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This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma Tax®. It has been updated for the 2019 tax year.
College is one of the biggest investments you’ll ever make, whether you’re paying for it yourself, using financial aid, getting help from your parents or some combination of the three.
And while the payoff for getting a degree is usually better earning power throughout your career, it’s normal to feel financially crunched while you’re in college. You might be able to get some relief in the form of a lower tax bill if you qualify for the American Opportunity Tax Credit, or AOTC.
Let’s take a look at the AOTC, who’s eligible, how to claim the credit, what are qualified expenses, and other education-related tax credits and deductions.
What is the American Opportunity Tax Credit?
Just like any other tax credit, the AOTC reduces the amount of tax owed by you or the person claiming the credit (for example, your parents). Here’s how it works:
The credit repays you 100% of the first $2,000 of qualified education expenses for each eligible student. For example, parents with two or more students in their first four years of college may be able to claim the credit for each student.
The credit also repays 25% of the next $2,000 of qualified education expenses ($500). However, if the initial portion of the credit reduces the tax you owe to zero, you can get 40% of the remaining amount (up to $1,000) back as a refund.
“The AOTC provides a great financial benefit per dollar of tuition and textbook expenses,” says Mark Kantrowitz, an independent student financial aid, scholarship and student loan expert. However, he adds, if you don’t have much tax liability to begin with, the refund portion of the credit might not benefit you.
Who is eligible for the American Opportunity Tax Credit?
The AOTC has multiple eligibility requirements. It’s important to make sure you’re eligible for this tax credit before filing your taxes so that you don’t potentially trigger an audit.
First, you need to check income limits. For you to claim a full $2,500 AOTC credit, the claimant’s modified adjusted gross income, or MAGI, must be $80,000 or less for an individual or $160,000 or less for a married couple filing jointly.
If you’re a single college student claiming the credit for yourself, you’ll probably have no problem meeting the MAGI limits to qualify for the full credit. It may be more difficult for your parents to claim the credit because their MAGI may exceed the income limitations.
You can get a reduced credit if your MAGI is between $80,000 and $90,000 for an individual and between $160,000 and $180,000 for a married couple filing jointly. If your MAGI is $90,000 or more as an individual or $180,000 or more as a married couple filing jointly, you are not allowed to claim the credit.
Additional eligibility requirements include:
- You must be pursuing a degree or other recognized educational credential.
- You must be enrolled at least half-time for at least one academic period that began in the tax year.
- You must be in your first four years of higher education, which means you can’t claim the credit if you are in your fifth, sixth, etc. year of college. So if you take some extra time to complete your undergraduate degree or if you’re headed to grad school, you might be out of luck.
- You can’t have claimed the AOTC (or the former Hope credit) for more than four tax years.
- You can’t have a felony drug conviction within the tax year.
If you meet the income and eligibility requirements, you can claim the AOTC on your taxes.
How do you claim the credit?
Your college should send you a Form 1098-T Tuition Statement by Jan. 31. You will need this statement to receive your AOTC. Notify your college if you don’t receive it. Make sure to keep this form and any other records related to the tax credit in case the IRS requests the data.
The form will include amounts received or billed during the tax year. You’ll find that amount in either Box 1 or 2. Note: This might not be the total amount you can claim. You may also be able to claim other qualified education expenses, which we’ll discuss later.
A friendly tip: You cannot claim the AOTC in the same taxable year that you claim the tuition and fees deduction. You must choose between the AOTC or take a deduction for tuition and fees. If you choose to take the tuition and fees deduction, you may be able to claim up to $4,000 for qualified tuition and fees.
Keep in mind, the IRS says the AOTC usually results in greater tax savings than the deduction, but suggests that you calculate both to see which would benefit you the most. Remember, deductions reduce the amount of income you’re taxed on while credits reduce the amount of tax you owe.
What are qualified expenses and what are not?
AOTC qualified expenses include tuition, required fees and course materials, including books, supplies and equipment needed to take the course. These expenses must be at an eligible post-secondary educational institution. A computer may qualify for the tax credit, but it must be required “as a condition of enrollment or attendance” at the college.
Not all college-related expenses are eligible. Ones that aren’t eligible include:
- Room and board
- Student fees that aren’t required
What are other education-related credits and deductions?
Not everyone is eligible for the AOTC. The good news is the IRS offers other tax credits and deductions for college students:
- Lifetime Learning Credit – The Lifetime Learning Credit is for qualified tuition and related expenses for eligible students enrolled in eligible educational institutions. The credit is up to $2,000 per tax return, and there are no limitations as to how many years you can claim this credit.
- Student loan interest deduction – If you qualify for the student loan interest deduction, you can deduct the lesser of $2,500 or the amount of interest you paid during the tax year.
Remember, deductions and credits come with conditions, and in order to claim them, you must meet the qualification requirements. Be sure you understand what the qualifications are before attempting to claim any deduction or credit.
College costs continue to rise. The average cost of undergraduate tuition at a public four-year college rose 3.1% between the 2016-2017 and 2017-2018 academic years, according to the College Board. Between the 1987-1988 and 2017-2018 school years, it soared 213%.
If you qualify for it, the AOTC is one way to reduce your taxes and possibly get a refund. You could then use that money to make interest payments on student loans, pay required enrollment fees or spend on next semester’s books.
The American opportunity tax credit can remove up to $2,500 from your tax bill, but don’t forget other ways you can save on your taxes. Make sure to run the numbers and see which education tax credits or deductions make the most sense for your situation.
Relevant sources: IRS: American Opportunity Tax Credit | IRS: American Opportunity Tax Credit: Questions and Answers (archival) | IRS Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits) | IRS Publication 970: Tax Benefits for Education (2019)
Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.