There’s no hiding the fact that college is expensive, so it’s good to be informed about all possible ways to save money on your educational journey. Aside from scholarships and grants, you should also be aware of education tax credits, which can reduce your tax burden if you have out-of-pocket school expenses.
The American Opportunity Tax Credit (AOTC) applies to any dependent student (including yourself) who is attending their first four years of school. This article covers how to determine if you qualify for it and how to claim it on your taxes. We also compare it to the Lifetime Learning Credit (LLC), which can lower your tax burden if you pay tuition expenses beyond the first four years or for a student not pursuing a degree.
Brief Overview of the AOTC
The AOTC is a tax credit for qualified tuition and related expenses paid on behalf of the taxpayer or dependent toward their first four years of undergraduate education.
This credit first came into being in 2009 as a replacement to its predecessor, the Hope Credit. Whereas the Hope Credit could only be used for the first two years of undergraduate education, the AOTC can be used for all four years. The AOTC also has a maximum amount of $700 more and can be applied to books and other expenses that the Hope Credit could not.
How educational tax credits work are as follows: When you pay out of pocket for higher education expenses at a qualifying institution, that institution will mail you a form in January for the previous year summarizing what you paid. Then, when you file your taxes, you will fill out a form recording this amount. You will then receive a credit for part of those expenses.
A tax credit is different from a deduction. A deduction is an amount you take off your total income before it is taxed. A tax credit, on the other hand, is an amount of money taken off your total tax burden. For example, if you owe a total of $10,000 in federal taxes for the year, but qualify for a $1,000 credit, the amount you owe is reduced to $9,000. If you’ve already paid more than this amount in taxes, then you will receive a refund for the difference.
The AOTC is considered partially refundable, as well. This means that if your tax burden is less than the credit amount, you can get a partial refund for 40% of the difference. For example, if you only owe $1,000 in taxes but would otherwise qualify for a $2,000 credit, you will not only have your tax burden reduced to $0, but you will receive an additional refund of 40% of the remaining $1,000 credit.
Who Can Claim the AOTC?
To claim the AOTC on your taxes, you must meet all three of the following requirements:
- You, your dependent (such as a child you claim on your taxes), or someone else paid qualified education expenses for higher education.
- The qualified education expenses were paid on behalf of an eligible student enrolled at an eligible educational institution.
- The eligible student is yourself, your spouse, or a dependent you listed on your tax return.
In addition, the student in question must not have received either the Hope Credit or the AOTC for more than four years and must be enrolled at least half-time in pursuit of a degree or credential. They must also be in their first four years of undergraduate study and not have already obtained a bachelor’s degree.
If you are unsure if you meet these criteria, the IRS has an interactive app you can use called “Am I Eligible to Claim an Education Credit?” to check.
How to Tell If an Expense Is Qualified or a Student or Institution Is Eligible
Qualified education expenses include any money you paid for tuition and enrollment fees, as well as monies paid for course material, such as books and supplies.
To be eligible, a student must:
- Be enrolled at least half-time at an eligible educational institution for at least one academic period (semester, trimester, or a quarter as determined by the school) beginning in the tax year.
- Not already have completed four years of education before the tax year.
- Be pursuing a degree or certificate.
- Not have any felony drug convictions as of the end of the tax year.
The majority of postsecondary schools meet the criteria for being an eligible educational institution. This includes most accredited public, nonprofit, and for-profit private institutions. You can check to see if your school is included by searching for it in the Database of Accredited Postsecondary Institutions and Programs.
How Much Is the AOTC?
The amount of the credit is 100% of the first $2,000 of qualifying expenses and 25% of an additional $2,000 for a maximum of $2,500. If there is more than one qualifying student listed on the tax return, this applies to each student individually.
If the amount of the credit exceeds the taxpayer’s tax burden, they may receive 40% of the difference as a refund. This credit can only be taken for four years for any one student.
What Are the Income Limits for the AOTC?
You can only get this credit if your income is below a certain threshold. For the tax year 2019, the credit can be taken by anyone earning less than $80,000 if single or $160,000 if married and filing a joint return.
These numbers are based on your Modified Adjusted Gross Income (MAGI). For most people, your MAGI is the same as your Adjusted Gross Income (AGI), which is your total earned income minus allowable adjustments. Your MAGI is determined by adding back the following:
- Foreign earned income exclusion
- Foreign housing exclusion
- Foreign housing deduction
- Exclusion of income by bona fide residents of American Samoa or Puerto Rico
If you earn between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return), the credit is gradually phased out. (If you earn over $90,000 or $180,000, respectively, you do not qualify.) The phaseout works as follows:
- If single, take the difference between your MAGI and $80,000 and divide by 10,000.
- If married filing jointly, take the difference between your MAGI and $160,000 and divide by 20,000.
- Multiply the decimal result by the amount of education credit you would have gotten if you made under the limits. This is the amount you qualify for.
How Do You Claim the Credit?
To claim the AOTC, the law requires that you or a dependent have received Form 1098-T or a Tuition Statement from the eligible institution. These forms are typically mailed out by schools before Jan. 31 each year and summarize what you paid for the previous year.
The statement or form will help you determine your credit. You will need a form for each qualifying student, and each student will also need a valid tax identification number or Social Security number.
To claim the AOTC, you will need to complete Form 8863 and attach it to your Form 1040 or Form 1040-SR when you file your taxes. This form is used for both the AOTC and Lifetime Learning Credit (LLC).
Differences Between the AOTC and LLC
In addition to the AOTC, there is another education credit called the Lifetime Learning Credit (LLC). If you qualify for it, the AOTC usually results in a larger credit, but the LLC has a lot more flexibility.
The maximum amount for the LLC is $2,000 per tax return (not per student), and it is nonrefundable, which means that if your credit exceeds your tax burden, you do not get any of the difference.
The income limits for the LLC are considerably lower (by $22,000 for those filing single and $44,000 for those filing jointly), but they can be applied to qualified educational expenses of any student, regardless of how many years they’ve been in school or how many years they’ve claimed the credit in the past.
Note that you cannot claim both credits for the same student in the same year. However, you can claim the AOTC for each qualifying dependent student and then additionally claim the LLC for any other family member’s educational expenses that did not qualify for the AOTC.
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