Skip to main content

Education Tax Credits: The American Opportunity Tax Credit Explained

education tax credits, tax refund credits, how to claim tax credits, AOTC, american opportunity tax credit, can i claim the tax credit, what is the AOTC, what is a tax credit, how to lower taxes, tax credits to claim,
It is time to file your taxes! While most people dislike filing their tax return, all people like receiving a tax refund. The sooner you file your taxes, the sooner you get a potential tax refund! If you are eligible for a tax refund, that means you overpaid/over-withheld taxes during the tax year. In other words, your actual tax liability is less than the estimated tax you paid during the year. In order to properly calculate your actual tax liability at year end, you must remember to claim all your eligible tax deductions and tax credits on your tax return. Doing so will decrease your taxable income and taxes owed.

A tax credit is a tax break for qualified taxpayers that reduces dollar for dollar the amount of tax you owe. Therefore, tax credits have a more significant impact on your tax liability than tax deductions. Below, I will detail the American Opportunity Tax Credit. Find out if you qualify for the educational tax credit!

Related Posts
The Complete List of Tax Credits for Individuals 
Filing your 2019 Tax Return for Beginners
File your taxes online for free

What is the American Opportunity Tax Credit?

The American opportunity tax credit is a credit for qualified education expenses during the year. The education expenses must be paid for or on behalf of an eligible student during his or her first four years of higher education. The American opportunity tax credit allows you to claim a maximum tax credit of $2,500 per eligible student per tax year. Additionally, the American opportunity tax credit is a hybrid tax credit in that it is partially non-refundable and partially refundable. More on that later.

The American opportunity tax credit does phase-out based on income limits. The following are the income threshold amounts to claim the AOTC:
  • Full Credit: Modified Adjusted Gross Income (MAGI) is $80,000 or less
  • Reduced Credit: MAGI is between $80,000 and $90,000
  • No Credit: MAGI is greater than $90,000
* The following income limits apply to single filers. If MFJ, the income limits are simply doubled.

Who is an eligible student for the American opportunity tax credit?

To be eligible for the American opportunity tax credit, you must meet several criteria. To begin, you must be a student pursuing a degree or other educational credential. Additionally, you must be attending the university or other educational institution at least half-time during one academic period during the tax year. An academic period can be a semester, trimester, or quarter (as determined by the school). As stated, the credit only applies to your first four years of higher education; therefore, the student must not have finished four years of higher education before the tax year. Lastly, the student cannot have a felony drug conviction on his or her record.

Below is a summary of the AOTC eligibility requirements:

  • Pursuing a degree or educational credential
  • Enrolled at least part time for an academic period
  • Applies only to the first four years of higher education
  • Have not claimed the AOTC for more than four tax years
  • Cannot have a felony drug conviction

What are qualifying expenses for the American opportunity tax credit?

The American opportunity tax credit includes qualified expenses paid to an eligible educational institution. Eligible educational institutions include universities, colleges, and other post-secondary schools that meet the requirements. Check with your school if you are unsure.

Qualified expenses include tuition and fees paid to the eligible school. Additionally, any expenses mandated by the school program may also be considered qualified expenses. These additional qualified expenses may include the cost of textbooks, online software, supplies, and equipment.

It is important to note that AOTC qualified expenses do not include the costs of room and board, transportation, and school-required medical insurance.

Lastly, the IRS does not allow you to include amounts you receive from tax-free scholarships, federal Pell grants, employer-sponsored tuition grants, school refunds, and other non-taxable assistance (not including gifts and inheritances). You can only include in qualified expenses the amount you actually paid rather than the listed price of attendance. For example, if your university tuition costs $10,000 per year, and you receive a $2,000 merit-aid scholarship, you can claim qualified expenses of $8,000 relating to your tuition costs.

How to calculate the American opportunity tax credit?

As stated, the maximum credit for the American opportunity tax credit is $2,500 per student. The tax credit is calculated based on the following:
  • 100% of the first $2,000 of qualified expenses;
  • 25% of the qualified expenses in excess of the first $2,000.
For example, if you have $3,000 in qualified expenses during the year, you will calculate the AOTC as follows:
  • 100% of $2,000 = $2,000
  • 25% of $1,000 = $250
The calculation equals $2,250. Therefore, you may claim a tax credit of $2,250 on your tax return.

Additionally, as stated earlier, the AOTC is a partially refundable tax credit. If the tax credit decreases your tax liability to zero, you may claim 40% of the remaining tax credit as a refundable credit amount. In other words, you can have the excess credit amount refunded to you. 

How to claim the American opportunity tax credit? 

To claim the American opportunity tax credit, you must receive a Form 1098-T, which is a tuition statement provided by your school. If you do not receive the Form 1098-T by January 31, reach out to your educational institution. The 1098-T serves as support for your qualified tuition, fees, and scholarship.

Use the information on the Form 1098-T to complete the Form 8863, which you will attach to your Form 1040 tax return. 

The federal tax credits available to taxpayers represent a major tax savings opportunity. Taxpayers should know and understand the tax credits available to them to save money and increase their 2019 tax refund. Please share the post with others to help them learn about the American opportunity tax credit. Additionally, please comment below or connect with me on social media if you have any questions relating to the American opportunity tax credit.


Popular posts from this blog

Gambling Winnings & Losses: How to report gambling income and losses

People love to gamble.  During the past NFL Super Bowl (2019),  gamblers wagered approximately $146 million in Nevada’s sports books, which fell short of the record set the year before of $159 million. The gambling industry continues to grow as U.S. legislation becomes less restrictive relating to the gambling industry.  Because of the size of the gambling market, the IRS set forth guidance to control the tax treatment of gambling winnings and losses. I will discuss income and losses, record keeping, reporting forms, and special rules. If you participate in gambling activities, it is important to know the unique personal tax rules. The term 'gambling' applies to a wide range of activities, including: sports betting, casino games, lotteries, etc. You will need to follow the established gambling tax rules when reporting winnings and losses from gambling activities. Related Posts IRA Income: Must know tax rules relating to your IRA Are your income items taxable? Gamblin

File your taxes online for free: The IRS Free File Program Explained

It is officially tax filing season. While many people dread filing their tax return, I have some good news that may cheer you up and save you some money during this tax filing season. For those that meet the requirements, you may file your tax return for free via the IRS Free File Program! What is the IRS Free File Program? The IRS Free File program is a partnership between the IRS and leading tax-preparation companies. The partnership states that these tax-prep software companies must provide free online tax preparation and electronic filing for those who qualify for Free File. What are the requirements to qualify for the IRS Free File Program? You may file your taxes for free using the Free File software if your income is $72,000 or less (for tax year 2020). By qualifying for Free File, you may choose from several brand-name tax software companies. The software will guide you through the tax preparation process, ultimately preparing and printing your tax return. If your inc

20 Tips & Tricks for Studying for the CPA Exam

For those on the way to becoming a certified public accountant, you now know it is a long and difficult journey. For those just beginning, good luck! The most difficult and time-consuming task is passing the CPA Exam. CPA candidates must spend hundreds of hours preparing for all four sections of the CPA. Each CPA section represents an entirely different topic, creating a daunting task for anyone looking to start studying for the CPA exam. I passed all four sections of the CPA with an average score of 91. Luckily, I did not have to retake any of the exams, which is a common occurrence as the average passing rate is around 40-50% per exam. Having personal experience dealing with the CPA exam process, I want to share valuable tips for conquering the CPA exam. I want you to feel confident and comfortable during the CPA exam process, and so, I believe the following tips will help you during the CPA exam process. Lets begin! Related Posts -  Preparing for the CPA Exam: How to Study