The American Opportunity Tax Credit

Receive up to $2,500 for undergraduate college education costs

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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 in 2018 and in future years if you qualify.

The AOC is worth up to $2,500 for the first $4,000 you spend on qualifying educational expenses on behalf of you, your spouse, or your dependents.

AOC Phase-Out Thresholds

The American Opportunity credit is gradually reduced—referred to as "phasing out"—for single taxpayers with modified adjusted gross incomes of $80,000, or $160,000 for married taxpayers who file jointly. These thresholds apply to 2018. Congress sometimes adjusts 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 respectively. 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 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's 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're 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 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. 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 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, aren't eligible. 

What's a Qualifying Education Expense?

Qualifying educational expenses include course materials that are required for enrollment, as well as tuition and some fees. The American Opportunity Credit is considered somewhat better than some other tax breaks for education in this respect as well. For example, 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 AOC 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 a student to take a tech-related class, but not if he'll use it generally in the course of his 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 educational tax credit or deduction. 

Comparing the American Opportunity Credit to Other Tax Breaks 

The Lifetime Learning Credit 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'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 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. It tends to be one of those end-of-the-year adjustments, and its status can change annually.