How Much Is the American Opportunity Tax Credit Worth?

With the AOTC, you can claim qualified education expenses for the first four years of a post-secondary education at an accredited institution. Dreamstime/TCA

By Gabriella Cruz-Martinez From Kiplinger’s Personal Finance

Did you know there’s a tax break designed to recoup costs related to your undergraduate degree?

The American Opportunity Tax Credit (AOTC) is a partially refundable credit that qualifying students can use to recover certain expenses within the 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 can recover.

What Is the AOTC?

With the AOTC, you can claim qualified education expenses (such as tuition, certain required fees, and course materials) for the first four years of a post-secondary education at an accredited institution.

Once the four 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 2024 AOTC?

• For 2024, the maximum annual credit amount is $2,500 per eligible student.
• A maximum of 40 percent is the refundable portion (of any remaining credit, up to $1,000).
• When calculating the AOTC, the total of all qualified tuition and related expenses cannot exceed $4,000.

Additionally, the credit amount is equal to 100 percent of the first $2,000 of qualified education expenses per student claimed, plus 25 percent 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 percent of the first $2,000 and 25 percent 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 leading 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 United States 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 Internal Revenue Service (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 starts to phase out if you are single and your modified adjusted gross income (MAGI) is more than $80,000, or more than $160,000 if you are married filing jointly. The AOTC completely phases out if you are single and your MAGI is more than $90,000; or more than $180,000 if you are married filing jointly.

As mentioned, the taxpayer claiming the AOTC can only claim the credit for a maximum of four years.

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 costs.
• 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 can use the credit if you paid for qualified education expenses using borrowed funds, such as a credit card, student loan, or personal savings.

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 Jan. 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.

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