax Credit and discuss the strict IRS rules regarding who qualifies. Following that, we’ll see how much the AOTC is worth and which expenses qualify. We’ll also compare AOTC to the Lifetime Learning Credit before showing you how to claim it and what mistakes to avoid when doing so.

What Is the American Opportunity Tax Credit (AOTC)?

The American Opportunity Tax Credit (AOTC) is a partly refundable tax credit designed to reimburse taxpayers for money spent on qualified expenses associated with higher education. It can be used by undergraduate students pursuing a degree or a recognized credential at qualified institutions for up to four tax years per student.

AOTC was initially introduced as one of the tax incentives in the American Recovery and Reinvestment Act of 2009, before eventually being made permanent to provide financial relief to families facing continuously increasing costs of undergraduate education. The maximum annual value of AOTC is $2,500 per student.

Since it’s an education tax credit, AOTC is much more potent than a tax deduction. It provides a dollar-for-dollar reduction of your tax liability, while deductions only reduce a portion of your income that is subject to taxation. As a result, if your tax liability is $2,000, and you qualify for $2,000 worth of AOTC, your tax liability will drop to zero.

The main purpose of the American Opportunity Tax Credit is to offset out-of-pocket expenses incurred during the first four years of post-secondary education. This includes expenses like college tuition, fees, and course materials, primarily helping low and medium-income households feel less financial strain.

One of the biggest and most attractive benefits of AOTC is that it’s a partly refundable tax credit. While many tax credits only reduce the liability and have no effect once it drops to zero, AOTC allows you to receive a portion of it as cash back. If you’re eligible for the credit and do not owe any income taxes, you can get up to 40% of its total value as a tax refund.

Who Qualifies for the American Opportunity Tax Credit?

When assessing who qualifies for the American Opportunity Tax Credit, the IRS looks at who is claiming it, what their income is, and what the student’s circumstances are.

Student Eligibility Requirements

To qualify for the American Opportunity Tax Credit as a student, you must fulfill the following criteria:

• You’re pursuing a degree or an equivalent credential in an eligible institution.
• You’re enrolled for at least half-time for at least one academic period.
• You haven’t finished your first four years.
• You haven’t claimed AOTC for more than four tax years.
• You don’t have a felony drug conviction.

An eligible institution is one that can participate in the U.S. Department of Education student aid program, and you can find it in the Database of Accredited Postsecondary Institutions and Programs.

Income Limits (MAGI)

AOTC income limits are based on the modified adjusted gross income (MAGI). MAGI is based on adjusted gross income (AGI), with certain tax deductions and exclusions added back. This makes it either the same or higher than AGI.

To claim full credit, your MAGI needs to be up to:

• $80,000 for single filers.
• $160,000 for married filing jointly.

You can receive a partial amount of AOTC if your MAGI is:

• Over $80,000 but less than $90,000 for single filers.
• Over $160,000 but less than $180,000 for married filing jointly.

You can’t claim AOTC if your MAGI is:

• Over $90,000 for single filers.
• Over $180,000 for married filing jointly.

Who Can Claim the Credit?

As a general rule, the person actually paying for the qualified expenses can claim the American Opportunity Tax Credit. This means that the AOTC can be claimed by:

• The student, if they have not been claimed as dependents.
• A parent or guardian who has claimed the student as a dependent.

Keep in mind that only one person can claim the credit per student per year. If a parent or a guardian claims the student as a dependent, only they can claim the American Opportunity Tax Credit (even if the student is making money and paying for the expenses).

How Much Is the American Opportunity Tax Credit Worth?

The American Opportunity Tax Credit is worth $2,500 at most. This is the maximum annual value that you can receive per eligible student.

The exact value of the AOTC depends on how much you spend on qualified expenses. The credit is structured as follows:

• You get 100% of the credit for the first $2,000 worth of expenses.
• You get 25% of the credit for the following $2,000 worth of expenses.

Ultimately, to receive the full amount of the American Opportunity Tax Credit, you need to spend at least $4,000 in qualified expenses.

Since the credit can be claimed once per student per tax year, a taxpayer can benefit from multiple credits if they have multiple dependents. For example, a family with two students can receive up to $5,000 in AOTC on a single tax return.

Remember that the American Opportunity Tax Credit is also subject to phasing out, depending on your MAGI. As a result, you will receive a reduced amount if your MAGI is between $80,000 and $90,000 for single filers, or between $160,000 and $180,000 for married filing jointly.

Apart from that, we’ve already mentioned that AOTC is partly refundable. That’s one of the biggest advantages of this tax credit for college students, since you can get a refund if AOTC reduces your tax liability to zero.

Note that the IRS allows you to receive up to 40% of the remaining credit amount as a cash refund. Since the maximum value of the American Opportunity Tax Credit is $2,500, up to $1,000 ($2,500 * 40%) is refundable.

For example, if you qualify for the full $2,500, and your total tax liability is $1,500, the credit will reduce it to zero, and you’d get $1,000 as a refund.

What Expenses Qualify for the AOTC?

Expenses that qualify for the AOTC generally encompass tuition, enrollment fees, and course materials. Knowing exactly which out-of-pocket costs qualify under IRS regulations is necessary to accurately calculate your American Opportunity Tax Credit.

Tuition and mandatory fees qualify as long as they are paid to an eligible institution and are strictly related to enrollment or attendance.

Course materials are also covered, creating a significant advantage for the AOTC compared to other tuition tax credits. This category includes textbooks, laboratory supplies, and required equipment (e.g., laptops or tablets if explicitly required for enrollment or coursework).

It’s important to note that course materials don’t have to be purchased directly from the university to qualify. You can purchase them from third-party vendors, and they will still count toward your AOTC calculations, provided that the materials are explicitly required for your coursework.

