The American Opportunity tax credit (AOTC) is a partially refundable credit for undergraduate college education expenses. Congress talked about eliminating some educational tax breaks at the end of 2017, but the AOTC survived. It can still be claimed in the 2020 tax year if you qualify.
The AOTC is worth up to $2,500 per student for the first $4,000 you spend on qualifying educational expenses on behalf of yourself, your spouse, or your dependents. The maximum amount you can claim is $2,500 multiplied by the number of eligible students in your family.
AOTC Phase-Out Thresholds
The AOTC is gradually reduced—referred to as "phasing out"—for single taxpayers with modified adjusted gross incomes (MAGIs) of $80,000, or $160,000 for married taxpayers who file joint returns. These thresholds apply to 2020. Congress sometimes adjusts various phase-outs to keep pace with inflation.
This means that you'll receive less of a credit if your MAGI is more than $80,000, or $160,000 if you're married and filing jointly. The credit isn't available to those with MAGIs over $90,000 or $180,000. It's phased out entirely at this point.
The Refundable Portion of the Credit
Up to 40% of the AOTC is refundable. The IRS will refund up to 40% 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 AOTC more valuable than some other educational tax credits and deductions. It can help offset the alternative minimum tax and the self-employment tax because it's partially refundable.
Calculating the Credit Amount
The AOTC works out to 100% of the first $2,000 you spend on qualifying education expenses, plus 25% 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're entitled to, and attach it to your Form 1040 tax return.
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, it would be $2,375 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 AOTC for themselves or for 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 an education credential. Anyone who has been convicted of a felony drug offense is not eligible.
Both the taxpayer claiming the AOTC and the student must have valid Social Security numbers 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 AOTC four times on previously filed tax returns, aren't eligible.
If the IRS disallows your claim for the AOTC, you'll need to file Form 8862 with your next tax return to reclaim your eligibility.
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 AOTC is considered somewhat better than other education tax breaks in this respect.
Books, lab supplies, software, and other class course materials can qualify for the AOTC 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 for the student to take a tech-related class, but not if it's used in the general course of their education.
Room and board aren't covered, nor are expenses you might pay with tax-free education assistance. You can't count the same expense twice for more than one educational tax credit or deduction.
Comparing the AOTC to Other Tax Breaks
The lifetime learning credit (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 doesn't 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, and you can't 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 since then. The Bipartisan Budget Act of 2018 extended it retroactively through the end of 2017, and the Consolidated Appropriations Act of 2020 again extended the expiration date through December 31, 2020.