The American Opportunity Tax Credit (AOTC): What Is It?

For qualifying education costs incurred during the first four years of a student’s postsecondary education, the American Opportunity Tax Credit (AOTC) is a form of tax credit. Each qualifying student may get up to $2,500 in credit each year. The AOTC can be claimed on a tax return by the student, a person listing the student as a dependant, or a spouse paying postsecondary education payments.

The American Opportunity Tax Credit (AOTC): An Overview

For the first four years of higher education, a household with a qualifying student can get an AOTC tax credit of up to $2,500 per year. Parents can claim an extra $500 kid Tax Credit if their dependent kid is a full-time student between 19 and 24.
The AOTC provides financial assistance with educational fees, including tuition and other charges associated with a student’s study. Students who qualify (or their parents) may recover 100% of the first $ 2,000 spent on educational costs and 25% of the subsequent $2,000 in costs. The total credit is calculated as follows: (100% x $2,000) + (25% x $2,000) = $2,500.

Tax credits might be full, nonrefundable, or,r in certain cases, neither. The AOTC is a partially refundable tax credit, with a maximum refundable amount of $1,000 (or 40%). Therefore, if the credit reduces your tax burden to zero, you can get a refund of 40% of your qualified credit, up to a maximum of $1,000.

Eligibility Requirements for AOTC

As with other tax credits, you must fulfill strict eligibility conditions to claim the AOTC.

Who May Make an AOTC Claim?

You must fulfill all three of these conditions to claim the AOTC on your tax return:

• For higher education, you pay eligible educational costs.
• You cover a qualified student’s educational costs.
• You, your spouse, or a dependent you list on your tax return are the qualifying student.

Who Are Eligible for the AOTC?

Only students who fulfill specified criteria are qualified for the AOTC. In particular, the learner must be enrolled in classes leading to a degree or credential. Be registered for at least one academic year commencing with the tax year, at least part-time. Not have completed the first four years of a four-year degree at the start of the tax year.
You must not have claimed the AOTC (or the previous Hope credit) for more than four tax years. After the tax year, not having a felony drug conviction

What Costs Are Eligible for the AOTC?

Tuition and other related expenses needed to attend an approved educational institution count as qualifying education expenses for the AOTC. Any recognized public, nonprofit, or private college, university, vocational school, or other postsecondary educational institution qualifies as an eligible educational institution.
Related costs consist of:

• Payments for student activities that must be paid to the school enroll or attend, whether you purchase them from the school or not, the books, resources, and tools you will need for your classes
• Student loans are a viable option for covering some educational costs. However, if you paid for expenditures using money from a 529 savings plan, a scholarship, a grant, or assistance from your employer, you cannot claim the credit.

Other Education Tax BreaksThe federal and state governments cover higher education costs through a variety of tax credits, deductions, and tax-advantaged savings schemes. Each of these programs can assist in reducing your income tax obligation and lowering the cost of higher education. Be sure to claim any additional education-related tax deductions for which you may be qualified, such as those for:

• Education costs
• Interest on student loans
• Suitable educational costs
• Business expense deduction for continuing education

Savings programs might also assist in paying for higher education. You can set money aside in these tax-advantaged accounts to cover your educational costs. Two well-liked programs are:

• Programs with approved tuition (529 plans)
• Education Savings Accounts (ESAs) through Coverdell

Example of AOTC

Rosa attends a four-year university full-time as an undergraduate student. She’s employed at a legal company as well. Rosa’s parents have a 529 savings account, but it doesn’t fully cover her needs. Rosa also has a student loan, with interest and payments postponed until after graduation.

Rosa and her family take out student loans to pay for her education, and they utilize money from a 529 plan to pay for room and board. Rosa receives her yearly 1098-T statement and intends to take the AOTC herself because she is employed. Although she is qualified for the AOTC and the LLC, she decided to take the AOTC instead because it offers a bigger credit and is partially refundable.

Rosa used a student loan to pay for her tuition, which is acceptable for the AOTC. She receives a partial refund and the AOTC’s assistance in reducing whatever tax she may owe. Rosa won’t start paying back her debts until after she has earned her degree. An eligible 529 cost is lodging and board. Thus, the money disbursed from the 529 was tax-free because it was spent for that purpose.

The American Opportunity Tax Credit (AOTC): How Do I Claim It?

Fill out Form 8863 and include it with your Form 1040 or 1040-SR when submitting your annual income tax return to claim the American Opportunity Tax Credit (AOTC). On line 3 of Schedule 3 of your 1040 or 1040-SR, enter the portion of the nonrefundable credit. Line 29 of the 1040 or 1040-SR must contain the refundable part of the credit.

Can I claim the Lifetime Learning Credit with the AOTC?

Yes. You can claim the AOTC and the Lifetime Learning Credit (LLC) on the same tax return. The same student or the same costs cannot, however, be claimed for both credits in the same tax year.

I received a grant. Can I still claim the AOTC?

Yes. However, it would help if you deducted that sum from your eligible educational costs before claiming the tax credit. Therefore, you could claim $1,000 of eligible school expenditures for the AOTC if you had $5,000 in fees and a $4,000 grant. According to the AOTC, grants consist of:

• Tax-free components of fellowships and scholarships
• Grants for students with financial need, such as Pell Grants
• Assistance from the employer
• Assistance with schooling for veterans
• Any additional tax-free payments you get for schooling (but not gifts or inheritances)

Conclusion

• The American Opportunity Tax Credit (AOTC) assists students and their parents (if the student is dependent) in paying for higher education.
• The AOTC offers a $2,500 yearly tax credit for eligible tuition, school fees, and textbooks.
• Accommodations, meals, transportation, and insurance are not considered acceptable expenses, nor are qualified expenses paid using a 529 plan.
• Your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 if married filing jointly) to be eligible for the full credit.