The American Opportunity Tax Credit
You could receive up to $2,500 for undergraduate college costs
The American Opportunity tax credit (AOC) is a partially refundable credit for undergraduate college education expenses. Congress talked about eliminating some educational tax breaks at the end of 2017; the AOC survived. It can still be claimed for 2018 and in future years if you qualify.
The AOC is worth up to $2,500 per student for the first $4,000 you spend on qualifying educational expenses on behalf of you, your spouse, or your dependents. The maximum amount you can claim is $2,500 multiplied by the number of eligible students.
AOC Phase-out Thresholds
The AOC is gradually reduced—referred to as "phasing out"—for single taxpayers with modified adjusted gross incomes (MAGI) of $80,000, or $160,000 for married taxpayers who file jointly. These thresholds apply to 2020. Congress sometimes adjusts phase-outs to keep pace with inflation.
This means that you'll receive less of credit if your MAGI is more than $80,000 (or $160,000 if you are filing jointly). The credit is not available to those with MAGIs over $90,000 or $180,000 (if filing jointly). It is phased out entirely at this point.
The Refundable Portion of the Credit
Up to 40 percent of the AOC is refundable. The Internal Revenue Service will refund up to 40 percent of what's left over, up to a cap of $1,000, if claiming the credit reduces your tax bill to zero. You can receive a refund of up to $1,000 even if your tax liability is zero when you file your return.
This makes the AOC more valuable than some other available educational credits and tax deductions. It can help offset the alternative minimum tax and the self-employment tax because it is partially refundable.
Calculating the American Opportunity Tax Credit Amount
The AOC works out to 100 percent of the first $2,000 you spend on qualifying education expenses plus 25 percent of the next $2,000 you spend for a total possible credit of $2,500. Use Form 8863 to calculate the exact amount of the tax credit you are entitled to and attach it to your Form 1040.
The maximum $2,500 credit is based on $4,000 in qualifying expenses. Your credit will be less if you had less than $4,000 in expenses. For example, your credit would be $3,500 if you spent $3,500 on qualifying expenses, assuming your MAGI falls below the income phase-out limits.
Qualifying for the American Opportunity Credit
Taxpayers can claim the AOC themselves or their dependents if the student is enrolled at least half-time in a college, university, or other accredited post-secondary educational institution. The student must be pursuing a degree or education credential. Anyone who has been convicted of a felony drug offense is not eligible.
Both the taxpayer claiming the AOC and the student must have a valid Social Security or other tax identification numbers at the time of the due date of the tax return.
It's Only Available for the First Four Years
The American Opportunity Credit is available for the first four years of a student's post-secondary education—the years of education immediately after high school. Students who have already completed four years of college education, or those for whom you have already claimed the AOC four times on previously filed tax returns, are not eligible.
What Is a Qualifying Education Expense?
Qualifying educational expenses include course materials that are required for enrollment as well as tuition and some fees. The AOC is considered somewhat better than some other tax breaks for education in this respect. For example, the Lifetime Learning Credit (LLC) restricts expenses solely to tuition, and the tuition and fees deduction does the same.
Other course materials, such as books, lab supplies, software, and other class materials, can qualify for the AOC if they are required by the school for enrollment in a course. For example, you can include the cost of a computer if it is required for a student to take a tech-related class but not if it is used in the general course of their education.
Room and board are not covered, nor are expenses you might pay for with tax-free education assistance. You cannot count the same expense twice for more than one educational tax credit or deduction.
Comparing the American Opportunity Credit to Other Tax Breaks
The LLC is available for any post-secondary education including graduate school or undergraduate education beyond four years. You can claim it for any course load—the student does not have to be enrolled at least half-time. But you won't receive any cash back after it erases your tax liability because it is not refundable, and you cannot include any costs other than tuition.
The tuition and fees deduction was supposed to expire at the end of 2016, but legislation has extended the expiration date each year. The Bipartisan Budget Act of 2018 extended it retroactively through the end of 2017, and the Consolidated Appropriations Act, 2020 again extended the expiration date through Dec. 31, 2020.
Congressional Budget Office. "Eliminate Certain Tax Preferences for Education Expenses." Accessed March 23, 2020.
Internal Revenue Service. "Publication 970 Tax Benefits for Education," Page 20. Accessed March 23, 2020.
Internal Revenue Service. "American Opportunity Tax Credit." Accessed March 23, 2020.
Internal Revenue Service. "American Opportunity Tax Credit: Questions and Answers." Accessed March 23, 2020.
Internal Revenue Service. "Publication 970 Tax Benefits for Education," Pages 11-12. Accessed March 23, 2020.
Congressional Research Service. "The American Opportunity Tax Credit: Overview, Analysis, and Policy Options," Page 3. Accessed March 23, 2020.
Internal Revenue Service. "Compare Education Credits and Tuition and Fees Deduction." Accessed March 23, 2020.
Congressional Research Service. "The American Opportunity Tax Credit: Overview, Analysis, and Policy Options," Page 4. Accessed March 23, 2020.
Internal Revenue Service. "Form 8917 Tuition and Fees Deduction," Page 2. Accessed March 23, 2020.
Congress.gov. "H.R.1892 - Bipartisan Budget Act of 2018." Accessed March 23, 2020.
Congress.gov. "H.R.1865 - Further Consolidated Appropriations Act, 2020." Accessed March 23, 2020.