American Opportunity Tax Credit (AOTC) Explained: Benefits, Eligibility, and More
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Summary:
The American Opportunity Tax Credit (AOTC) is a valuable tax credit designed to ease the financial burden of higher education expenses for eligible students and their parents. This article delves into the details of AOTC, including eligibility criteria, qualifying expenses, income limits, and how it compares to other education-related tax credits. Whether you’re a student or a parent, understanding the AOTC can help you make informed financial decisions when pursuing a college education.
What is the American opportunity tax credit (AOTC)?
The American Opportunity Tax Credit (AOTC) is a tax credit aimed at reducing the financial strain associated with the first four years of a student’s postsecondary education. It offers a maximum annual credit of $2,500 per eligible student, and it can be claimed by the student, a person claiming the student as a dependent, or a spouse responsible for postsecondary education expenses.
Understanding the American Opportunity Tax Credit (AOTC)
The AOTC serves as a valuable resource for households with qualifying students pursuing higher education. It provides a maximum annual tax credit of $2,500 for the first four years of college. Additionally, parents claiming a dependent child who is a full-time student between the ages of 19 and 24 can claim an additional $500 Child Tax Credit.
This tax credit helps cover essential educational expenses, such as tuition and course-related materials. Eligible students or their parents can claim 100% of the first $2,000 spent on school expenses and 25% of the next $2,000, resulting in the maximum credit of $2,500.
This tax credit helps cover essential educational expenses, such as tuition and course-related materials. Eligible students or their parents can claim 100% of the first $2,000 spent on school expenses and 25% of the next $2,000, resulting in the maximum credit of $2,500.
Moreover, the AOTC is partially refundable, meaning that even if your tax liability is $0, you can receive 40% of your eligible credit (up to $1,000) as a refund.
AOTC eligibility requirements
To qualify for the AOTC, specific eligibility criteria must be met:
Who can claim the AOTC?
To claim the AOTC on your tax return, you must satisfy the following conditions:
- You must pay qualified education expenses for higher education.
- You must pay the education expenses for an eligible student.
- The eligible student is either you, your spouse, or a dependent you claim on your tax return.
- Additionally, you must receive Internal Revenue Service (IRS) Form 1098-T to claim the credit.
Which students qualify for the AOTC?
A student is eligible for the AOTC if they meet specific requirements:
- They are pursuing courses leading to a degree or a recognized education qualification.
- They are enrolled at least part-time for at least one academic period within the tax year.
- They have not completed the first four years of higher education at the start of the tax year.
- They have not claimed the AOTC (or the former Hope credit) for more than four tax years.
- They do not have a felony drug conviction at the end of the tax year.
Academic periods can include quarters, trimesters, semesters, or summer school sessions. If the school lacks academic terms, you can consider the payment period as an academic period.
Which expenses qualify for the AOTC?
Qualified education expenses for the AOTC encompass tuition and some associated costs necessary for attending an eligible educational institution. These institutions can be accredited public, nonprofit, or private colleges, universities, vocational schools, or other postsecondary educational institutions.
Related expenses eligible for the AOTC include:
- Student activity fees paid as a condition of enrollment or attendance.
- Books, supplies, and equipment required for classes, whether purchased from the school or elsewhere.
However, insurance, medical expenses (including student health fees), room and board, transportation, and living expenses are not considered qualified education expenses. Additionally, expenses paid with scholarships, grants, employer-provided assistance, or funds from a 529 savings plan do not qualify for the AOTC.
What are the income limits for the AOTC?
To claim the full AOTC credit, your modified adjusted gross income (MAGI) must be $80,000 or less if filing as single or $160,000 or less if married filing jointly. The credit gradually phases out above these income limits and completely disappears if your MAGI exceeds $90,000 (single) or $180,000 (married filing jointly).
AOTC vs. Lifetime Learning Credit
The AOTC and the Lifetime Learning Credit (LLC) are both valuable tax credits for individuals with educational expenses, but they differ in several ways:
AOTC
- Maximum benefit: Up to $2,500 per student
- Credit type: Partially refundable (40% of credit)
- MAGI limit (single): $90,000
- MAGI limit (married filing jointly): $180,000
- Number of tax years available: Four per student
- Program requirement: Degree seeking
- Course load: At least half time for at least one academic period
- Qualified expenses: Tuition, required fees, and course materials
- Felony drug conviction: Not allowed
Lifetime Learning Credit (LLC)
- Maximum benefit: Up to $2,000 per return
- Credit type: Nonrefundable
- MAGI limit (single): $80,000
- MAGI limit (married filing jointly): $160,000
- Number of tax years available: Unlimited
- Program requirement: N/A
- Course load: At least one course
- Qualified expenses: Tuition and fees
- Felony drug conviction: N/A
If you’re eligible for both the AOTC and the LLC, it’s essential to assess your specific circumstances to determine which tax credit offers the most significant benefit. The partial refundability of the AOTC can be a crucial factor in this decision. Some taxpayers may only qualify for the LLC, simplifying the choice. You can claim both the AOTC and the LLC on the same tax return, but not for the same student or the same qualified expenses during a single tax year.
