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American opportunity tax credit (AOTC): Definitions, qualifications & how to claim

Students studying
Maskot/Getty Images/Maskot

The journey of selecting colleges, submitting applications and receiving financial aid offer letters is an exciting time for a family. From college tours to application essays, you have plenty to think about, including how to pay for it all.

While scholarships, personal savings and other financial aid resources might make up a large chunk of your higher education financing strategy, the American opportunity tax credit (AOTC) can also lend a helping hand.

What is the American opportunity tax credit?

The American opportunity tax credit is a federal income tax credit designed to help cover the cost of higher education. You can claim the AOTC on your federal income tax return if you meet the qualifications and have incurred certain educational expenses.

The AOTC came about as part of the American Recovery and Reinvestment Act, which was signed into law in February 2009.

How much does the AOTC provide?

The credit is worth 100% of the first $2,000 of qualified education expenses you paid for each eligible student, plus 25% of the next $2,000 of qualified education expenses paid for that student. In other words, you can claim a credit of $2,500 per student per year for the first four years of their higher education. If the credit brings your tax bill below zero, you can have 40% of any remaining credit (up to $1,000) refunded to you.

What are the AOTC eligibility requirements?

Eligibility for the AOTC isn't automatic. College students most:

  • Be pursuing an undergraduate degree or another recognized education credential.
  • Be enrolled at least half time.
  • Not have claimed the AOTC (or its predecessor, the Hope credit) for more than four tax years.
  • Not have a felony drug conviction.

What are the income limitations for the AOTC?

In addition to these eligibility requirements, income limitations prevent high-income taxpayers from claiming the credit.

  • You can claim the full credit if your modified adjusted gross income (MAGI) is $80,000 or less ($160,000 or less for married couples filing jointly).
  • You can claim the credit at a reduced amount if your MAGI is over those limits but below $90,000 if single or $180,000 if married filing jointly.
  • You can't claim the AOTC if your MAGI is over $90,000 if single or $180,000 if married filing jointly.

What education expenses qualify for the AOTC?

Qualified expenses for the American opportunity tax credit include:

  • Tuition.
  • Fees required for enrollment or attendance.
  • Books, supplies and equipment needed for the course of study.

Room and board, transportation, insurance, medical expenses and other costs that aren't required for enrollment or attendance aren't eligible.

How the AOTC works with LLC and 529 plans

Several other tax incentives help students and their parents afford a higher education, including:

  • The lifetime learning credit (LLC). This tax credit is worth up to $2,000 per tax return. But unlike the AOTC, you can use it for tuition and related expenses for undergraduate or graduate and professional degree courses.
  • 529 plans. A 529 plan allows you to contribute to an education savings account. Earnings in the account grow tax-free, and withdrawals are tax-free as long as you use them to pay for qualified education expenses.

The good news is you don't have to choose between the AOTC and these other tax benefits. However, there is one caveat: You can't "double dip." In other words, you can't claim both the AOTC and LLC on the same expenses. And if you use tax-free withdrawals from a 529 plan to pay for expenses, you can't use those same expenses to calculate the AOTC.

Other college savings plan options and grants could play into the AOTC calculation. For instance, if you receive a grant, you'd have to subtract that amount from your qualified education expenses before you can claim the AOTC. Consider comparing tax benefits and regulations with a tax professional to determine which tax break and savings option best fits your situation.

How to claim the AOTC

Follow these steps:

1. Save documentation

Keep all receipts and financial records documenting how much you paid for eligible education expenses.

2. Calculate your qualified expenses

Add up all qualified expenses and subtract any expenses paid for with 529 plan funds or grants.

3. File your federal income tax return

If you work with a tax professional, they can confirm your eligibility, calculate the credit, and help you fill out the appropriate forms. If you file your own return, IRS Publication 970 provides detailed instructions for claiming the AOTC.

Choose the best financial assistance options for your family

The American opportunity tax credit may not cover all your higher education expenses, but it's a significant step toward making education more affordable for millions of people. If you're considering the AOTC, a Thrivent financial advisor can help determine how to prioritize it among other forms of financial assistance.

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Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

Offered through a brokerage arrangement with Thrivent Investment Management Inc. 529 college savings plans are not guaranteed or insured by the FDIC and may lose value.

Consider the investment objectives, risks, charges, and expenses associated before investing. Read the issuers official statement carefully for additional information before investing.

Investigate possible state tax benefits that may be available based on the state sponsor of the plan, the residency of the account owner, and the account beneficiary. Consult with a tax professional to analyze all tax implications prior to investing.
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