American Opportunity Tax Credit (AOTC)

Overview

The American Opportunity Tax Credit (AOTC) is a partially refundable federal tax credit that helps offset qualified higher-education expenses for eligible students during their first four years of postsecondary study. The maximum annual credit is $2,500 per eligible student; up to $1,000 (40%) of that amount may be refundable.

How the credit is calculated

• 100% of the first $2,000 of qualified expenses = $2,000
• 25% of the next $2,000 of qualified expenses = $500
• Maximum credit per student per year = $2,500
• Up to $1,000 of the credit is refundable (payable even if your tax liability is reduced to zero)

Who can claim the AOTC

To claim the AOTC, all of the following must be true:
– You (or your spouse, or a dependent you claim) paid qualified education expenses for an eligible student.
– The student is enrolled at least half-time in a program leading to a degree or other recognized educational credential.
– The student is in the first four years of postsecondary education and has not previously claimed the AOTC (or the former Hope credit) for more than four tax years.
– The student has no felony drug conviction at the end of the tax year.
– You receive IRS Form 1098‑T from the eligible school (the form documents tuition paid and scholarships/grants).

Qualified expenses

Eligible expenses generally include:
– Tuition and required enrollment fees
– Course-related books, supplies, and equipment (whether purchased from the school or not)
– Student activity fees required for enrollment or attendance

Not eligible: room and board, insurance, medical expenses (including student health fees), transportation, and living costs.

You may use student-loan proceeds to pay qualified expenses and still claim the credit, but you must reduce qualified expenses by tax-free educational assistance (scholarships, grants, Pell Grants, employer-provided assistance, tax-free veterans’ benefits, and certain other tax-free aid). If a grant or scholarship covers only part of the expenses, you can claim the remaining eligible amount.

Income limits and phaseout

• Full credit available if modified adjusted gross income (MAGI) is:
• $80,000 or less for single filers
• $160,000 or less for married filing jointly
• The credit phases out for MAGI above those amounts and is completely phased out at:
• $90,000 for single filers
• $180,000 for married filing jointly

AOTC vs. Lifetime Learning Credit (LLC)

• AOTC: Up to $2,500 per student, partially refundable, limited to first four years of postsecondary study and requires at least half-time enrollment for at least one academic period in the tax year.
• LLC: Up to $2,000 per return (20% of first $10,000), nonrefundable, available for undergraduate, graduate, and courses to acquire or improve job skills, and does not require at least half-time enrollment.
• You cannot claim both credits for the same student or the same expenses in a single tax year. Choose the credit that provides the greater benefit.

How to claim the credit

• Complete IRS Form 8863 and attach it to your Form 1040 or 1040‑SR.
• Enter the nonrefundable portion of the credit on Schedule 3 (Form 1040), line 3.
• Enter the refundable portion on Form 1040, line 29.

Example

Rosa is a full-time undergraduate who paid tuition with student loans and used 529 funds for room and board. She received Form 1098‑T and claims the AOTC herself. Because tuition paid with loans is eligible and the 529 distribution covered nonqualified AOTC expenses (room and board), Rosa can use the AOTC to reduce her tax and receive a partial refund.

Key takeaways

• AOTC can reduce taxes by up to $2,500 per eligible student per year, for up to four years.
• Up to $1,000 of the credit is refundable.
• Eligible expenses: tuition, required fees, and course materials; exclude room and board and other living costs.
• You must meet student-enrollment and income requirements; the credit phases out between $80k–$90k (single) and $160k–$180k (MFJ).
• Use Form 8863 to claim the credit, and do not double-claim the same expenses under the AOTC and other education tax benefits.