What Is the American Opportunity Tax Credit (AOTC)?
The American Opportunity Tax Credit (AOTC) refers to a tax credit for qualified education expenses for a student for the first four years of post-secondary education for American taxpayers. The AOTC also applies to taxpayers who claim the students as dependents.
- The American Opportunity Tax Credit (AOTC) is a partially refundable tax credit available to help pay for higher education costs among American taxpayers.
- The credit grants up to $2,500 in tax savings credited toward qualified tuition expenses, school supplies, or other related costs for up to four years of education.
- Room and board, medical expenses, and insurance do not qualify for the AOTC, nor do any qualified expenses paid for with 529 plan funds.
- Eligibility requirements include student enrollment status and income limitations.
Understanding the American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit was introduced in 2009 specifically for students attending a post-secondary institution. Slated to run until Dec. 2017, there were no changes made to the credit under the new tax plan—the Tax Cuts and Jobs Act (TCJA), approved by Congress on Dec. 22, 2017.
The AOTC can save a household with a qualifying student as much as $2,500. The credit helps with educational expenses such as tuition and any other expenses related to the student's coursework. Eligible students can claim 100% of the first $2,000 spent on acquiring materials for school, and another 25% of the next $2,000 in expenses. This means the maximum amount a qualifying student can claim with the AOTC is (100% x $2,000) + (25% x $2,000) = $2,500. In other words, $2,500 worth of credit can be used to reduce the first $4,000 in educational costs.
Most tax credits are non-refundable, meaning that once a taxpayer's liability is reduced to zero, that’s the end of it. However, the AOTC is not one of them, as 40% of the credit is refundable. This partial refund means that if the student’s tax liability has been reduced to zero with AOTC, they may still receive 40% of the remaining credit, up to $1,000, as a tax refund from the Internal Revenue Service (IRS).
AOTC vs. Lifetime Learning Credit
The U.S. government subsidizes individuals' higher education expenses through a number of tax credits, tax deductions, and tax-advantaged savings plans. Each of these programs lowers income tax liability for students or their parents. The subsidies include the Lifetime Learning Credit, the American Opportunity Tax Credit, the tuition and fees deduction, and 529 savings plans.
The AOTC is one of two tax credits available to students in the U.S. The second tax break available for students is called the Lifetime Learning Credit (LLC). While both credits cannot be claimed in the same tax year, the LLC differs from the AOTC in a number of ways. A maximum of 20% of up to $10,000 of expenses (i.e. $2,000) for tuition and other educational costs can be claimed using an LLC. The LLC is not limited to students pursuing a degree or studying at least part-time. Instead, it covers a broader group of students—whether part-time, full-time, undergraduate, graduate, or taking classes and courses to develop a skill or other purpose. Finally, the LLC is non-refundable—once a taxpayer's bill has been reduced to zero, there will be no refund on any credit balance.
A tax filer who qualifies for both education tax credits may be better off opting for the AOTC since both credits cannot be applied in the same year. A taxpayer who does not qualify for the AOTC may find that the next best option is the Lifetime Learning Credit.
According to the IRS, a qualified student is one who must be enrolled at least part-time in one academic year in an accredited post-secondary institution, must still be enrolled at the institution at the beginning of the tax year, is taking courses toward a degree or some other recognized education qualification, and has not been convicted of any felony drug offense at the end of the tax year. Check out the IRS website for a more detailed list of who is considered an eligible student.
The AOTC can be claimed by eligible taxpayers for up to four years of post-secondary education to reduce the costs of tuition and other eligible expenses. According to the IRS, a qualified educational expense includes tuition paid to the school, as well as expenses for books, supplies, and equipment that may have been bought from external sources. These expenses can be paid for with student loans to qualify, but not with scholarships or grants. Room and board, medical expenses, and insurance do not qualify for the AOTC. It should also be noted that expenses paid with funds from a 529 savings plan do not qualify.
A single taxpayer has to have a modified adjusted gross income (MAGI) that is less than $80,000 to qualify for the AOTC. A MAGI between $80,000 and $90,000 will have a partial credit at a reduced rate applied. A taxpayer with a MAGI over $90,000 would not qualify for the AOTC. The MAGI requirements for a married couple filing jointly can be assessed from the table below:
|MAGI Eligibility for American Opportunity Tax Credit|
|Single||Married, Filing Jointly|
|Full Credit||≤ $80,000||≤ $160,000|
|Not Eligible||> $90,000||> $180,000|
Example of the AOTC
Consider two college students, David and Lawrence. David spent $4,000 on educational material, while Lawrence spent $900 during the academic year. Since they are both qualified according to the stipulations set by the IRS, David can claim the maximum credit of $2,500 allowed under the AOTC, which would reduce his tax bill to $4,000 – $2,500 = $1,500. On the other hand, Lawrence can claim the AOTC on his tax returns and have his $900 tax bill reduced to zero. Since there's still some leftover credit ($900 – $2,500 = –$1,600), he will also be given a refund of 40% x $1,600 = $640.
Internal Revenue Service. "American Opportunity Tax Credit." Accessed Feb. 3, 2020.
Internal Revenue Service. "Tax Reform Provisions that Affect Individuals." Accessed Feb. 3, 2020.
United States Congress. "Actions Overview: H.R. 1, 115th Congress." Accessed Feb. 1, 2020.
Internal Revenue Service. "Publication 970 (2019), Tax Benefits for Education." Accessed Feb. 5, 2020.
Internal Revenue Service. "Compare Education Credits and Tuition and Fees Deduction." Accessed Feb. 5, 2020.
Internal Revenue Service. "The Lifetime Learning Credit (LLC)." Accessed Feb. 1, 2020.
Internal Revenue Service. "Qualified Education Expenses." Accessed Feb 2, 2020.