The American Opportunity Tax Credit

Receive up to $2,500 for undergraduate college education

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The American Opportunity Tax Credit is a semi-refundable credit for undergraduate college education expenses. It provides up to $2,500 in tax credits on the first $4,000 of qualifying educational expenses you pay.

Details of the American Opportunity Credit

Qualifying educational expenses include course materials that are required for enrollment as well as tuition.

The American Opportunity Credit is gradually reduced—referred to as "phasing out"—for single taxpayers with modified adjusted gross incomes of $80,000 to $90,000, or $160,000 to $180,000 for married taxpayers who file jointly as of 2018.

This means that you'll receive less of a credit if your MAGI is more than $80,000 or $160,000 respectively. The credit isn't available to those with MAGIs over $90,000 or $180,000.

Up to 40 percent of the credit is refundable. If claiming the credit reduces your tax bill to zero, the government will refund up to 40 percent of what's left over up to a cap of $1,000. You can receive a refund of up to $1,000 even if your tax liability is zero. This makes the American Opportunity Credit more valuable than the Lifetime Learning Credit, which is non-refundable.

Calculating the American Opportunity Tax Credit Amount

The American Opportunity Credit 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. Use Form 8863 to calculate the exact amount of the tax credit you're entitled to and attach it to your Form 1040 or Form 1040A. 

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.

Qualifying for the American Opportunity Credit

Taxpayers who aren't subject to the phase-out can claim the American Opportunity Credit for themselves or their dependents if the student is enrolled at least half-time in a college, university, or other accredited post-secondary educational institution.

Anyone who has been convicted of a felony drug offense is not eligible, however. 

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 American Opportunity credit four times on previously filed tax returns aren't eligible. 

What's a Qualifying Education Expense?

Qualifying educational expenses include tuition, some fees, and related course materials. The American Opportunity Credit is considered somewhat better than the Lifetime Learning Credit in this respect as well. The Lifetime Learning Credit restricts expenses solely to tuition, and the tuition and fees deduction does as well.

Other course materials, such as books, lab supplies, software and other class materials can qualify for the American Opportunity tax credit if they're required by the school for enrollment in a course. For example, you can include the cost of a computer if it's required to take a tech-related class, but not if you'll use generally in the course of your education.

Room and board are not covered, nor are expenses you might pay for with tax-free education assistance. You can't count the same expense twice for more than one credit or deduction. 

Comparing the American Opportunity Credit to Other Tax Breaks 

The Lifetime Learning Credit is more restricted in some ways but it's 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's not refundable.

The American Opportunity credit can help offset the alternative minimum tax and the self-employment tax because it's semi-refundable.

The tuition and fees deduction was supposed to expire at the end of 2016 but the Bipartisan Budget Act of 2018 extended it retroactively through the end of 2017. You can claim this deduction as an adjustment to income on the first page of your 2017 tax return for any post-secondary tuition up to $4,000 per year per student.

It remains to be seen if Congress will renew this legislation again. This tends to be one of those end-of-the-year adjustments and it can change annually.