Other tax breaks for education
In addition to the AOTC and LLC, various federal and state government programs provide support for higher education expenses through tax credits, deductions, and tax-advantaged savings plans. Be sure to explore other education-related tax deductions you may be eligible for, including those for:
- Tuition and fees
- Student loan interest
- Qualified education expenses
- Business deductions for work-related education
Savings plans can also help alleviate the financial burden of higher education. Two prominent programs include: - Qualified tuition programs (529 plans)
- Coverdell Education Savings Account (ESA)
Thanks to the Tax Cuts and Jobs Act, you can now use up to $10,000 of 529 plan distributions annually for K–12 expenses per beneficiary, expanding the usefulness of these accounts beyond college and postsecondary education.
AOTC example
Let’s consider an example to illustrate how the AOTC works:
Rosa is a full-time undergraduate student at a four-year institution, working part-time at a law firm. Her parents have a substantial 529 savings account, but it doesn’t cover all her expenses. Rosa also has a student loan with deferred payments and interest until after graduation.
Rosa is a full-time undergraduate student at a four-year institution, working part-time at a law firm. Her parents have a substantial 529 savings account, but it doesn’t cover all her expenses. Rosa also has a student loan with deferred payments and interest until after graduation.
Rosa and her family use student loans to pay for her tuition and the 529 plan to cover room and board. Rosa receives her annual 1098-T statement and plans to claim the AOTC herself. She qualifies for both the AOTC and the LLC but chooses the AOTC due to its higher credit value and partial refundability.
Since Rosa paid her tuition with a student loan (eligible for the AOTC), she can use the AOTC to reduce her tax liability and receive a partial refund. Her loans do not require payments until after graduation. The funds distributed from the 529 plan for room and board expenses are tax-free, as they constitute qualified 529 plan expenses.
How do I claim the American Opportunity Tax Credit (AOTC)?
To claim the AOTC, you need to complete Form 8863 and submit it with your Form 1040 or 1040-SR when filing your annual income tax return. Enter the nonrefundable part of the credit on Schedule 3 of your 1040 or 1040-SR, line 3. The refundable portion of the credit should be reported on line 29 of the 1040 or 1040-SR.
Can I claim the AOTC and the Lifetime Learning Credit?
Yes, you can claim both the AOTC and the Lifetime Learning Credit (LLC) on the same tax return. However, you cannot claim both credits for the same student or the same expenses during a single tax year.
Can I claim the AOTC if I receive a grant?
Yes, you can still claim the AOTC if you receive a grant. However, you must subtract the grant amount from your qualified education expenses before claiming the tax credit. For example, if you have $5,000 in costs and receive a $4,000 grant, you can claim $1,000 of qualified education expenses for the AOTC. Grants that affect the AOTC include tax-free portions of scholarships, fellowships, Pell Grants, employer-provided assistance, veterans’ educational assistance, and other tax-free payments for educational aid (excluding gifts and inheritances).
Frequently asked questions
Is the AOTC available for graduate students?
No, the AOTC is only available for students pursuing their first four years of higher education. Graduate students do not qualify for this credit.
Can I claim the AOTC for online courses?
Yes, you can claim the AOTC for online courses if they are taken at an eligible educational institution and meet the other qualifying criteria.
What should I do if I didn’t receive Form 1098-T?
If you did not receive Form 1098-T from your educational institution, contact them to request the form. You need this form to claim the AOTC.
Is the AOTC available for part-time students?
Yes, part-time students can qualify for the AOTC as long as they are enrolled in at least one academic period within the tax year and meet other eligibility criteria.
Can I claim the AOTC if I have a felony drug conviction?
No, individuals with a felony drug conviction at the end of the tax year are not eligible for the AOTC.
Are expenses paid with a student loan eligible for the AOTC?
Yes, expenses paid with a student loan are eligible for the AOTC. However, expenses covered by scholarships, grants, employer-provided assistance, or 529 plan funds do not qualify.
Key takeaways
- The AOTC provides financial assistance for postsecondary education expenses for students and their parents.
- Qualified expenses eligible for the AOTC include tuition, school fees, and course materials.
- Room and board, medical costs, transportation, and insurance do not qualify.
- To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 if married filing jointly).
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