Did you know there’s a tax break designed to recoup costs tied to your undergraduate degree?
The American Opportunity Tax Act is a partially refundable credit that qualifying students can use to recover certain expenses within their first four years of post-secondary education. As a partially refundable credit, you may be eligible for a refund if your tax liability is $0.
The student, someone claiming the student as a dependent, or a spouse making qualifying education payments can claim the AOTC on their tax return. While the credit won’t cover room and board expenses, it will help you with the cost of tuition and more.
The AOTC is just one of many education tax breaks you can benefit from this upcoming tax season, so read on to learn what expenses you recover.
What is the American Opportunity Tax Credit?
With the American Opportunity Tax Credit (AOTC), you can claim qualified education expenses (such as tuition, certain required fees, and course materials) for the first 4 years of a post-secondary education at an accredited institution.
Once the 4 years are up, you can no longer claim the AOTC even if you are still pursuing your undergraduate degree, certificate, or other related credential.
As mentioned, the credit is partially refundable. That means that it can lower your tax liability to zero and you can get a portion of the remaining credit back as a tax refund.
What is the credit amount for the AOTC?
- For 2024, the maximum annual credit amount is $2,500 per eligible student
- A maximum of 40% is the refundable portion (of any remaining credit, up to $1,000)
- The total of all qualified tuition and related expenses when calculating the AOTC cannot exceed $4,000
Additionally, the credit amount is equal to 100% of the first $2,000 of qualified education expenses per student claimed, plus 25% of the next $2,000 of qualified expenses you paid for that student.
In other words: If you have $4,000 in qualifying expenses, the AOTC will cover 100% of the first $2,000 and 25% of the additional $2,000. That is equal to a maximum credit amount of $2,500.
Who is eligible for the American Opportunity Tax Credit?
To qualify for the AOTC, you’ll have to meet several standards regarding your enrollment status, the type of institution you are attending, and income.
The credit can be claimed by an eligible student, your spouse (if filing jointly), or a dependent you claim on your tax return. That being said, let’s dive in.
Student requirements:
To be eligible for the AOTC, students must be enrolled in a post-secondary institution program conducive to a degree, certificate, or other recognized credential and meet the following conditions:
- They are enrolled at least half-time in a post-secondary institution that satisfies the requirements to participate in the U.S. Department of Education Program
- The credit is claimed during the first four years of post-secondary education
- The student does not have a felony drug conviction at the end of the tax year
According to the IRS, academic periods can be semesters, trimesters, quarters, or any other period of study including summer school. Some academic institutions may also count credit hours as an academic period.
Income limits for the AOTC
The AOTC has an income threshold based on your tax filing status. For tax year 2024, the credit phases out if you have a modified adjusted gross income (MAGI) of:
As mentioned, the taxpayer claiming the AOTC can only claim the credit for a maximum of four years.
Other taxpayer requirements:
To claim the AOTC you, your spouse (if filing jointly) or the qualifying student must have a valid taxpayer identification number (TIN) issued or applied by the due date of the return.
What counts as a taxpayer identification number:
- A Social Security number
- An individual taxpayer identification number (ITIN) or,
- An adoption taxpayer identification number (ATIN)
What are qualified education expenses for the AOTC?
While the American Opportunity Tax Credit can help offset some costs related to your post-secondary education, it won’t cover all your expenses. That’s because other education tax credits are designed to target some of those expenditures.
Qualifying expenses for the AOTC include:
- Tuition
- Required enrollment fees
- Course materials, such as books or supplies
Note: A qualifying education expense may include a computer if you need it for attendance at your educational institution.
The AOTC does not cover the costs associated with:
- Room and board
- Transportation
- Medical expenses
- Insurance
- Student fees, unless required as a condition of enrollment or attendance
How you pay for your qualified education expenses could also impact your eligibility.
You won’t be able to claim the AOTC if the qualifying education expenses have already been paid with tax-free educational assistance, a scholarship, an employer-assistance program, a 529 college savings plan, or a federal grant like the Pell Grant.
However, you may use the credit if you paid for qualified education expenses with borrowed funds such as a credit card, student loan, or personal funds.
You can’t claim the same expenses twice.
While the AOTC can help you recover some qualified education expenses, it’s not the only education tax credit available to you.
For instance, if you are claiming some expenses with the Lifetime Learning Credit, you can’t claim those same expenses under the American Opportunity Tax Credit.
How to claim the American Opportunity Tax Credit
To claim your qualified educational expenses through the AOTC, you must have received an IRS Form 1098-T, Tuition Statement, from an eligible educational institution. According to the IRS, students usually receive their Form 1098-T from their school by January 31.
You should also include the following tax document attached to your Form 1040 or 1040-SR:
- You must fill out Form 8863, Education Credits (for the AOTC and/or the Lifetime Learning Credits).
- The law requires you to include your school’s Employer Identification Number on Form 8863
What happens if my AOTC is incorrect?
When claiming your qualified education expenses, it’s best to keep a record or receipt of your transactions to avoid errors.
If the IRS audits and finds that they issued an incorrect payment and you don’t have the relevant documents to prove your expense, there are consequences:
- You must pay back the amount of AOTC received in error with interest
- You may be charged with an accuracy or fraud penalty
- You could be banned from the AOTC for two to ten years
Why is the American Opportunity Act important?
With the costs of tuition, books, and school materials rising, getting some of that cash back can come in handy for a student.
The AOTC is a tax break that can reduce the cost of attending an accredited post-secondary institution during the first four years of your degree, typically for undergraduates.
If you are a student who meets all the requirements, you can gain back up to $2,500 of annual college expenses. Since it’s a partially refundable tax credit, you can get up to 40% of that amount as a tax refund.
With tax season upon us, make sure you take advantage of this tax break if you, your spouse, or a dependent on your tax return is an eligible student.
