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.
What is the American opportunity tax credit?
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:
- 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
- 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 planallows 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.
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,
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