American Opportunity Tax Credit: What Is It and Who Qualifies?

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The cost of attending college can be a major financial burden on students and their families. The average costs for tuition, books, supplies and daily living expenses reached $38,270 in 2024, according to the Education Data Initiative. The American Opportunity Tax Credit eases that burden with an annual education tax credit of up to $2,500 for tuition and fees for the first four years of higher education, and it’s available to students and parents of dependent children.

Read on to learn more about who can claim the American Opportunity Tax Credit.

What Is the American Opportunity Tax Credit?

The American Opportunity Tax Credit, or AOTC, reduces the financial impact of college tuition by decreasing the amount of federal income tax you owe. Come tax time, each dollar of AOTC you receive reduces your tax liability by $1. If the credit reduces your tax liability to $0, 40% of any remaining credit, up to $1,000, can be refunded to you.

You can claim the credit for 100% of the first $2,000 of eligible expenses and 25% of the next $2,000, up to a maximum credit of $2,500. Eligible expenses include tuition, enrollment fees and course materials.

Who Qualifies for the American Opportunity Tax Credit?

You (or your dependent child) meet the requirements for the AOTC tax credit if you:

• Are actively pursuing a degree at an accredited institution
• Have not finished four years of higher education at the beginning of the tax year
• Are enrolled at least half time beginning in the tax year
• Have no felony drug convictions at the end of the tax year
• Have not claimed the AOTC or the former Hope credit for more than four tax years

Can You Claim the American Opportunity Credit If You Are a Dependent?

Unfortunately, if you are being claimed as a dependent or spouse on someone else’s tax return, you cannot claim the American Opportunity Tax Credit.

What Are the Income Limits for the American Opportunity Tax Credit?

The taxpayer who claims the credit must make a modified adjusted gross income of no more than $160,000 if filing jointly and $80,000 if filing individually. The credit amount is gradually reduced if your MAGI is over $80,000 but less than $90,000 — or over $160,000 but less than $180,000 if you file a joint return.

You’re ineligible to claim an AOTC tax credit if your MAGI is $90,000 or more — or $180,000 or more if you file a joint return.

How the American Opportunity Tax Credit Is Calculated

To calculate the credit, start by adding up your eligible expenses — tuition, enrollment fees and course materials. If, for example, they total $30,000, $30,000 is your starting point.

1. Take 100% of the first $2,000 ($2,000). 
2. Take 25% of the next $2,000 ($500).
3. The total credit is $2,500 — the maximum.

If you don’t owe $2,500 in taxes, you can take some of the credit as a refund. Say, for example, you owed $1,500 in taxes, and the AOTC reduced your taxes owed to -$1,000. Up to 40% of the credit can be refunded to you, so you would get a $400 (40% of $1,000) tax refund.

Here’s a look at how much credit you’ll receive depending on the amount you claim for tuition, fees and course materials.

What Is the Difference Between the American Opportunity Tax Credit and the Lifetime Learning Credit?

The Lifetime Learning Credit reimburses the same types of expenses as the AOTC. But whereas the AOTC has a $2,500 limit and can only be used for four years of college or other post-secondary education, the Lifetime Learning Credit is worth a maximum of $2,000, and there’s no limit on the number of times you can claim it. Also, students don’t have to be enrolled half-time to qualify for the Lifetime Learning Credit.

How Do You Get the Full American Opportunity Credit?

You get the full credit by having at least $4,000 in qualified education expenses. To claim the full credit or a lesser amount, submit the Form 1098-T sent to you by the school. The form shows the total amount of tuition and other educational expenses the school collected during the calendar year. You must also complete Form 8863 and attach it to Form 1040 when you file your tax return. The deadline for applying is the same as the regular tax due date: April 15.

As you work on Form 8863 and your tax return, make sure that all the figures are correct. If you’re audited by the IRS and the numbers you provided are incorrect, you’ll have to repay the credit with interest, and the IRS might charge you an accuracy or fraud penalty.

Takeaway

Finding and working with a financial advisor is a great idea. A financial advisor will help keep track of your finances and assist you in attaining your financial goals. While finding the right one can be overwhelming, you can decide to work with a financial advisor in your community or a virtual one.

Get to know your financial advisor options today for free!

Cynthia Measom and Gabrielle Olya contributed to the reporting for this article.

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