American Opportunity Tax Credit: How to Calculate What You'll Get Back
Your tuition bill this year totaled $4,200, and you're receiving a Form 1098-T for the first time. If you skip the American Opportunity Credit, you could miss out on a credit of $2,500 per student, and you can receive up to $1,000 of that back even if you don't owe any taxes.
You can claim 100% of your first $2,000 in qualified expenses, plus 25% of the next $2,000. Completing Form 8863 will take approximately 10 minutes and will enable you to claim this credit.
What is the American Opportunity Tax Credit
The American Opportunity Tax Credit can help reduce the cost of college by providing taxpayers with a credit of up to $2,500 per year per qualifying student. Proceeds from the credit can go toward tuition, enrollment fees, and course materials.
Only one education credit is allowed per student per year, and the person who's claiming the credit must be the one who's claiming the student (e.g., parent or self).
Who Qualifies for the American Opportunity Tax Credit?
The income limit to receive the American Opportunity Tax Credit is $180,000 when filing jointly or $90,000 if you are single, head of household, or a qualifying surviving spouse. Note that the maximum credit is gradually reduced for those making between $80,000 and $90,000 or between $160,000 and $180,000 when married filing jointly.
| Filing Status | Full Credit | Reduced Credit | No Credit |
|---|---|---|---|
| Single, Head of Household, Qualifying Surviving Spouse | $80,000 or less | $80,001 - $90,000 | Over $90,000 |
| Married Filing Jointly | $160,000 or less | $160,001 - $180,000 | Over $180,000 |
What is the Phaseout Range for the AOTC?
The AOTC is available only for the first four years of post-high-school education, and the credit hasn't been claimed for that student in any of the 4 prior tax years.
To be eligible, the student must be enrolled in a program leading to a degree or another recognized educational credential, and must have been enrolled at least half-time for one academic period during the tax year. Also, the student must not have been convicted of a felony involving the possession or distribution of a controlled substance.
Which Education Expenses Qualify?
You may only claim the AOTC to pay for “qualified education expenses,” which includes tuition paid to any accredited public, nonprofit, or privately owned college, university, vocational school, or other post-high school educational institution.
Qualified education expenses also include enrollment fees or materials that are required for a course. For the institution to be eligible, it must participate in a student aid program administered by the U.S. Department of Education. For unusual situations, refer to IRS Publication 970.
How to Calculate the American Opportunity Credit
The formula is fixed, so only your total expenses can change. Follow these three steps in order:
Add Up Qualified Education Expenses
To claim education expenses, start with what you paid the school for one eligible student in the tax year. This includes tuition, required fees, and necessary books and supplies.
You can count expenses from the year you paid them if the academic period begins that year or in the first three months of the next year. Required materials count even if purchased outside the campus bookstore, potentially saving you hundreds in credits.
Room and board, transportation and health insurance don't count.
Subtract Tax-Free Assistance
You can't claim the credit on money you never paid tax on. Remove tax-free assistance from the total amount of education expenses prior to calculating the credit, such as:
- The tax-free portion of education scholarships and fellowship grants
- Employer-provided education assistance
- Veterans educational assistance
- Any other tax-free educational assistance, not including gifts.
Apply the 100% and 25% Formula
Take your adjusted expenses from Step 2 and use the following formula:
- Claim 100% of the first $2,000.
- Claim 25% of the next $2,000 (maximum of $500).
- Add the amounts from steps 2 and 3.
- Note: The total claimed cannot exceed $2,500 per student, per year.
| Adjusted expenses | 100% of first $2,000 | 25% of next $2,000 | Your credit |
|---|---|---|---|
| $1,500 | $1,500 | $0 | $1,500 |
| $2,000 | $2,000 | $0 | $2,000 |
| $3,000 | $2,000 | $250 | $2,250 |
| $4,000 or more | $2,000 | $500 | $2,500 |
If you have less than $4,000 in qualifying educational expenses, you will not receive the full $2,500 credit.
Example: You paid $3,000 in qualifying educational expenses. You claim 100% of the first $2,000, which is $2,000. Then, you claim 25% of the remaining $1,000. Twenty-five percent of $1,000 is $250. Add that to the $2,000, and your credit is $2,250.
Frequently Asked Questions
How does a tax credit affect my tax return?
A tax credit allows taxpayers to reduce their tax bill or increase their tax refund each year. It directly decreases the tax burden on a dollar-for-dollar basis. This contrasts with a deduction, which reduces the amount of taxable income. For example: if you receive a $1,000 tax deduction, it reduces your income by that amount. You then pay your tax rate on a reduced amount of income.
If, however, you receive a $1,000 tax credit and have a bill of $3,000, then your tax burden drops to $2,000, saving you more compared to the deduction. Both credits and deductions are important components of lowering your federal tax burden each year.
How many years can you claim the American Opportunity Credit?
You can claim the tax credit for a student for up to 4 tax years. These four years don't have to be consecutive, but they must all fall within the student's first four years of higher education. If you claimed the credit for that student in any prior year, including the student themselves, it will count as one of the four years used.
Can you claim the credit for graduate school?
No. The American Opportunity Credit only covers the first four years of college. This means you can't use it for graduate courses. If you're working on a graduate degree, getting professional training, or taking continuing education classes, you can use the Lifetime Learning Credit instead.
Can you claim the credit for more than one student?
Yes, you can get a credit worth up to $2,500 for each eligible student, not per tax return. If you have two qualifying students, your household can claim up to $5,000. To do this, complete a separate Part III of Form 8863 for each student.