It’s also important to note that qualified expenses must be made during the tax year for an academic period that begins in the same year or within the first three months of the following year.

What Expenses Don’t Qualify for the AOTC?

Not all college expenses qualify for the AOTC, even though some may be fundamentally required to attend college. Here are some of the biggest and most common expenses that don’t fulfill the AOTC eligibility criteria, since they aren’t considered direct education costs:

• Personal living expenses, such as room and board, student housing, utility bills, and campus meals.
• Transportation and travel costs, as well as parking passes.
• Health insurance premiums and student medical expenses.
• Student activity fees that aren’t required for enrollment (e.g., sports, games, hobbies).
• Expenses that could qualify but have been paid with tax-free funds, untaxed scholarships, grants, or employer assistance.

American Opportunity Tax Credit vs. Lifetime Learning Credit

The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) are both education tax credits that help offset associated costs, but have different purposes and limitations. Understanding these differences is critical since you can’t claim both credits for the same student in the same tax year (though you can claim both credits on the same tax return).

AOTC is tailored toward undergraduate students in their first four years of college. It offers up to $2,500 per student and is partly refundable, i.e. in the amount of up to 40% of the credit’s full value.

LLC is available to a wider group of individuals, including undergraduates and graduates, as well as those paying for professional degree courses. There’s no limit on the number of years an LLC can be claimed. Its value is up to $2,000, it’s nonrefundable, and it can be claimed once per tax return.

LLC is subject to the same income limits as AOTC. It gets gradually reduced if your MAGI is between $80,000 and $90,000 for single filers, and between $160,000 and $180,000 for married filing jointly. You can’t claim the credit if your MAGI is above these figures.

Here’s a concise AOTC vs. LLC comparison in the table below:

How to Claim the American Opportunity Tax Credit

To claim the American Opportunity Tax Credit, you need to complete the IRS Form 8863, Education Credits. To do this, you need to gather your financial tax documents and collect Form 1098-T, Tuition Statement, from your educational institution.

Form 1098-T details payments received for qualified tuition and related expenses in Box 1. You can use this information when filling out your Form 8863 based on IRS instructions, but keep in mind that you may not claim the entire amount as your tax credit.

Additionally, you may apply for the credit even if you don’t receive Form 1098-T, since educational institutions aren’t always required to furnish it. Moreover, Form 1098-T likely won’t show amounts spent on course materials purchased off-campus. That’s why you need to keep detailed records and receipts associated with all purchases to be able to substantiate them.

Lastly, once you’ve completed your Form 8863, attach it to your Form 1040 or Form 1040-SR and file it with the IRS.

4 Common Mistakes to Avoid When Claiming the AOTC

Making a mistake when claiming the AOTC can lead to delayed or rejected refunds, but also penalties with interest and bans from claiming the credit for 2–10 years. The four most common mistakes you need to avoid include:

1. Double-claiming expenses. You can’t use the exact same college expenses for multiple tax benefits. For example, you can’t use tax-free money from a scholarship, a 529 College Savings Plan, or a Pell Grant during AOTC calculations. You can only do so if you deduct tax-free assistance from your expenses first.
2. Claiming non-qualified expenses. One of the most common mistakes taxpayers make is claiming non-qualified expenses, like room and board or meal plans. Since the IRS classifies these as personal living expenses, any attempts to use them for AOTC purposes will immediately flag your tax return.
3. Neglecting your MAGI and filing status. If you’re married, you can only claim AOTC if your filing status is “married filing jointly.” If you file taxes under “married filing separately,” you’re legally barred from claiming an education credit. Moreover, ignoring MAGI phaseout thresholds can result in overstating the credit.
4. Claiming AOTC and LLC for the same student. While you can claim AOTC and LLC on the same tax return, you can’t claim them for the same student in the same year. You can only claim both if you have two or more children in college, so you claim AOTC for one student and LLC for the other on the same return.

Track Your Income to Assess AOTC Eligibility with Paystub.org

Since your eligibility for the American Opportunity Tax Credit depends on your MAGI, it’s essential to accurately track your income. Paystub.org can help you do that by creating detailed and professional documentation. You can use the following generators:

• Pay stub generator. Create pay stubs for personal recordkeeping if you’re not receiving them from your employer.
• Invoice generator. Bill your clients and monitor payments to track your earnings.

Final Thoughts

The American Opportunity Tax Credit is a potent financial tool that can help families manage the increasing costs of higher education. By directly reducing your tax liability and even offering a potential refund, it offers unparalleled financial relief to students during their first four years of college.

In this article, we’ve talked about the eligibility and expenses, and explained Form 1098-T and Form 8863 to help you understand and claim the credit. Remember to accurately track your spending and be mindful of your filing status to avoid making potential mistakes and enjoy the full benefit of AOTC.

American Opportunity Tax Credit FAQs

#1. Can you get AOTC as a refund?

You can get AOTC as a refund in the amount of up to $1,000. If claiming the credit would reduce how much tax you owe to zero, you can have up to 40% of its full value ($2,500) refunded to you.

#2. Can I claim AOTC without the 1098-T form?

Yes, you can claim AOTC without Form 1098-T. In some instances (e.g., a student is enrolled in courses for which no academic credit is awarded), educational institutions aren’t required to furnish the form. In those cases, you need to provide alternate proof of enrollment and receipts for your expenses.

#3. Can both parents and students claim it?

No, parents and students can’t both claim AOTC. Only one taxpayer can claim the American Opportunity Tax Credit per student per tax year. The student can claim it if they file independently, or one of their parents can claim the AOTC if the student is claimed as a dependent.