Discover essential details about the American Opportunity Tax Credit (AOTC) – eligibility criteria, qualifying expenses, maximum credit amount, and claiming process. Learn how this credit can alleviate higher education costs for eligible students or their parents.

What To Know About the American Opportunity Tax Credit

Discover essential details about the American Opportunity Tax Credit (AOTC) – eligibility criteria, qualifying expenses, maximum credit amount, and claiming process. Learn how this credit can alleviate higher education costs for eligible students or their parents.

November 11, 2023

What To Know About the American Opportunity Tax Credit

You may be eligible to receive a maximum of $2,500 to cover undergraduate college expenses.

The American Opportunity tax credit (AOTC) remains intact, offering a partially refundable credit for undergraduate education costs despite discussions about eliminating certain educational tax breaks in 2017. Eligible individuals can still claim the AOTC for the 2022 tax year (the return filed in 2023).

This credit is valued at up to $2,500 per student, covering the initial $4,000 spent on qualifying educational expenses for yourself, your spouse, or dependents. The total claimable amount is capped at $2,500 multiplied by the number of eligible students in your family.

Key Takeaways: 

  • The AOTC is calculated based on the initial $4,000 spent each year on eligible educational expenses.
  • The student eligible for this credit can be yourself, your spouse, or your dependent.
  • The maximum credit amount is $2,500 for the 2022 tax year (the return filed in 2023), and a portion of it is refundable.
  • The AOTC is subject to a phase-out, meaning it may not be available if your income exceeds a certain threshold.

AOTC Phase-Out Thresholds

The American Opportunity Tax Credit (AOTC) experiences a gradual reduction, or "phasing out," for single taxpayers with modified adjusted gross incomes (MAGIs) surpassing $80,000 in the 2022 tax year. This threshold is adjusted periodically by Congress to account for inflation. For married taxpayers filing joint returns, the phase-out threshold is $160,000 for the 2022 tax year.

If your MAGI exceeds $80,000 (single) or $160,000 (married filing jointly), the AOTC will be reduced. The credit becomes unavailable entirely for individuals with MAGIs exceeding $90,000 (single) or $180,000 (married filing jointly), reaching a complete phase-out at those income levels.

The Refundable Portion of the Credit

The refundable portion of the American Opportunity Tax Credit (AOTC) stands at a maximum of 40%. If claiming the credit reduces your tax bill to zero, the Internal Revenue Service (IRS) will refund up to 40% of the remaining amount, capped at $1,000. Notably, you can receive this refund even if your tax liability is zero at the time of filing your return. This characteristic enhances the value of the AOTC compared to some other educational tax credits and deductions. Additionally, its partial refundability allows it to offset the alternative minimum tax and the self-employment tax.

Calculating the Credit Amount

The American Opportunity Tax Credit (AOTC) is calculated as 100% of the initial $2,000 spent on qualifying education expenses, along with 25% of the subsequent $2,000, resulting in a potential maximum credit of $2,500.

To determine the precise amount of the tax credit you qualify for, use Form 8863 and attach it to your Form 1040 tax return.

It's important to note that the maximum $2,500 credit is based on $4,000 in qualifying expenses. If your expenses were less than $4,000, the credit will be proportionately reduced. For instance, with $3,500 in expenses and a MAGI below the income phase-out limits, the credit would amount to $2,375.

Qualifying for the American Opportunity Credit

To be eligible for the American Opportunity Credit (AOTC), taxpayers can claim the credit for themselves, their spouses, or their dependents, provided the student is enrolled at least half-time in a college, university, or another accredited post-secondary educational institution. The student must be actively pursuing a degree or an education credential, and individuals convicted of a felony drug offense are not eligible.

It's essential to note that both the taxpayer claiming the AOTC and the student must possess valid Social Security numbers or other tax identification numbers by the due date of the tax return.

It's Only Available for the First Four Years

The American Opportunity Credit is applicable for the initial four years of a student's post-secondary education, specifically the years following high school. Students who have completed four years of college education or have had the AOTC claimed on their behalf four times in prior tax returns are ineligible.

If the IRS rejects your claim for the AOTC, you can regain eligibility by filing Form 8862 with your subsequent tax return.

What Is a Qualifying Education Expense?

Qualifying educational expenses for the American Opportunity Credit encompass mandatory course materials, including tuition and certain fees. The AOTC is considered more favorable in this regard compared to other education tax breaks.

Course materials such as books, lab supplies, software, and other essentials required for enrollment in a course can be eligible for the AOTC. The cost of a computer is also includable if it's necessary for the student to take a tech-related class, but not if it's used generally in their education.

It's important to note that room and board expenses are not covered, and the same expense cannot be counted for more than one educational tax credit or deduction. Additionally, expenses covered by tax-free education assistance are not eligible.

Comparing the AOTC to Other Tax Breaks

When comparing the American Opportunity Tax Credit (AOTC) to other tax breaks, the Lifetime Learning Credit (LLC) emerges as an alternative. The LLC is applicable for any post-secondary education, including both graduate and undergraduate studies beyond the initial four years. Unlike the AOTC, there are no restrictions on the course load, and the student doesn't necessarily have to be enrolled at least half-time.

However, the LLC has its limitations. It is not refundable, meaning you won't receive any cash back after it offsets your tax liability. Moreover, it only applies to tuition costs and doesn't encompass additional expenses.

Frequently Asked Questions (FAQs)

Can I claim AOTC credits for a master's degree?

Typically, no. The American Opportunity Tax Credit (AOTC) is designed for the first four years of education post high school graduation. However, any study within the remaining time up to four years could be eligible if you happen to complete an undergraduate degree in less than four years.

Is the AOTC amount different for each state?

No, the AOTC is a federal benefit, ensuring a uniform amount nationwide. It remains the same in every state.

I hope this information was helpful! If you have any questions, feel free to reach out to us here. I’d be happy to chat with you.

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This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.

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